Thanks to the good work of Rep. Jeb Hensarling, R-Texas, the GOP House will be voting to repeal a substantial portion of the Dodd-Frank regulatory monster. The Financial CHOICE Act is perhaps the biggest and only major accomplishment of the House this year.
While people’s eyes usually glaze over upon hearing the subject of financial regulations, banking rules, the credit market, and the Dodd-Frank bill, anyone who cares about the future growth of our economy better pay attention.
In many respects, Dodd-Frank was the forgotten disaster of the Obama years – the Obamacare of the financial markets. With Republicans’ failure to repeal Obamacare, conservatives should demand that they at least repeal its lower-profile stepsister, which has not engendered the same degree of government dependency.
In a perfect example of the arsonist becoming the firefighter, the government blamed capitalism for the financial meltdown of 2008 rather than the government-banking crony capitalist interventions – most prominently, the affordable housing mandates, which destroyed the housing market, locked up credit, and induced a regulatory and bailout regime that did nothing to address the true causes of the problems.
Dodd-Frank as the source of economic stagnation
Here is a brief overview of the key elements of the Dodd-Frank Act of 2010, a 2,300-page behemoth:
Too big to fail: Title I of the bill created a new permanent bailout regime — the Financial Stability Oversight Council. This institution would vitiate the bankruptcy process and allow the government to take over any entity that it arbitrarily deems vital to the rest of the economy. In other words, it enshrines “too big to fail” as a permanent policy — the very issue this bill was supposed to fix.
Volcker rule: The Volcker rule ostensibly prohibits regular banks from investing their own money via bond trading. It also prohibits banks from holding more than a three percent stake in private equity funds. Just this part of the bill is 300 pages long! It will take hundreds of new Keynesian jobs just to enforce, interpret, and comply with the rule.
CFPB: The bill created the Consumer Financial Protection Bureau (CFBP). Ultimately, it’s worked to limit the choices of consumers in financial markets, thereby making it harder and more expensive to obtain credit. This unaccountable agency operates autonomously within the Federal Reserve and is not subject to congressional appropriations or oversight.
The CFPB is, essentially, the “death panel” of the financial sector, with control over bank accounts, mortgages, and student loans. The CFPB director now operates as an independent “fourth branch” czar over the most important aspects of financial services, including mortgages, student loans, credit cards, and all banking practices. The director wields both the “legislative” power to regulate and the enforcement power over 19 consumer-protection statutes previously handled by seven multi-member agencies.
Derivatives trades: Some key restrictions on derivatives trades only apply to banks with assets above $10 billion. This has created a perverse incentive for banks to limit their expansion and — by extension — the creation of jobs, for the purpose of staying below the limit.
Debit card fees: The new limitations on bank charges for processing debit card submissions from retailers has caused an increase in user fees for customers — most notably, for opening checking accounts. It has also prompted banks to eliminate debit card rewards programs.
Freddie/Fannie: Dodd-Frank did nothing to privatize or even reform these two behemoths that are responsible for the housing crisis and the recession.
A maladroit Republican Party and a complaisant media has ensured that people forgot about the cause of the financial meltdown — and how Dodd-Frank exacerbates it instead of solving it.
Bill Clinton’s National Homeownership Strategy did to the housing sector what Obamacare will do to the health care sector. The Clinton administration created entire offices and programs dedicated to forcing banks to underwrite risky mortgages, all under the dubious goal of universal home ownership. Concurrently, Fannie Mae and Freddie Mac bought up the lion’s share of the subprime mortgage securities and fueled the toxic asset bubble. The bubble popped, bringing down the entire economy with it.
Thus, the housing mandates and Dodd-Frank were a superlative example of the failed cycle of government. They forced banks into risky credit schemes on the one hand, then created more government regulations to artificially lock up the credit market to rectify their own mistakes. What’s worse, banks are caught in an untenable position.
On the one hand, banks can be sued for not lending to those who can’t afford a mortgage (particularly if the prospective borrower happens to be a racial minority). On the other hand, thanks to a zany Supreme Court ruling, they can be sued for offering them mortgages as well (and earn the demonizing moniker of “predatory lender”)! Isn’t it time to let the market dictate demand and parameters for credit and mortgages, instead of having the government recklessly loosen it and then freeze it?
The credit market and banking are the lifeblood of our financial economy — i.e. entrepreneurship, housing, and job creation. Thus, the imposition of the Dodd-Frank regime is likely one of the major hidden factors in the permanent stagnation of our economy.
The opportunity of Hensarling’s bill
What all of the regulation and stagnation from the Dodd-Frank Act means for the American people is a negative impact just under $1 trillion — or, over $3,300 for every working-aged person in the U.S. — from 2016 to 2025, an American Action Forum study in 2015 estimated.
According to another study last year, it had already cost over 73 million paperwork hours for small businesses and resulted in a 14.5 percent drop in consumer credit, further stymieing economic growth and job creation.
And that was all in just six years of Dodd-Frank’s existence.
While the Hensarling bill before the House today doesn’t completely repeal Dodd-Frank, or even the CFPB, it does take a significant chunk out of the beast. And unlike Obamacare, a half repeal is feasible and actually moves the ball forward rather than complicating the market further.
The bill strips the CFPB of much of its regulatory and enforcement power and places it under congressional control. It also restores the bankruptcy regime from the existing bailout regime for large banks that fail.
A good next step would be to follow up with true financial reform with companion bills abolishing Freddie Mac and Fannie Mae and eliminating the officious and harmful housing mandates. This would go a long way in improving GDP growth (as the president has promised).
Unfortunately, much like with every good idea, the RINO-controlled Senate will likely serve as its graveyard, unless conservatives get engaged on this issue.
Nate Madden contributed to the research on this article.
Author: Daniel Horowitz
Daniel Horowitz is a senior editor of Conservative Review. Follow him on Twitter @RMConservative.