Now that the Senate has passed the massive 2,300-page Dodd-Frank bill, paving the way for the President to sign this unprecedented bill into law, it is useful to look at what the bill does and does not do. Proponents have long claimed that this measure is vital to reining in Wall Street excesses, to ending the ‘too big to fail’ political falsehood that led to numerous and costly taxpayer bailouts of failed private companies, and to achieving financial stability by eliminating any chance of risk in our economy, ensuring that always elusive goal of liberals: a risk-free society.
Of course, none of those claims is correct. Instead of addressing the obvious flaws that led to the very real financial crisis that began in 2008, the Dodd-Frank bill’s labyrinth of regulatory overreach and ill-conceived changes is certain to injure our economy for years if not decades to come.
The fundamental principle of any reform has to be getting the right diagnosis, because without that you cannot possibly hope to find the right cure. The Dodd-Frank bill fails that crucial test in several ways.
Killing Job Creation
First, and most importantly in this period of high unemployment, there is nothing in this bill that will help create jobs and much that will impede us in that goal. Through its numerous provisions that ban and ration credit products, make credit more costly and less available, and reduce consumer choices, the Dodd-Frank bill will be a private-sector job killer at a time when government policy ought to create an environment where private lenders lend responsibly to creditworthy consumers and small businesses. In fact, the only professions that may benefit from this bill are trial lawyers and government bureaucrats.
That sad fact gives way to yet another critical flaw in the Dodd-Frank bill: Massively expanding the size of government’s regulatory bureaucracy with new layers, agencies, and required rulemakings does not mean that oversight will get any better. In all likelihood, consumers will be worse off as the new alphabet soup of merged and restructured agencies struggle to organize, hire staff, stake out their jurisdictions and write an estimated minimum of 12 new government reports, 44 studies, and 243 new rulemakings required under the bill. All the while, banks and investors will sit cautiously on the sidelines waiting out the regulatory uncertainty of Dodd-Frank before they resume lending, Thus hampering our prospects for economic growth.
Despite Democrats’ claims that this bill will end taxpayer-funded bailouts, the bill creates a permanent TARP-like government bailout mechanism that is specifically designed to bypass the time-tested bankruptcy process for failed non-bank financial firms. Repeating the mistakes of TARP and making them permanent only institutionalizes the inherent unfairness of the government’s picking winners and losers. By bureaucratic fiat, the government can now take over a failed or failing company and borrow from the Treasury to pay off politically favored creditors.
The crony capitalism approach of rewarding politically favored allies over other similarly situated parties allowed the Obama Administration to favor the UAW over secured creditors in the bailout of GM, and foreign bank counterparties to be paid 100 cents on the dollar in the bailout of AIG while others with less political clout got a haircut.
No Fannie or Freddie Reform
Finally, the Dodd-Frank bill is singularly noteworthy for what it does not do: It does not require any reform whatsoever of Fannie Mae and Freddie Mac, the two government-sponsored mortgage giants whose failures have already cost taxpayers $147 billion and counting.
Repeatedly, other conservatives and I offered taxpayer-protection amendments to end the bailouts of Fannie and Freddie, recoup lost taxpayer money and end the hybrid public-private status of these two financial Frankensteins. At first our efforts were simply voted down by the Democratic majority. Later, when the omission of Fannie and Freddie from the bill became indefensible, our amendments were declared non-germane to the bill’s subject matter, which covers every aspect of economic activity from prepaid gift cards to a bank teller’s Christmas bonus.
Some may say the Dodd-Frank Wall Street bailout bill is as much a product of a flawed process as it is of the government-knows-all philosophy of its authors. I disagree. As usual the Democrats failed to grasp what the American people intrinsically know to be true: You cannot outlaw risk and you cannot achieve a stable economy by sacrificing prosperity. Unfortunately, I fear those truths will be reinforced with a vengeance once the Dodd-Frank bill is signed and the Obama Administration begins its implementation.