Dodd-Frank: To Reform or Not?

On June 17 the Dallas Morning News had two excellent op-eds on financial reform. Congressman Jeb Hensarling wrote of his forthcoming Financial Choice Act to change provisions of the onerous, some say unconstitutional Dodd-Frank Act of 2010. Reverend Gerald Britt argued against reform. Due to space considerations, many facts had to be left out.

Most Americans aren’t familiar with Dodd-Frank, but are affected by it due to its effect on community banks, business startups and regulatory burden. Oil executive and philanthropist Cary Maguire approached the National Center for Policy Analysis (NCPA) on whose board I sit in December of 2014. His concerns were that the causes of the 2008 financial crisis were not understood, that Dodd-Frank did nothing to solve the problem, and that he was concerned as to whether a future crisis could be prevented. Over the last 18 months, NCPA under my leadership has brought together 11 experts for conferences here in Dallas and in DC. In the next few weeks, KERA Channel 13 will air six episodes of the McCuistion program on this subject.

Here are the facts on the crisis and the response that was Dodd-Frank:

• The Financial Crisis Inquiry Commission (FCIC) was established in May 2009 to determine the causes of the problem. It made its reports in early 2011.
• Dodd-Frank, a 2319 page law, was passed in July 2010 to solve the problem. Reverend Britt says most Republicans supported this bill. The facts are that only three Republican Senators and three Republican Congressmen voted for it. Does this remind one of the Affordable Care Act? Only in DC could a law be passed to solve a problem six months before the causes of the problem were revealed.
• The irony of this sequence is that the FCIC got the causes wrong. Fortunately, one of the FCIC commissioners issued a minority report that got the causes right—it wasn’t lack of regulation or derivatives that caused the problem, it was the government’s own housing policies under Presidents Clinton and George W. Bush that pushed Fannie Mae and Freddie Mac into buying millions of subprime loans. That commissioner was Peter Wallison, author of Hidden in Plain Sight: What Really Caused the World’s Worst Financial Crisis and Why It Could Happen Again, and he was here and in DC for NCPA’s conferences.
• Dodd-Frank didn’t end too big to fail, but it did cause tens of thousands of pages of regulations to be written that have helped cause over 1000 community banks to sell or merge in the last six years. These are the banks that lend to small businesses. According to Gallup, for the first time in 35 years, more businesses close each year than are created. That’s why real economic growth is lacking. The annual regulatory cost to America today is $1.88 trillion according to the Competitive Enterprise Institute.
• And, speaking of the Competitive Enterprise Institute, they called me in 2013 to help them locate a community bank with the guts to sue the federal government over the constitutionality of Dodd-Frank. I introduced them to a courageous banker, Jim Purcell of the State National Bank of Big Spring. The suit over the constitutionality of Dodd-Frank and in particular the CFPB is pending in federal court today.
• Many believe the Consumer Financial Protection Bureau (CFPB) to be unconstitutional due to its structure as it has, by design, no Congressional authority over its budget or regulations. One person, not a bipartisan commission, leads it. It’s housed inside the Federal Reserve with automatic budget increases and a cadre of lawyers who have the power to act as prosecutor, jury and executioner. Extortion is the word I most often hear when the CFPB is mentioned. The reader will remember that liberal Senator Elizabeth Warren of Massachusetts midwifed CFPB– the same Senator who has hated banks since childhood and who famously declared that entrepreneurs didn’t create their businesses….the government’s role made it possible.
• Reverend Britt rails against payday lending, and I’m no fan of it either. However, there are people who need small, short term loans. Yes, the costs are high, and yes, some borrowers get stuck just rolling over their loans, but what’s the alternative? Thanks to the regulatory burden, some banks and credit unions have had to stop making these small loans as they are not profitable. Perhaps Reverend Britt and many community organizations would be more effective by either educating those who need this product or making the loans themselves.

The good thing is that Hensarling and Britt did agree on one thing that our experts also recommended– that banks maintain more capital against their asset base. That would not only prevent some banks from failing, it would prevent you and me as taxpayers from having to bail them out again. One last thought: Dodd-Frank, like virtually every law passed in DC, fits the definition of the only law in DC that works—–the Law of Unintended Consequences!

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Dennis McCuistion is a “recovering community banker”, a director of the National Center for Policy Analysis, the host of the McCuistion television program seen Sundays on Channel 13, and a Clinical Professor of Corporate Governance at UT Dallas. Reach him at mccuistion@mccuistion.com.