Eugene Grygo, Chief Content Editor, FTF News
It only took six years but the Republicans have finally issued a response to the much-maligned Dodd-Frank Act, and there was a disturbingly familiar refrain amid the rants of the Republican chairman of the House Financial Services Committee, Texas Congressman Jeb Hensarling, who is the proponent of the GOP alternative.
To recap, moving from the Party of No to Real Responses via Ryan, Hensarling has been promoting a plan to repeal the Dodd-Frank Act with the Financial CHOICE Act. It has too many points to cover in this post except to say that in an important distinction the Republicans want to challenge and simplify the capital requirement levels of Dodd-Frank and Basel III. These concerns are related to a much larger worry over banks that have reached the unfortunate status of “Too Big to Fail (TBTF)” since the Great Recession.
“When they voted for it, supporters of Dodd-Frank told us it would ‘promote financial stability,’ ‘end too big to fail,’ and ‘lift the economy.’ None of this has come to pass,” Hensarling said in a speech to the Economic Club of New York on June 7. “Today the big banks are bigger and the small banks are fewer. In other words, even more banking assets are now concentrated in the so-called ‘Too Big to Fail’ firms. Pray tell, how does this promote financial stability?”
The last point has come from the mouths of U.S. Senators and Progressive firebrands Elizabeth Warren from Massachusetts and the eternal presidential primary candidate Bernie Sanders from Vermont. Warren and Sanders have repeatedly been pushing for a return to a 21st century version of the Glass-Steagall act and for breaking up the very large banks. (Warren called the GOP plan “a wet kiss for Wall Street.”)
Yet Hensarling’s alleged kiss may be a peck as he is arguing that “Dodd-Frank codified into law Too Big to Fail and taxpayer-funded bailouts.” It’s likely that Wall Street wants a safety net via the government that regulates it. “This is bad policy and worse economics. It erodes market discipline and risks even further bailouts. It becomes a self-fulfilling prophecy, helping make firms bigger and riskier than they otherwise would be,” Hensarling adds.
“According to the Richmond Federal Reserve, the implicit and explicit federal guarantees of financial sector liabilities have increased to a whopping 60 percent of total liabilities post-Dodd-Frank. When private investors, depositors, and counterparties expect a bailout, their incentives to monitor risk clearly wane,” the Congressmen argues.
“Additionally, Dodd-Frank’s Volcker Rule and provisions of Basel have led to dramatic bond market illiquidity and volatility. Many believe this could well be the source of the next financial panic. When it comes to systemic risk, regulatory micromanagement is no substitute for market discipline,” warns Hensarling.
So, a key point of the Financial CHOICE Act is that “taxpayer bailouts of financial institutions must end and no company can remain too big to fail,” according to the Congressman.
Texas Congressman Jeb Hensarling
To summarize, the Republican response to Dodd-Frank “will relieve financial institutions from regulations that create more burden than benefit in exchange for meeting higher, yet simple, capital requirements,” Hensarling argues. “Our reform plan allows banks to opt-in to an alternative regime that replaces growth-strangling regulation with reliable accountability. It stops investors from betting with taxpayer money. Think of it as a market-based, equity financed Dodd-Frank off-ramp.”
I and many others would love to see a full-throated debate in the Senate and the House of Representatives about real financial reform. It’s too bad the GOP took so long to formulate a response because we should have had this debate in 2009.
The problem now is that the fate of Wall Street reform lies with U.S. presidential politics, which has been similar to watching the antics of those in an insane asylum.
As the insanity moves into the general election, I suspect the issue will boil down to the parameters of TBTF/Glass-Steagall/breaking-up-the-banks. We will see what Bernie extracts from Hillary on that front for his support. We will also see if Trump even understands the issue and has a clear position.
Who knows? There may be agreement between the nominees that TBTF is real and must be dealt with. Given the land mines of this campaign, that may be a consensus worth hoping for.
Need a Reprint?