The Heritage Foundation’s Blueprint for Reform offers scores of policy recommendations for the next administration. Many of the proposals aim to fix the failed economic policies of the last decade. Of these, none is more important than the think tank’s call to repeal the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.
A political response to the 2008 financial crisis, the Dodd-Frank Act was woefully misguided. Supporters of the measure have consistently argued that what triggered the crisis and the ensuing recession was deregulation of the financial industry. This, we are told, loosed the hounds of rapacious capitalism, who exploited the free market by indulging in greed-fueled excesses.
But this is a wholly false narrative. The U.S. has seen no substantial reduction in financial regulations for more than a century. Were Congress to repeal the Dodd-Frank Act in its entirety, the financial services industry would still be saddled with a dangerous regulatory system completely at odds with the concept of a free society.
For decades prior to the 2008 crisis, U.S. regulators expanded the size and scope of banking regulations. They also increasingly applied bank-like regulations to insurers, investment funds and other non-bank financial companies. Dodd-Frank doubled down on this initiative.
Regulators’ increasingly paternalistic role harmed the stability, competitiveness, and effectiveness of the financial system long before the financial crisis. Indeed, this ever-expanding role contributed mightily to the crisis.
One of the most oft-repeated claims is that the 1999 Gramm-Leach-Bliley Act (GLBA) caused excessive risk-taking because it repealed the Glass-Steagall Act, the 1933 law that separated commercial and investment banking. In fact, the GLBA did not fully repeal Glass-Steagall.
More importantly, it didn’t really deregulate financial markets. Between 2000 and 2007, federal financial regulators issued almost 800 separate rules, totaling more than 7,000 pages. The agencies listed only seven of these rules as deregulatory.
Of course, these figures pale in comparison to the regulatory onslaught that Dodd-Frank provided. Dodd-Frank enacted very broad mandates for regulatory agencies to write rules, and the regulators have taken every opportunity to flex their newly acquired muscles.
Between 2008 and July 2016, federal financial regulators issued more than 1,000 rules (only 15 of them deregulatory in nature) totaling almost 21,000 pages. For those keeping track, that means regulators have issued almost 1,800 new rules totaling more than 28,000 pages since 2000.
The bulk of these rules have been issued since the financial crisis, and Dodd-Frank requirements represent a large portion of the total. While increasing regulation is nothing new in Washington, it’s an approach which has flourished during the Obama administration.
According to the regulatory agencies’ own numbers, the administration has imposed a total of 229 major rules — defined as regulations that cost at least $100 million per year apiece). Together, these rules now cost $108 billion annually, according to the regulators’ estimate, and there’s little doubt that the actual costs are far greater. Some of the worst effects — loss of economic freedom and opportunity, for example — are incalculable.
Rather than deal with the true causes of the 2008 crisis, Dodd-Frank exacerbated and compounded the economy’s existing ills. The resulting financial regulatory framework has restrained the economy’s recovery, introduced even more moral hazard, and expanded the number of firms that are too big to fail.
Again, Dodd-Frank is largely based on the mistaken belief that the 2008 crisis stemmed from unregulated financial markets. Quite the contrary, what brought on the financial crisis was the government’s very active role in directing financial markets, along with its promises to absorb losses of private risk-takers.
The next presidential budget should recognize that free financial markets improve economic growth and prosperity. A vibrant financial sector widens economic opportunity by fostering capital formation and promoting a more efficient allocation of capital.
The current financial regulatory framework is complex, counterproductive and interferes with these processes. The next budget should set forth a path for returning financial market regulation to its core purposes of deterring and punishing fraud.
The next president should work with Congress to repeal Dodd-Frank.
• Norbert J. Michel, Ph.D., is a research fellow specializing in financial regulation at the Heritage Foundation’s Roe Institute for Economic Policy Studies.