Three years after the Dodd-Frank Wall Street Reform and Consumer Protection Act became law, experts are still debating its impact.
President Barack Obama celebrated its enactment during his weekly address.“Three years ago this weekend, we put into place tough new rules of the road for the financial sector so that irresponsible behavior on the part of a few could never again cause a crisis that harms millions of middle-class families,” he said.
“We’ve locked in new safeguards to protect against another crisis and end bailouts for good, and even though more work remains, our financial system is more fair and much more sound than it was,” Obama declared.
Some experts, however, believe the president is overselling the law passed in response to the 2008 financial crisis. They worry that the increased regulation limits consumer choice while protecting business interests, and that the law’s new rules and institutions embrace the “too-big-to-fail” mindset while threatening individual privacy.
John Berlau, a scholar at the free-market Competitive Enterprise Institute, argued to The Daily Caller News Foundation that big businesses hijacked Dodd-Frank for their own gain.
“Walmart, Walgreens and Home Depot got price controls on what they pay to banks for debit cards, which is really one of the most costly provisions for ordinary consumers,” he said. “That’s when banks got rid of free checking unless you have a big balance, because if they couldn’t get retailers fees they had to charge more to consumers.”
“At the time, the businesses that were more popular than the banks could use [Dodd-Frank] to their advantage,” he continued. “It was a free-for-all; different lobbyists with different agendas, if they could label it financial reform, got their agenda thrown in there, whether or not it was in the public interest.”
Berlau also lamented a lack of consumer choice in financial products and its unfortunate repercussions.
“There are limits on competition,” he said. “Some community banks have stopped making mortgages,” which forced consumers into larger banks that operate under Dodd-Frank’s auspices but which often offer less-competitive pricing.
Many academics are additionally concerned that Dodd-Frank allows investors and institutions to take irresponsible risks – like the ones that precipitated the 2008 financial crisis – because they know the government will protect them in the end.
Hester Peirce, a scholar at the Mercatus Institute, told TheDCNF how Dodd-Frank’s placement of all financial derivatives into government-managed clearing houses could lead to poor investment decisions and possibly unbalance the financial markets.
Because derivatives are such a complicated and long-term investment, Peirce argues that investors should always pay close attention to who they’re dealing with. “What Dodd-Frank does is say, ‘Don’t worry about [your counterparty], because you’re going to be in this relationship now with a clearing house for a year, and the clearing house is safe, so don’t worry about it,” she said.
“What we’ve done then is we’ve removed a whole layer of market scrutiny on counterparties,” Peirce concluded.
Other experts fear that certain Dodd-Frank institutions perpetuate a “too-big-to-fail” mentality, making future bailouts of financial institutions and other big businesses all-but-inevitable.
Writing in National Review, Iain Murray describes how the Financial Stability Oversight Council designated certain large firms as“systemically important financial institutions.”
“The idea of this designation was to end ‘too big to fail’ and thereby end bailouts,” he wrote, “but it appears to have had the reverse effect and entrenched ‘too big to fail’ firms.”
The designated firms come under greater regulatory scrutiny by the Federal Reserve, but in doing so they receive funding advantages over their competitors while still enjoying the implicit support of the government should their business fail.
“The implication is that the Fed’s regulation will keep them strong, but if in the future they should become weak for any reason, their customers and creditors can have some confidence that the government will step up to be sure that they meet their financial obligations,” wrote Peter Wallison at American Enterprise Institute.
Wallison reports that non-banks like GE Capital and Prudential have also recently been designated “systemically important financial institutions.”
Finally, academics worry about the accountability of Dodd-Frank’s most powerful progeny, the Consumer Financial Protection Bureau.
Berlau decried the “lack of checks on the CFPB” in a recent article. The bureau is funded directly from the Federal Reserve, allowing it to sidestep the congressional appropriations process. It is run by a single, unimpeachable director and is immune from the kind of judicial scrutiny to which other independent agencies must submit.
This perceived lack of accountability led the Competitive Enterprise Institute to challenge the constitutionality of the CFPB’s structure in federal court.
Even more disturbing to Berlau, however, is the secretive data collection program being run by the CFPB. TheDCNF previously reported details about the program, including that millions of Americans’ financial information falls under its purview and that private contractors are building a database containing 80 percent of all credit card transactions in the United States.
“[The database] smacks of the National Security Agency scandal, but lacks the justification of fighting terrorism,” Berlau wrote.
Taken together, the experts’ analyses make it clear that Dodd-Frank’s impact is far from settled. And with two-thirds of the law essentially unimplemented, the possibility that more problems arise remains high.
“You can’t expect [how Dodd-Frank implementation will progress],” Berlau said. “Given the imagination of Obama administration regulators, and given the vagueness in terms of the statute itself, there may be some really nasty surprises.”
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