Politics & Economics

Dodd-Frank Act for Beginners-“Keep it or Repeal it?” 

Author: Leslie Ferderigos, JD

I will by no means say I am an expert or even close to it when it comes American economics. In fact, I really didn’t even thoroughly understand the difference in each political parties economic platforms until recently. So why even read this blog? You should read it because even though I hardly knew anything in this area, I did spend hours over the last weeks researching and interviewing both republicans and democrats on their idea behind whether they believed the Dodd-Frank Act should be kept or repealed. Reading this article will  save you time and allow you to contribute intelligently to the next Dodd-Frank conversation without having spent your life on Wall Street or put in the hours like I did over the past few weeks.

For those who do not know what the Dodd-Frank Act is, I will take you thru a brief historical timeline leading up to its creation. Again, this will be brief so I encourage you to do more research for a thorough understanding in the political party debate of regulation vs deregulation. If you are really interested, maybe even dissect the act itself.

  • Great Depression: 1929-late 1930s
  • Creation of Glass-Steagall act (government regulation) 1930s – 1999
  • Repeal of Glass-Steagall act: 1999
  • 2007 market crash: 2007-2008
  • Creation of Dodd-Frank act: 2010 (government regulation)

After tracing historical events leading to the creation of the Dodd-Frank Act, I reached out to both Right wing and Left wing advocates to see what each side had say. I posted this comment on my social media and waited for responses:

Hello Friends: Trump wants Congress to repeal this act, that was set up by Obama to protect the consumer after the 2007 market crash. I am wondering the long term effects it will have once repealed. Last time deregulation was allowed in this area, we hit our biggest housing crash since the Great Depression. This is something I am unfamiliar with and appreciate any insight from those more researched in this area. Any thoughts?

The Right Wing says…this answer came from a professional with over 70 years experience in banking, lending, and financial service:

Dodd-Frank only served to make the too big to fail banks bigger and stronger. It has destroyed competition within the banking industry, driven up the cost of banking for consumers, and reduced the availability of credit. It has a very detrimental impact on the growth of small business in this country, that segment of the economy that has responsible for the largest number of new jobs created. It has only served to further entrench the corrupt banks that worked with corrupt politicians to create the conditions that led to the 2007 market collapse. What does need to be reestablished are portions of Glass-Steagall. 

The intent of the Volcker Rule is sound, but like a lot of things the devil is always in the details. If we recall the S&L crisis of the late 80s was also centered around “speculative investment” activities as well. As structured the rule has had a detrimental impact on community banks. The larger banks have yet to comply with the law and have pressed for an extension to their exception. The narrative that has been pushed by both the government and the main stream media is that the 2007 crisis was caused by the large banks, when in fact it was caused by the government facilitating and coercing the banking industry into making risky loans, loans that they would not have made otherwise. Yes, the final straw in 2007 had to do with derivative investments associated with mortgage backed assets, but the reasons those investments were such a problem was that the underlying loans were a problem, loans that never would have existed without government guarantees. When the government bailed out the too big to fail banks they were effectively bailing themselves out! Dodd-Frank was sold as the remedy when in fact it only strengthened the ability of the too big to fail banks to maintain market dominance. The real underlying problem was and is government guarantees, regulation, and coercion that results in bad loans and market distortions. Since 2007 we have seen this repeating itself in the student loan market, and to a large extent the health care markets as well.

The Left Wing says…these responses come from various left wing lawyers:

We have to watch this closely. I am affiliated with an organization that does this work and we are concern about the repeal which will open The door for predatory lenders

The Dodd Frank Act is a very weak protection for borrowers but it was the best bill possible at the time; without it we’re losing a lot of ground.

Wasn’t Dodd-Frank largely toothless? The major financial deregulation occurred with the Glass-Steagal repeal and Commodity Futures Modernization Act passage under Bill Clinton. Though I’m sure Bill and his acolytes would dispute that, naturally.

In reality, nothing is to stop the market from doing that now. And critics are right: the costs of compliance falls most heavily on smaller banks. But there’s ways to pass real financial regulation that prevents the abuses leading up to the housing crash (if not removing that risk altogether). Dodd-Frank just isn’t it- though some provisions, like some functions of the CFPB, have proven useful. As an aside, along with Trump, several states are suing the Fed Gov’t over Dodd-Frank’s constitutionality.

Not toothless. It gave a lot of new tools and mandates to the Cftc and SEC, among other things. Dodd frank is huuuuge. It’s hard to make generalizations on it. Some people hate how it affecting the mortgage lending industry, but that is a very small part of it

Toothless to a point, but remember that it helped create the CFPB. If that act fails, CFPB disappears. We lose a BIG watchdog. 

The current view as I have heard it is that it is less likely that the entire Act will be rolled back, and more likely that selected investment and securitization reforms will be rolled back. The CFPB will probably be weakened by reducing its autonomy further, reducing its funding and/or filling it with bank-friendly appointees. Banks have spent a lot of money to comply with the CFPBs rules up to this point… rolling everything back would be more expensive than just hitting pause.

 

I hope this blog gave you the basic idea behind  issues on the Dodd-Frank Act. If your an expert in this area, maybe you enjoyed hearing what each party had to say. For the beginners, the next time you hear someone speak of the Dodd-Frank Act, you can intelligently join in the conversation and maybe even impress someone

Happy learning!!

Leslie Ferderigos, JD

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s