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Checking in on ‘Too Big to Fail’ After Five Years

The Dodd-Frank financial reform law is still nothing to be proud of.

The Dodd-Frank financial reform law is now five years old, and it’s still nothing to be proud of. The Wall Street Reform and Consumer Protection Act was written by those who insisted deregulation was the cause of the financial crisis, and that stricter government control of the financial sector would boost the economy and bring financial stability. Unsurprisingly, the law failed to bring about this economic wonderland. In fact, as usual when government steps into a situation, things are worse.

Former Sen. Christopher Dodd (D-CT) and former Rep. Barney Frank (D-MA) — do note they are both former members of Congress — proceeded from the assumption that a lack of regulation was what sent the economy into a tailspin in 2007. In fact, the opposite is true. A report by George Mason University’s Mercatus Center indicates that regulatory restrictions on the financial sector grew every year between 1999-2008. Leave it to statists to confuse the amount of regulations with the effectiveness of regulations.

One of the worst regulations was easing mortgage lending standards beginning in 1977, which allowed people to purchase homes they couldn’t afford — all so Democrats could say that poor and minority home ownership was on the rise. The resulting easy credit created a housing bubble that burst spectacularly in 2007, toppling financial institutions left and right by 2008.

The government then stepped in (again), used taxpayer money to bail out some institutions while arbitrarily letting others collapse, then declared no institution should be “too big to fail.” Dodd-Frank was supposed to put an end to that problem.

Five years later, we still have banks that are too big to fail. In fact, the big banks are even bigger, while smaller community banks are being gobbled up by larger institutions or are going under because they cannot handle the crushing bureaucratic nightmare that Dodd-Frank unleashed. Since these smaller banks are the ones that make the majority of small business loans, individual entrepreneurship has become an unwitting victim of what Dodd-Frank hath wrought.

Fewer banks can now offer free checking or free debit card services in part because banks and retailers are now responsible for transaction fees imposed by the law. This reduces the banking and credit choices that poorer individuals and families can make.

Beyond all that, Dodd-Frank has done nothing to make the financial services sector safer from a shock like that in 2008. A series of regulatory schemes have reduced liquidity in the markets, taking away a principle safeguard that can reduce volatility during a financial downturn. Additionally, regulators can compel companies to install federal government officials on corporate boards to “oversee” financial decisions. In reality, these new board members have a say in every corporate decision from finance right on through to hiring and firing employees.

The Consumer Financial Protection Bureau was designed to have no oversight. It does not rely on congressional appropriations, drawing its budget instead from the very companies it fleeces on a regular basis. Courts are supposed to defer to CFPB decisions on how it chooses to interpret the law.

Naturally, both Dodd and Frank think the law is doing just swell. In an interview with The Wall Street Journal, Frank said, “The financial institutions are doing fine.” Dodd parroted his clueless assessment: “I think we got it about right and a lot of people who complain about this couldn’t organize a two-car funeral.”

In reality, Dodd-Frank, which passed the House without a single Republican vote and only three Republican votes in the Senate, has done nothing but percolate more financial chaos since its inception. Its only historical mark is that it almost surely will be a significant factor in the next financial crisis.

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