http://www.truth-out.org/opinion/item/41827-you-can-t-be-serious-debunking-the-dangerous-arguments-against-dodd-frank
You Can't Be Serious: Debunking the Dangerous Arguments Against Dodd-Frank
Tuesday, September 05, 2017 By Sue Banks, Occupy.com | Op-Ed
Not content with their fruitless assault on Obamacare, one of President
Obama's two signature achievements, Republicans are now staging a
similarly symbolic challenge to the other. In June, the House passed a
measure that would significantly pare back the Dodd-Frank financial
reforms. While it's highly unlikely to become law, the bill promotes
bogus and dangerous arguments for unregulated finance.
Passed in 2010, Dodd-Frank was Congress's response to the 2008 financial
crisis, which was a product of Wall Street excess more than the naïve
homebuyers who are often blamed for it. The idea was partly to rein in
the inordinate risk-taking by large financial institutions that pose a
hazard to innocent bystanders. There's a link here: When out-of-control
financial systems crash and burn and the economy contracts in response,
as happened in 2007-09, millions of people lose jobs. Pre-Obamacare,
that meant losing your health insurance.
The assault on Dodd-Frank is being led by House Financial Services
Chairman Jeb Hensarling (R-TX), who, to no great surprise, gets much of
his campaign money from the financial-services industry. The
Hensarling-drafted Financial CHOICE (Creating Hope and Opportunity for
Investors, Consumers and Entrepreneurs) Act, which passed the House in
June, would do several big things that are in the interests of financial
institutions but not of most other folks. (The Senate is considering its
own version of Dodd-Frank rollback.)
Among its more critical features, the bill would:
• Replace Dodd-Frank's Orderly Liquidation Authority, a process for
closing a failing institution without setting fire to the entire
financial system);
• Retroactively repeal the authority of the law's Financial
Stability Oversight Council to designate firms "systematically important
financial institutions" (SIFIs);
• Repeal the Volcker Rule, which generally forbids banks from
making risky bets with their own money ("proprietary trading") while
benefitting from federal deposit insurance;
• Effectively strip the law's Consumer Financial Protection Board
(CFPB) of its authority and make its director a political appointee
subject to removal at the president's whim.
So much for regulatory independence.
Hensarling pitches the CHOICE Act with predictably populist language:
"If we want strong economic growth and more freedom, we must empower
Americans, not Washington bureaucrats."
This sort of mindless platitude calls for analysis. First, since when
are federal employees not Americans? Second, how would non-bureaucrats
prevent irresponsible SIFIs from wrecking the financial system? Third,
how would removing constraints on gigantic financial institutions
"empower" Americans, aside from the Americans who run large SIFIs?
"Strong growth and more freedom" for whom?
Like most opponents of Dodd-Frank, Hensarling gets the logic of
financial markets exactly backwards: Finance is an inherently risky
enterprise involving inherently risky personality types, and Washington
bureaucrats, also known as regulators, are often the only adults in the
room.
There are plenty of disingenuous rationales for paring back Dodd-Frank.
One is that the law has curtailed bank lending and hurt the economy. Not
true, according to several analyses including this one. The latest data
from the Federal Deposit Insurance Corp, the chief regulator of the
biggest banks, shows that they don't seem to be suffering very much, either.
Then there's the argument that Dodd-Frank compliance rules are hurting
community banks. But that's far from obvious. If anything is crimping
bank lending, it's the banks themselves, according to an intriguing and
under-reported letter to the Senate Banking Committee from FDIC Vice
Chairman Thomas Hoenig, who says that if the 10 biggest U.S. banks
didn't spend 99 percent of their net income on dividends and share
buybacks -- a deceptive way of boosting the banks' share price -- they'd
have an additional $1 trillion (equal to more than 5 percent of national
output) free for lending.
Another Wall Street trope is that Dodd-Frank (indeed all regulation)
creates uncertainty, which is always a problem for financial markets.
But the law is a seven-year-old fact. A serious threat of repeal is what
would create uncertainty. Others argue that the Volcker Rule is
unnecessary because proprietary trading by banks has fallen off since
the financial crisis.
Francis Creighton, head of the Wall Street lobbying group Financial
Services Roundtable, told CNN earlier this year that "Prop trading is
gone. We're not looking for it to come back." That's a bit like saying
the wolves are no longer at the door, so let's take down the fence.
There may be parts of Dodd-Frank that need revising, even repealing. But
that's mere detail. The big question has to do with the nature of
financial crises, which in the absence of prudential regulation are not
occasional anomalies but inevitabilities. The best-known exponent of
this idea is the late economist Hyman Minsky, whose "financial
instability thesis" holds that unless they're restrained in some
fashion, financial institutions necessarily make increasingly risky bets
(higher returns generally require higher risk), rather like a reckless
driver finding out the hard way how fast is too fast.
If an institution is big and well-connected enough, its failure, or even
a rumor of failure, can generate waves of fear that shut down the
financial system and wreck the real economy, where average people live.
This is essentially what happened in 2008. The looser Congress makes the
regulatory leash, the riskier SIFIs will be. In a relentlessly
competitive realm where every firm is judged on quarterly earnings and
pressured by merciless shareholders, there is little choice. As
Citigroup CEO Chuck Prince put it on the eve of the 2008 flameout, "As
long as the music is playing, you've got to get up and dance."
Dodd-Frank, however imperfect, isn't just about protecting average folks
from reckless, predatory finance. It's also about protecting Big Finance
from itself. The House assault on the law probably won't succeed this
time around, but the propaganda behind it promotes a dangerous myth that
even Alan Greenspan has renounced: that banks can regulate themselves.
That idea will have consequences when memories of 2008 fade, as you can
be sure they will.