Regulatory Reform

Dodd Frank at Five Years – Another Big Government Failure

The Dodd-Frank Act of 2010, named for Senator Christopher Dodd and Representative Barney Frank, who helped spearhead its creation in reaction to the financial crisis, was touted as a means to prevent another government bailout and to mitigate supposed predatory financial lending practices.

The law as ultimately enacted is more than 848 pages long, creating huge government bureaucracies that have slowed economic growth and harmed small businesses. By comparison, the Banking Act of 1933, which was enacted after the Wall Street Crash of 1929, was only 37 pages long.

The scope of Dodd-Frank’s red tape has ensnared banks in a regulatory web that continues to stifle innovation and economic recovery. The law is so convoluted that the average compliance cost is now 12 percent of a bank’s operating costs and can be more than double that amount for smaller institutions.  JP Morgan, for example, was forced to hire more than 10,000 compliance officers, while at the same time having to lay off 15,000 other value-adding employees.

While Dodd-Frank was touted as going after large banks – “Too big to fail” institutions – in fact, the regulatory costs are crippling small banks, which have shrunk by 19 percent in total assets since the law’s passage. The loss of so many small banks shrinks consumer choices and decreases competition, which adds additional banking costs and hassle to consumers wishing to receive loans.

The Consumer Financial Protection Bureau (CFPB), the Financial Stability Oversight Council and the Orderly Liquidation Fund are among the new bureaucracies created under Dodd-Frank. Below is a graph from the Economist which details the agencies and their influence.

The CFPB has the ability to determine what financial services and products can be offered and to whom, as well as the ability to penalize companies the bureau subjectively deems to be acting in an abusive manner. The implementation of these rules has not gone smoothly; the Davis Polk law firm published a report tracking the progress of the bill for its fifth anniversary, stating only 247 of the 390 required rules have been enacted. Unfortunately, that means after five years of rules and regulations, more red tape is on the way.

Despite all of its new bureaucracy, it is still unlikely that Dodd-Frank would have done much to prevent the 2008 economic collapse. The regulations do little to address the cause of the crisis, which was government-backed support for bad housing loans. Peter Wallison of the Wall Street Journal wrote the following:

“By 2008 roughly 58% of all U.S. mortgages—32 million loans—were subprime or otherwise low quality. Of these 32 million loans, 76% were on the books of government agencies, primarily Fannie and Freddie, showing incontrovertibly where the demand for these loans originated. When the housing bubble burst, mortgage defaults soared to unprecedented levels. Although the left’s narrative placed all blame on the private sector, these numbers show that private firms were responsible for less than a quarter of the problem.”

Dodd Frank was nothing more than an excuse by the Left to insert massive new regulations on the economy, which have stifled economic growth and harmed consumers.  ALEC foresaw the fundamental flaws of this Act and drafted a resolution in opposition to its overreach, which can be viewed here. It’s time to pursue economic solutions that promote limited government, free markets and federalism.

In Depth: Regulatory Reform

In his first inaugural address, Thomas Jefferson said that “the sum of good government” was one “which shall restrain men from injuring one another” and “shall leave them otherwise free to regulate their own pursuits of industry.” Sadly, governments – both federal and state – have ignored this axiom and…

+ Regulatory Reform In Depth