The Dodd-Frank financial reform bill is now two years old. Happy birthday to this unsuccessful odyssey orchestrated by a Democratic-controlled Congress.
Representative Jeb Hensarling (R-TX) wrote an op-ed piece in the Wall Street Journal that bashes D-F. Here are seven observations offered by Hensarling that prove the law is bad for America:
1) D-F is a 2,300 page “behemoth” touted to be a panacea for the prevention of future financial crises and a bill that would “lift our economy,” give “certainty to everybody” and end “tax-funded bailouts-period” because institutions will no longer become “too big to fail.”
2) Two years have passed, the U.S. remains in recession, “too big to fail” is “enshrined into law,” and D-F is confusing, complex, and harmful to our capital markets.
3) D-F was based on the premise that regulators did not have enough power to control financial institutions, and this resulted in an economic crisis. Actually, federal policies pushed financial institutions to lend to people for houses that they could not afford. Mortgage underwriting standards were abandoned and more than 70% of all risky subprime mortgages were backed by federal government entities such as Fannie Mae, Freddie Mac, and the Federal Housing Administration.
4) D-F created 400 new regulations that either created new uncertainty or economic harm. The Volker Rule is supposed to limit risky investments by banks. There are about 1,300 questions in it covering 400 topics that elicited 18,000 comment letters by interested parties. The derivative legislation will make it more difficult for American companies to hedge risks. And, the “Qualified Residential Mortgage” rule “will increase mortgage rates by one to four percentage points, according to Moody’s Analytics.”
5) The House Financial Services Committee estimates that private sector job creators will need to spend over 24 million hours annually trying to comply with D-F.
6) The Consumer Financial Protection Bureau can appoint a credit czar “who can ban or ration any kind of consumer product without congressional oversight.” Rationing consumer credit will hurt individuals and small businesses.
7) D-F codified into tax law a taxpayer-funded safety net for institutions deemed too big to fail. This will cost taxpayers billions as more companies are bailed out prospectively. “Moody’s explicitly stated that its ratings still reflect an assumption about the very high likelihood of support from the U.S. government for bondholders and other creditors ... to prevent default.”
D-F must be repealed and the market should be allowed to take its course and weed out failing institutions. An alternative course that would avoid costly bailouts would be one that requires reporting transparency by large institutions along with capital and liquidity standards that offset the inherent risks in the operations of banks.