One of the many reasons the United States is unique is the presence here of a vibrant small-business sector that drives our economy. Unfortunately, this way of life may be threatened by the regulations now being considered in Washington. In an effort to reform the banking sector in the aftermath of the most recent economic crisis, big banks will see increased protection from failure, while small businesses may find themselves with limited opportunities for survival. While we advocate reforms that address gaps in regulation, we must ensure that these reforms do not come at the price of our small-business sector. The bill before the U.S. Senate, written by Connecticut senator Christopher Dodd, would favor the biggest Wall Street banks over small businesses and restrict access to credit, harming job creation.
The Safety Net for Big Banks: Senator Dodd’s effort seeks to prevent another meltdown of our financial sector, like the one that gripped our country in 2008 and led to the bailout of the biggest Wall Street banks. Unfortunately, when drafted into legislation, this effort misses the mark. Dodd’s legislation creates a special class for the biggest banks, protecting them from failure because of their size. As a result, the biggest banks are free to take excessive risks, all the while knowing they will receive special treatment from the government that will protect them from failure. As a result, the government will be picking winners and losers among U.S. companies by providing an implicit guarantee for the biggest banks that small businesses do not have. We think it’s important for banks to know that if they take risks and fail, the government won’t be there to bail them out. We want all businesses to take appropriate steps to manage their own risk, rather than incentivize a certain class of business to operate under the assumption they’ll be provided with a safety net.
Limiting Access to Credit: Small businesses are the engine of the economy across the United States. Small businesses employ over half of all U.S. workers and “start-up” businesses with fewer than 20 employees account for 86.7 percent of net job creation in the Representative Griffith’s district in North Alabama is a great example. According to the Huntsville Chamber of Commerce, 95 percent of Huntsville’s regional economy, or $18.24 billion, is dependent on the existence of its small businesses. Small businesses employ more than 850,000 employees statewide and more than 300,000 individuals are employed by a business with fewer than 20 employees. These businesses rely extensively on consumer financial products, including home equity loans, personal loans, auto title loans and credit cards. According to the Small Business Administration (SBA), almost half of firms with fewer than 20 employees use a consumer credit card to help finance their businesses. Unfortunately, under Dodd’s legislation, businesses such as these would find themselves restricted in what financial products they can use.
The Dodd bill would create a new government entity with jurisdiction over all consumer financial products and services. While institutions that issue financial products are already regulated by the government, this new “consumer financial protection bureau” would specifically oversee the products themselves. This legislation would create a bureaucracy to determine the “appropriateness” of products for consumers, which has the potential to restrict credit in the name of safety. As a result, creditworthy consumers and business owners could be denied mortgages for homes, loans for college, and start-up capital for new companies. Quantitative evidence suggests that this new government entity will increase the cost of borrowing and will reduce net new jobs to the economy by a conservative estimate of 4.3 percent, according to a study commissioned by the American Bankers Association. This will lead to a reduction of 2,336 jobs in North Alabama alone by 2015. In Rep. Garrett’s state, New Jersey, businesses could lose as many as 2,000 potential new jobs every year if this legislation goes into effect.
Protecting Consumers from Themselves: Proponents of a consumer financial protection bureau explain their support by referencing academic studies that have determined consumers to be “fallible in systematic and important ways.” In a study conducted by Michael Barr, the Treasury Department’s assistant secretary for financial institutions, Barr writes, “Individuals consistently make choices that…diminish their own well-being in significant ways,” “households fail to optimize their savings decisions,” and credit cards “may encourage sub-optimal borrowing behavior.” In other words, this legislation is designed to protect you from yourself, because statistics suggest you are not able to adequately accomplish this task. We whole-heartedly disagree with this paternalistic approach to regulation and favor increased disclosure about financial products for consumers, allowing them to make their own decisions about a product’s appropriateness.
In conclusion, we strongly support reforms to our financial system that will enhance corporate responsibility, regulator efficiency and provide increased disclosure for consumers. It is essential, however, that these reforms do not have the unintended consequence of restricting credit, limiting a business’s ability to create jobs. The Dodd bill under consideration in the Senate favors big banks over small businesses and assumes consumers are incapable of making their own financial decisions.
We believe that reform should focus on empowering consumers. Rather than “consumer protection,” we believe in “taxpayer protection” — protecting taxpayers from more government bailouts by holding big banks accountable for the risks they take. Only then will we have achieved true reform.
– Rep. Parker Griffith represents Alabama’s fifth district and Rep. Scott Garrett represents New Jersey’s fifth district.