The new minority leader in the Senate, Democrat Chuck Schumer, has been chortling that he has the votes to prevent the repeal of the anti-business growth Dodd-Frank Act. Dodd-Frank was passed by Democrats on the heels of the Great Recession as a means of deflecting criticism from the government and its policies on home mortgages to pretend that the causes of the Great Recession were entirely or mostly due to private financial institutions. Senator Christopher Dodd and Congressman Barney Frank had been among the most vociferous advocates of the government policy of easy credit for home loans and had explicitly claimed before the financial crash that there was no looming credit risk. President-elect Trump has pledged to repeal Dodd-Frank, which is a very good idea.
A very interesting article in the 17 November Wall St. Journal by Peter Wallison discusses both the false pretenses that were used to justify the Dodd-Frank Act and the harm done to recovery from the recession and to economic growth rates by that act. On the matter of whether the act actually addressed the causes of the recession and a few of its consequences:
Signed into law in 2010, Dodd-Frank was based on the idea that insufficient regulation, particularly of Wall Street, had allowed a buildup of subprime mortgages, a housing bubble and, ultimately, the 2008 financial crisis. The Democrats who controlled the Congress elected in 2008 acted quickly to follow out the implications of this diagnosis by adopting Dodd-Frank, the most restrictive financial legislation since the New Deal.
Strikingly for such important legislation, there was no significant debate in Congress about whether the cause of the crisis had been correctly identified.A later study, in 2014 by my colleague at the American Enterprise Institute Edward Pinto, showed that by 2008 more than half of all mortgages in the U.S. were subprime or otherwise risky, and 76% of those were on the books of government agencies. This leaves no doubt that government housing policies—and not a lack of regulation—created the demand for these risky mortgages. But by then it was too late.
It is not difficult to find connections between Dodd-Frank and the historically slow recovery from the financial crisis. Here’s a sampling.
The Financial Stability Oversight Council, a Dodd-Frank invention, was empowered to designate large financial firms as systemically important financial institutions, or SIFIs, turning them over to the Federal Reserve for “stringent” regulation. One of the council’s earliest actions, in July 2013, designated GE Capital as a SIFI.
GE soon recognized that its huge financial subsidiary was wilting under the Fed’s control. Seeking an exit, GE wound down GE Capital, eliminating from the market an important source of funding for small and innovative firms.
The Volcker rule, another Dodd-Frank provision, prohibited banks and their affiliates from trading securities for their own account, although there was no evidence that this activity had any role in the financial crisis.
Soon, trading desks all over Wall Street were closing down, and traders were complaining that the debt markets were dangerously short of liquidity. The Treasury Department, deeply tied into Dodd-Frank, said it was “studying” the issue. It still is, and spreads are still historically wide.
Small banks, the credit sources for small businesses and startups, faced new and costly regulation, requiring them to hire compliance officers instead of lending officers.
One regulation on mortgage lending from the Consumer Financial Protection Bureau—a Dodd-Frank agency—was over 1,000 pages long. Imagine that landing on your desk in a small bank.
No wonder, as this newspaper recently reported, banks are no longer the nation’s principal mortgage lenders. Worse still, as reported last week, job gains at startup firms, which are major sources of new employment and technological innovation, are at their lowest level in 20 years.
I added the bold to the sentence in the quoted portion of the article.