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Subcommittee: Washington Got Cause of Financial Crisis Wrong

Hastily passed Dodd-Frank Act a grab bag of excessive regulations harming consumers and the economy

Washington, May 13, 2015
The Dodd-Frank Act not only failed to respond effectively to the 2008 financial crisis, but it also created a host of new problems and lays the groundwork for the next financial crisis, a House subcommittee heard from witnesses on Wednesday.

The Financial Services Subcommittee on Oversight and Investigations, chaired by Rep. Sean Duffy (R-WI), held the hearing to examine assumptions about the cause of the 2008 financial crisis that resulted in passage of the Dodd-Frank Act and its accompanying regulatory burdens.
“Those who supported Dodd-Frank have been more concerned with helping special interests in Washington than their constituents back home and the proof is in the numbers.  Fewer people have returned to the work force than in any other modern recovery.  Our community banks are closing every week, main street lenders are being slowly euthanized and the number one cause that I hear from people in Wisconsin is the excessive regulatory burden imposed by this administration.  Dodd Frank is a major cause of that burden,” said Chairman Duffy.

“Dodd-Frank’s crushing regulatory regime continues to keep people out of work, prevent businesses from hiring and makes it harder for my constituents to get the loans they need to finance the expansion of their business or buy their first home,” he added.
Key Takeaways From the Hearing:

  • Hastily passed in reaction to the 2008 financial crisis, Dodd-Frank is the most recent example of policymakers deflecting blame and public anger by pushing forward an inaccurate narrative of “market failure” and insufficient regulations.  Like the historical examples that preceded it, Dodd-Frank is a failed law that benefits big banks at the expenses of consumers.
  • Rather than being caused by market failures, the 2008 financial crisis was caused by bad government policy and regulatory incompetence.  Federal housing policy pushed financial institutions to lend money to people to purchase homes they could not afford. The Federal Reserve’s accommodative monetary policy inflated the housing bubble until it burst.  Regulators whose responsibility it was to monitor and ensure the safety and soundness of financial institutions failed to recognize and understand the risks building up in the system until it was too late.  Before the crisis, regulators had all the authority they needed to regulate the financial system; they simply failed to use that authority responsibly, effectively, or wisely.
  • Because Dodd-Frank does not address the fundamental causes of the financial crisis, it will be ineffective in preventing the next crisis.  Instead, Dodd-Frank lays the groundwork for another financial crisis by enshrining “too big to fail” and taxpayer-funded bailouts into law.  In addition, Dodd-Frank benefits the most powerful and well-connected financial firms by raising barriers to entry that give big firms a huge competitive advantage over smaller firms.

Topline Quotes from Witnesses:

“The flaws of Dodd-Frank are not surprising; the drafters were working quickly under difficult circumstances without full information. Rather than relying on its own investigative powers, Congress delegated much of the legwork for determining what had gone wrong to the Financial Crisis Inquiry Commission.  That commission produced its report six months after Dodd-Frank became law.” – Hester Peirce, Financial Markets Working Group Director at the Mercatus Center, George Mason University

“As the failures and bailouts of the financial crisis accumulated, so too did the calls for a quick and thorough rewriting of the financial regulatory rulebook. The resulting Act was the product of fear and fury, not of careful analysis.  Grounded in an inaccurate market failure narrative, Dodd-Frank expands regulators’ authority to enable them to play a more central role in managing the financial system and identifying and mitigating systemic risks. This approach to financial regulation, while a natural response to a market failure narrative, only increases the vulnerability of financial system to regulatory failure.” – Hester Peirce, Director of the Financial Markets Working Group at the Mercatus Center, George Mason University

“A likely competitive consequence of these decisions is that there will be fewer and larger banks in the United States. After the acute phase of the financial crisis but before enactment of Dodd-Frank, Professor Joseph Stiglitz said, in testimony before the Joint Economic Committee, ‘There is no good case for making the smaller, competitive, community-oriented institutions take the brunt of the down-sizing, as opposed to the bloated, ungovernable, and predatory institutions that were at the center of the crisis.’  But that is exactly what Dodd-Frank does, by layering on costly new regulations that the large banks can afford but smaller ones cannot. Since Dodd-Frank’s enactment, the rate of bank failures has remained high by historical norms, but all of the failures have been of smaller banks, with only a handful having assets in excess of a billion dollars.” – Paul G. Mahoney, Dean and Professor of Law, University of Virginia School of Law
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