5 reasons why Paul Ryan's Dodd-Frank overhaul is terrible
Between the Trump administration's grand plans for infrastructure and the looming congressional testimony of former FBI Director James Comey, this is shaping up to be quite a week. And just in case that wasn't enough, the House also plans to vote on whether to upend U.S. financial regulation.
The specific bill in question is the Financial CHOICE Act, spearheaded by Rep. Jeb Hensarling (R-Texas), the chairman of the House Financial Services Committee. It's basically an effort to repeal and replace Dodd-Frank, the sweeping financial regulation bill passed by President Obama and the Democrats in July 2010, two years after the financial crisis plunged the economy into a catastrophic recession.
House Speaker Paul Ryan (R-Wis.) is definitely a fan. On Monday, he released a statement entitled "5 Reasons to Support the Financial CHOICE Act." Unfortunately, Ryan's five reasons run from confused and misguided to downright underhanded. The CHOICE Act is just a terrible bill.
And here, appropriately, are five reasons why:
1. The CHOICE Act doesn't actually replace Dodd-Frank with anything. The core idea behind Ryan's bill is a trade-off: Banks don't have to obey many of Dodd-Frank's rules if their equity from investors is at least 10 percent of their assets. Higher equity ratios give banks more cash on hand to cushion their finances in case of catastrophe, so the idea isn't inherently nuts.
Unfortunately, to achieve the desired result, the CHOICE Act's 10 percent threshold would need to be two or three times higher. On top of that, risks can come at a bank's balance sheet from multiple directions, and high equity requirements just don't account for all of them. Lastly, the practical design of the CHOICE features a mediocre enforcement mechanism, so banks might simply not stick to their 10 percent commitment anyway.
2. It's based on a lie about "Too Big To Fail." "Dodd-Frank actually made [too big to fail] the law of the land," Ryan wrote. This is a common conservative refrain, based on two claims. First, Dodd-Frank has a system for identifying "systemically important" institutions and subjecting them to tougher regulations. Critics contend banks will want to be labeled "systemically important," because then they know they'll never be allowed to fail. Except we now have plenty of data on banks' behavior under Dodd-Frank, and it's clear they avoid the label like the plague.
Dodd-Frank also created something called "orderly liquidation authority" (OLA) — basically a tool regulators can use to quickly dismantle a failing bank while protecting the rest of the system. Ryan and his cohorts characterize this as a bailout by another name. But that's ridiculous: OLA is specifically designed to make shareholders and creditors bear the cost of unwinding the bank. Management and board members would be fired and lose a lot of money. The bank would die. It would be an exceedingly strange "bailout."
3. It's also based on a lie about community banks. Ryan claims Dodd-Frank placed "untenable burdens on community banks across the country." Those smaller banks have historically provided the bulk of home mortgages and small-business loans, but Dodd-Frank's critics argue the law's myriad rules cut off that flow of credit. "That has hit Main Street hard," Ryan said.
Except lending has grown relentlessly since Dodd-Frank, and is almost back to its historical highs as a share of the economy. Bank profits are doing just fine, too. So consumers have plenty of access to credit.
Ryan is right that community banks themselves are dying, but they've been dying for several decades and the passage of Dodd-Frank caused hardly a blip in the trend line. Furthermore, the main reason they're dying is that inequality and wage stagnation, combined with the mass accumulations of wealth among the 1 percent, has driven interest rates permanently into the basement. And that creates a much tougher environment for small banks to thrive.
4. The CHOICE Act guts consumer protection. Possibly Dodd-Frank's biggest success was the creation of the Consumer Financial Protection Bureau (CFPB), which polices consumer financial products for predatory and exploitative practices. Conservatives have had it in for the CFPB for a while, and Ryan decries it as "unchecked, unconstitutional, and unaccountable." But the design of the CFPB's leadership and financing, while unusually strong, is not unique among government agencies.
Furthermore, the myriad ways the CHOICE Act would shrink the CFPB's jurisdiction and dismantle its regulatory tools (most remarkably, it gets rid of the CFPB's public database of consumer complaints) makes it clear the law's purpose isn't expanding freedom for consumers — it's expanding freedom for financial firms at consumers' expense.
5. Finally, it's based on a pernicious misunderstanding of the economy. Add all the justifications for the CHOICE Act up, and you actually get a somewhat coherent philosophy: Under capitalism, the best way to make money is often to already have money. So as wage stagnation, inequality, and financial insecurity spread, it becomes harder for traditional financial products — designed on the assumption of a middle-class economy where wealth is broadly shared — to work for most Americans. So the financial industry must be allowed to offer more outlandish, risky, and predatory forms of credit to keep capital flowing to the lower reaches of the economy.
The other solution, of course, would be to use tools like unions, regulations, monetary policy, and fiscal policy to cut the rich down to size, redistribute wealth, empower workers, and raise incomes. But that's something the GOP would never contemplate. So the CHOICE Act is it.