Rewarding success and punishing failure is the best way to ensure more of the first and less of the second. That’s common sense, but Congress has a knack for spreading confusion. The Obama-era financial services law called Dodd-Frank was intended to prevent financial practices that triggered the Great Recession of 2008, but its mountains of regulations have picked the pockets of consumers rather than protecting them. An opportunity is at hand to restore balance between freedom and responsibility in the marketplace.
The House is expected to vote this week on the Financial Choice Act, a bill endorsed by the Financial Services Committee last month in the usual party-line vote. The measure would enable the Securities and Exchange Commission to triple the penalties imposed on companies for fraudulent practices. It would take taxpayers off the hook for bailouts, ensuring that no company is “too big to fail.” (The managers of such a company might have been too big for their britches, however.) Instead of using taxpayer money to replace losses, insolvent companies would be sent into the bankruptcy courts. Rather than hit Americans in the wallet, the White House predicts the legislation could save $35 billion over 10 years.
Such a law would repeal the so-called Chevron Doctrine, which defers to federal agencies in interpreting the rules they administer. In the hands of ambitious bureaucrats, the doctrine has been a license to expand their domain in ways that Russia’s Vladimir Putin might envy.
The legislation would rename Consumer Financial Protection Bureau the Consumer Law Enforcement Agency and restructure its function to include protection of both consumers and competitive markets and, significantly, rein current unaccountability by placing its budget under the Federal Reserve and making it easier for the president to fire a rogue director. So far there’s nothing to overturn Dodd-Frank’s cap on debit card swipe fees. The cap was meant as a money-saving measure for consumers, but banks, unwilling to swallow losses, made themselves whole by eliminating their popular free checking feature.
The blizzard of federal regulations unleashed by Democrat-backed passage in 2010 of Dodd-Frank’s 2,300 pages put at a disadvantage smaller financial institutions like community banks, which rarely have the resources to cope with heavier burdens. The impact was telling: Community banks’ assets were halved from 1994 to 2015, according to a Harvard study. While the Great Recession was rough on small banks, with 6 percent of them disappearing, the study found that “since the second quarter of 2010 — around the time of the passage of the Dodd-Frank Act — their share of U.S. commercial banking assets has declined at a rate almost double that between the second quarters of 2006 and 2010.” Swinging their regulatory club at Wall Street, Congress missed, and clobbered Main Street.
The triggers for the Great Recession without a doubt included market malfeasance by financial institutions that took on too much risk, and the accompanying lax lending practices of quasi-government lenders Fannie Mae and Freddie Mac. Government-mandated affordable housing policies instituted in the 1970s also played a role.
Hard times call for action, but Dodd-Frank was too much of the wrong action. Congress can correct course by repealing and replacing it with the Financial Choice Act.