When the Dodd-Frank Act took effect on July 21, 2010, critics were fast to predict that the 2,300 page-long legislation, which passed the House without a single Republican vote and received only three GOP votes in the Senate would fail. Tomorrow will mark the five-year anniversary of Dodd-Frank and its unfortunate distorting effects. Just as when it was passed, the legislation remains unable to address the problems it was intended to.
The legislation has overwhelmed the regulatory system, stifled the financial industry, impaired economic growth, and done nothing to correct the pernicious effects of “too big to fail.” But that’s only the beginning: Many more of its regulations still need to be written, some several years down the road, all of which injects massive uncertainty into the financial industry.
Here is a round-up of interesting articles to read before this sad anniversary. First, we have a great piece by Chairman Hensarling in the Wall Street Journal (“After Five Years, Dodd-Frank is a Failure.”). Thankfully for us, the chairman is as committed to getting rid of Dodd-Frank as he was to getting rid of the Ex-Im Bank. I wish him the same success and more. The whole thing is worth a read, but here are a few paragraphs:
Dodd-Frank was supposedly aimed at Wall Street, but it hit Main Street hard. Community financial institutions, which make the bulk of small business loans, are overwhelmed by the law’s complexity. Government figures indicate that the country is losing on average one community bank or credit union a day.
Before Dodd-Frank, 75% of banks offered free checking. Two years after it passed, only 39% did so—a trend various scholars have attributed to Dodd-Frank’s “Durbin amendment,” which imposed price controls on the fee paid by retailers when consumers use a debit card. Bank fees have also increased due to Dodd-Frank, leading to a rise of the unbanked and underbanked among low- and moderate-income Americans.
Has Dodd-Frank nevertheless made the financial system more secure? Many of the threats to financial stability identified in thelatest report of Dodd-Frank’s Financial Stability Oversight Council are primarily the result of the law itself, along with other government policies.
There’s also a new report by John Berlau at CEI that shows how Dodd-Frank has stifled competition among the banks even more so than before the financial crisis. A failure to approve new banks, for instance, means that those “too big to fail” banks are now more entrenched than ever. In the last five years, regulators have approved only one new bank, as opposed to an average of 170 new banks per year before 2010, according to Berlau. As he notes: “This lack of new bank competitors is one important reason why a large bank failure could severely curtail the supply of credit and availability of financial services. That in turn sets the stage for a continuing cycle of bailouts.”
The New York Times has an interesting piece (“Fannie and Freddie are Back, Bigger and Badder Than Ever“) by Bethany McLean. It’s must read recap of the promises of what Freddie and Fannie would achieve vs. actually happened, along with the failure to reform two agencies in the aftermath of the financial crisis.
The proposed solutions for this mess? Among other things, Senator Warren believes it’s time to bring back the Glass-Steagall Act, a law that would require big banks to divide commercial and investment banking. Most economists and Federal Reserve policymakers disagree that the repeal of Glass-Steagall had anything to do with the financial crisis but, Democratic presidential candidates Bernie Sanders Martin O’Malley support the idea nonetheless. Hillary Clinton hasn’t said yet what she thinks of the proposal. However, according to Kevin Cirilli at The Hill, the White House is distancing itself from this push:
The White House wants to keep its distance from a liberal push to re-implement legislation that would break up big banks…
“At this point, we believe that the kind of implementation of Wall Street reform is the most effective way to protect our economy and middle-class taxpayers,” White House press secretary Josh Earnest told reporters at a press briefing Friday when asked whether President Obama supports it. …Earnest said the administration is still focused on implementing the 2010 Dodd-Frank Wall Street Reform law.“Wall Street reform has been incredibly effective at reforming our financial system in a way that looks our for the interests of middle-class families and taxpayers,” Earnest said.