|Dodd-Frank: Ripe for Repeal|
By Timothy H. Lee
Thursday, February 16 2017
Stop me if you've heard this before. It's a tragically recurring tale.
As an economic bubble gradually forms, everything appears to be going well. The tech sector. The housing sector. Healthcare. Then inevitably, the bubble becomes unsustainable, and bursts. A recession often ensues. Somehow everyone seems surprised, as if things were going to be different this time. We thought we had figured it out after the last bubble. Hadn't new laws been passed and new bureaucracies created to prevent this from happening again?
Terrified politicians and hyperventilating media figures immediately begin identifying scapegoats and demanding scalps. Conveniently, those scapegoats always reside in the private sector, never mind how government mandates dictated business decisions or steered us toward the reckoning. Blame is always placed on alleged insufficient regulation, never overregulation.
Predictably, the scapegoats also happen to have deep pockets. Trial lawyers descend like vultures, and class action lawsuits multiply. New laws are passed. New regulations are imposed. New agencies are empowered. They won't let this happen again.
Then, a few short years later it happens again anyway. Wash, rinse, repeat.
Remember Sarbanes-Oxley? Wasn't it supposed to prevent the next meltdown after the tech bubble?
Nothing, however, compares to Dodd-Frank, the mother of all unworkable, incomprehensible, suffocating and unconstitutional federal laws signed into law by Barack Obama in the wake of the government-caused housing and financial crash of 2008.
Dodd-Frank's stated premise of targeting "too big to fail" financial institutions unsurprisingly had the opposite effect of rewarding industry titans and punishing smaller lenders. That stands to reason, since the law's sheer volume and complexity required armies of lawyers to ensure compliance. Big banks can live with that result, since it keeps entrants out of the marketplace. It keeps the big banks big, and the small banks small. It prevents new entrants to the market, and has shrunk the number of competing banks.
In addition to having the opposite effect of its stated premise, Dodd-Frank has frozen capital as banks fear lending because of regulatory uncertainty. That has in turn crippled the larger economy and led to the most anemic cyclical economic recovery in recorded U.S. history, as American Enterprise Institute fellow Peter Wallison has explained in The Wall Street Journal:
"It is not difficult to find connections between Dodd-Frank and the historically slow recovery from the financial crisis...
"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."
So in addition to assisting larger banks while crippling smaller banks, Dodd-Frank has had disastrous consequences for the larger economy. Every dollar diverted to compliance costs at the expense of lending can't fuel a growing economy.
Fortunately, we may be witnessing a rare and welcome reversal of Dodd-Frank's regulatory onslaught.
First, federal courts have ruled some of its provisions unconstitutional, which the new Trump Administration can decline to appeal. Second, President Trump has quickly imposed much-needed regulatory sanity through executive orders. Third, Congress can legislatively curtail or even rescind Dodd-Frank, which it appears ready to do in the coming weeks.
But Americans must hold their representatives in the House and Senate accountable, and let them know that Dodd-Frank must be cast into the dustbin for the benefit of American consumers and businesses.
Working together, the Trump Administration and Congress can bring badly-needed economic reform after nearly a decade of mismanagement and stagnation under Barack Obama. Markets have quickly ascended to record highs in anticipation of reform, and Americans' economic confidence has jolted upward. By finishing the job on Dodd-Frank, which has deprived the U.S. economy of oxygen, we can help ensure that positive change continues.
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