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Dodd-Frank Act Leaves America Less Stable, Less Prosperous, Less Free

Washington, July 21, 2015 - WASHINGTON – House Financial Services Committee Chairman Jeb Hensarling (R-TX) will deliver remarks today at the American Enterprise Institute on the fifth anniversary of the Dodd-Frank Act becoming law.  The following is the embargoed text of his speech as prepared for delivery:

Thank you, Peter [Wallison], for your kind words. You know, there are those on the left who have abandoned all pretense to truth. For them, story-telling has replaced truth-telling. Not Peter. His work on the real causes of the financial meltdown of 2008 is a paradigm of scholarship “speaking truth to power.” We need more solid research like that if this nation is to follow the right path to prosperity and freedom in the future.

I am sorry Arthur Brooks could not be with us today. I love the title of Arthur’s new book, The Conservative Heart. It is intentionally ironic.  After all, conventional wisdom is that conservatives have no heart and liberals have no brain. There is very little then Arthur can do about the liberals, but he has set out to change this misperception of conservatives and create—or restore—a conservative language that speaks to the heart and not just the head. The Founders of America were deeply conservative, yet they spoke a powerful language of personal worth and happiness. They sparked a revolution of equal rights and liberty under law that is still transforming the world.  Conservatism lays down the foundations for meaningful work, family, community, and faith—the institutions that make it possible for every human being to pursue the God-given right to happiness. This is Arthur’s eleventh book. He writes them much faster than I can read them! But I look forward to learning from his latest as I have from the others.

Thank you for inviting me to speak here at American Enterprise Institute.

Ladies and gentlemen: something is changing in America. The “animal spirits” of free enterprise, entrepreneurial risk-taking and dream-chasing that have identified us as a people are being tamed. This corresponds not only to challenging economic times but to the perceptible loss of individual freedom in America today.

Today I want to focus on the unhappy results of Dodd-Frank, the so-called “Wall Street Reform and Consumer Protection Act,” which was signed into law five years ago today. Weighing in at 2,300+ pages, promulgating 400 new administrative rules, it represents the most dramatic and sweeping rewrite of our financial laws since the New Deal. At the time its proponents promised it would “lift our economy, end “Too Big to Fail” and “promote financial stability.”  Yet five years later the evidence continues to mount that our society is now less stable, less prosperous, and less free.

The financial panic of 2008 caused anger against financial firms and the bailouts they received. The liberals’ story was that an alchemy of Wall Street greed, outsized risk and massive Washington deregulation almost blew up the planet. This necessitated enormous taxpayer bailouts and a functional occupation of our capital markets by federal regulators courtesy of Dodd-Frank.

Although false, the left’s narrative has permeated the body politic. I am reminded of Churchill’s remark: “History will be kind to me, for I intend to write it.” To our detriment we allowed the left to write the first history of the 2008 financial panic. Thankfully the record is now being set straight through the great work of Peter Wallison and others at AEI and elsewhere.

It is clear that the financial crisis resulted not from deregulation but from dumb regulation. In fact, total regulatory restrictions on the financial services sector grew every year in the decade leading up to the panic, including landmark laws hailed for stopping abuses: Sarbanes-Oxley, FIRREA, and the FDIC Improvement Act, to name just a few. Yet Washington not only failed to prevent the financial crisis; Washington led us into it.

Washington promoted moral hazard by encouraging bad loans supported by Fannie Mae and Freddie Mac to meet their mandatory “Affordable Housing Goals” put on steroids. Let’s remember that more than 70 percent of subprime and Alt-A mortgages that led to the crisis were backed by Fannie and Freddie, the FHA and other taxpayer-backed programs. Liberals asked them to “roll the dice a little bit more.” They did, and we all lost.

If you have to point to a root cause of the financial crisis, this is it: government housing policies.

Finally, the Federal Reserve did its indispensable part by maintaining a highly accommodative monetary policy that dramatically lowered interest rates, kept them low and inflated the housing bubble. Sound familiar?

Now let’s examine another part of the Left’s narrative of the financial crisis—the claim regarding “outsized” risks taken by financial institutions. As Hayek explained in Road to Serfdom, the willingness to bear risks is one of the central ideas upon which society rests. Risk is an essential element of personal liberty and of market prosperity. To take away risk from the financial system is to take away innovation and the opportunity for the common man to succeed. If we ever lose our ability to fail in America, we may one day discover we have just lost our ability to succeed.

For those who want Washington to be the final arbiter of acceptable financial risk in our economy, they should first consider whether Washington is even competent to manage risk. A review of the federal government’s track record in this area does not inspire confidence.  The National Flood Insurance Program is $24 billion underwater — yes, pun intended. The Pension Benefit Guaranty Corporation is running a total asset deficit of approximately $62 billion. And the Federal Housing Administration recently received its first taxpayer bailout courtesy of the Obama Administration.

Now let’s turn to greed. It is an article of faith on the Left that Wall Street greed caused the crisis. My question to them is when hasn’t there been greed on Wall Street? How was that the determining factor? 

The greater threat has always been greed in Washington: the greed of the ruling elite for more power over an ever increasing share of our economy, our lives, and our liberty. Dodd-Frank is the absolute epitome of Washington greed.


The Dodd-Frank architecture, first of all, has made us less financially stable. Since the passage of Dodd-Frank, the big banks are bigger and the small banks are fewer. But because Washington can control a handful of big established firms much easier than many small and zealous competitors, this is likely an intended consequence of the Act. Dodd-Frank concentrates greater assets in fewer institutions. It codifies into law “Too Big to Fail” and taxpayer-funded bailouts. Title I dangerously allows the federal government to designate Too Big to Fail firms — also known as “SIFIs.”  In turn, Title II creates a taxpayer funded bailout system (the so-called “Orderly Liquidation Authority”) that the nonpartisan CBO estimates will cost taxpayers over $20 billion.

However, from Wall Street’s point of view, Dodd-Frank may not be such a bad deal after all. The big investment houses can help shape regulations guaranteeing taxpayer bailouts for themselves while stifling their competition and grabbing market share.

This is bad policy and worse economics. It erodes market discipline and risks further bailouts, to be paid mostly by middle and lower income taxpaying families. It becomes a self-fulfilling prophecy, helping make firms bigger and riskier than they otherwise would be.

Let’s look more closely at two other prime examples of Dodd- Frank risk.

First: derivatives markets were perceived to be at the heart of the 2008 crisis. Dodd-Frank’s scheme for regulating them is to mandate clearing of certain derivatives, claimed to be systemic risks, through centralized clearinghouses. It then designates these clearinghouses as a whole new class of institutions it calls “systemically important financial market utilities,” or FMUs. In return for greater supervision by the Federal Reserve, guess what FMUs get? Immediate access to the Fed’s discount window. You might expect these private firms to resist socialization, but former FDIC Chair Sheila Bair said that some clearinghouses “were drooling at the prospect of having access to loans from the Fed when Title VIII was being crafted.” So Dodd- Frank did not lessen risk, it just centralized it and placed it on the taxpayer balance sheet. 

Second is the Dodd-Frank horror known as the Volcker Rule, a 932-page confounding, confusing and convoluted regulation which  hits Main Street businesses. The Rule is a paradigm for a bureaucratic solution in search of a problem. It severely limits financial institutions’ proprietary trading. 450 financial institutions failed during or as a result of the 2008 financial crisis, but not one was due to proprietary trading. Not one. In fact, financial institutions that varied their revenue streams were better able to weather the storm, keep lending and support job growth.

While Volcker is solving a problem that does not exist, it is creating a new problem that did not exist before: dramatically reduced liquidity in the corporate bond markets. Many economists believe the next financial crisis could result from the illiquidity and volatility in our bond market.  The CEO of Blackstone recently wrote an op-ed in the Wall Street Journal saying that: “locked-up markets and rapidly falling securities prices will force banks to reduce assets and hoard liquidity…to satisfy…regulatory tests. With individuals suffering losses and companies not able to raise capital, the economy will contract with layoffs, lower tax revenues and pain for middle- and lower-income Americans.”


Second, in addition to making our economy less stable, the Dodd- Frank bill has made us less prosperous. Under the Obama economic strategy of which Dodd-Frank is a central pillar, our anemic recovery has created 12.1 million fewer jobs than the average recovery since World War II. For more than a year now, the share of able-bodied Americans in the labor force has hovered at the lowest level in nearly 40 years.  Small business startups are at the lowest level in a generation. Had this recovery been as strong as average previous ones, middle income families would have nearly $12,000 more in annual income, and 1.6 million more Americans would have escaped poverty.

But more than numbers, my constituents’ angst tells me all I need to know. One wrote: “There are part time jobs around my area…but always jobs with no benefits and less than 40 hours…My son is a disabled Iraqi Freedom combat veteran who has lost hope of a decent full time job.” Another said: “Our small business has recently laid off 25% of its workers. The remaining of us have taken a 15% pay cut and that is probably not going to be enough without more layoffs for tenured people.” Every member of Congress still gets letters like these.  The painful truth is that Dodd-Frank and the hyper-regulated Obama economy are failing low- and moderate income Americans who simply want their fair shot at economic opportunity and financial security.

Dodd-Frank has killed off a benefit which many, if not most, consumers once took for granted: free checking. 75 percent of banks used to offer free checking. By 2012, two years into the Dodd-Frank regime, only 39 percent did so — a trend many attribute to price controls imposed by Dodd-Frank’s “Durbin amendment.” Democrats on my committee actually sneered at this last week. But for low- income families, the cost of banking is no laughing matter.

How does Dodd-Frank’s Orwellian-named Consumer Financial Protection Bureau (or CFPB) impact minority borrowers?  A recent Federal Reserve report states that within a few years roughly one-third of black and Hispanic borrowers may find themselves disqualified from obtaining a mortgage to buy a home because of CFPB’s “Qualified Mortgage” rule based solely on its rigid debt-to- income requirements.

Furthermore, according to the FDIC, more than 9 million households don’t have a checking or savings account, principally because account fees are too high or unpredictable, another consequence of Dodd-Frank.

The Act’s 2,300 pages launched a salvo of consequences that have crippled growth. It was supposed to target Wall Street but has instead clearly hit Main Street. It has had pernicious effects on small businesses and community financial institutions which are the lifeblood of the Main Street economy.

Community banks and credit unions supply the bulk of small business and agricultural loans, but the combined weight of Dodd-Frank’s 400 regulations is dragging them down. In fact, we’re now losing one community financial institution a day. One Texas community banker told me: “My major risk is not credit risk, risk of theft, risk of some robber coming in with a gun in my office. My number one risk is federal regulatory risk.”

And Dodd-Frank’s rules go far beyond banks and credit unions.  The corporate governance provisions in Title IX hit every public company in America. Grocery markets, cable TV servers, and bowling alley chains did not cause the financial meltdown but still must comply with regulations imposing wage controls, salary ratios, and private compensation disclosures made for Wall Street investment firms.  Every dollar businesses spend to hire lawyers and accountants to explain this gibberish is taken out of working peoples’ wages and capital expansion. No wonder the economy limps along at 2 percent GDP growth, 40 percent below its historic norm. No wonder low- and moderate-income Americans lose sleep at night worrying about their stagnant wages, smaller bank accounts, and children’s future.


Third, and perhaps most ominously, Dodd-Frank has made us less free. We are losing not only our economic freedom but our political freedom as well. Today, Americans are less and less governed by the rule of law and more and more governed by the discretion of regulators.

It is OSHA now, not Congress, that governs over workplace safety.  It is the EPA now, not Congress, that governs our air quality.  It is HHS now, not Congress, that governs over our health care.

And most alarmingly to our economic opportunity and economic liberty, it is now the bureaucratic progeny of Dodd-Frank that rules over our financial markets.

Jonathan Macey of Yale Law School was most prescient when he noted that, “laws classically provide people with the rules. Dodd- Frank is not directed at people. It is an outline directed at bureaucrats and instructs them to make still more regulations and to create more bureaucracies.”

Two of the most worrisome new government entities are the aforementioned CFPB, and the Financial Stability Oversight Council – FSOC. Both operate largely out of public view. Both are subject to virtually no checks and balances.  And both have been granted sweeping, unilateral powers to fundamentally control huge swaths of the U.S. economy.

Arguably, the CFPB is the single most powerful and least accountable federal agency in our nation’s history. The CFPB, or more specifically its one unelected director, has almost absolute discretionary power to find any consumer credit product “unfair” or “abusive” and, thus, functionally outlaw it. When it comes to credit cards, auto loans and mortgages of hardworking taxpayers, the CFPB has unbridled power not only to make them less available and more expensive, but to absolutely take them away.

Now let’s look at FSOC. FSOC is an amalgamation of regulators heading agencies that either helped cause the financial crisis or were largely negligent in preventing it, notwithstanding they had the regulatory power to do so.  Dodd-Frank rewards their failures by granting them the most sweeping powers over our capital markets since the New Deal. Dodd- Frank allows Federal regulators to unilaterally define vague statutory terms like “systemic risk,” “financial stress,” and “financial stability.” And by doing so, dictate the capital standards, product mix and lending activities of major financial firms within our economy.  Should firms not bow to FSOC’s will, FSOC is even empowered to break them up. This is nothing short of a functional occupation of the “commanding heights” of our economy by federal regulators who have now been empowered to be central planners.

With the exception of agencies dealing in classified information relating to national security, FSOC may very well be the nation’s least transparent federal entity.  Better Markets, a Washington organization that consistently advocates for more regulation of our financial system, said: “FSOC’s proceedings make the Politburo look open by comparison.”

The raison d'être of the Dodd-Frank Act was the risk of the “shadow banking system.” Yet a far greater danger is instead posed by the “shadow regulatory system” which operates beyond the checks and balances of the three branches of government established by our Constitution.

When the Founders set up our system of governance, they included many constitutional protections for a great national economy under the “rule of law.” They wanted a society of commerce, trade, industry, work, and entrepreneurship, and they dismantled high government barriers to these activities. They had a noble purpose.  They wanted all, including those who in the Old World were at the bottom of the ladder—the poor, the needy, the oppressed—to rise in this new “land of promise.”

It wasn’t arrogance that made America the new “land of promise.” For they knew there was a contradiction between this “land of promise” and the millions in bondage here whose human worth and natural rights were denied. As Lincoln told us later, the Founding generation could not find a way to free them at the start, but they did boldly proclaim that all human beings are entitled to their God-given rights. They had the foresight to lay down an open market economy under a limited government—and when the time of liberation came at last, the opportunity to rise would be theirs as well.  and oppressed of many lands to realize their dreams in this “land of promise,” inspired by the Founders’ conservative vision of individual freedom, opportunity, accomplishment, and happiness.

Never in history has there been an economic system under the rule of law which has been so successful and so prosperous for so many people. In America, we understood that we don’t need free markets just to create private riches or government largesse—because material possessions can never substitute for meaning and purpose in one’s life. Economic freedom fosters these: achievement, productive work, savings, imagination, enterprise. All of these are entitled to their just reward. When government taxes away the fruits of your work and smothers your imagination with a thick web of rules, they haven’t just taken your wealth—they’ve robbed you of purpose.  They’ve stolen your right to pursue your dream. 

Even worse, although the Progressive version of government by the “rule of regulators” claims to cut the rich down to size, it is those at the bottom struggling to better their lives who are pulled down by these uncompassionate policies. The American Idea unites liberty, law, and the goal of happiness in a bond that must not be severed.  America is unique in being called upon to restore the promise of liberty under the rule of law—a promise we have shed blood to defend.

Tomorrow is another day. Tomorrow I see an America with the most competitive, innovative, transparent financial markets the world has ever known. Tomorrow I see an America where the economic liberties of every citizen are respected. Tomorrow I see an America with boundless opportunity in a surging economy for anyone who will work and dream big dreams. 

So today, let’s commit ourselves to nothing less than the replacement of Dodd-Frank. Before the next economic downturn, Congress should replace Dodd-Frank. With this modest first step, together we can begin to win back America’s promise.

Thank you.                                                                                                                           


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