President Obama took office in the immediate aftermath of the financial crisis and Great Recession, so it is hardly surprising that the White House took advantage of Democrat majorities in the House and Senate to push forward new financial regulations. Indeed, the administration was so eager to take advantage of the opportunity that it began the legislative process before receiving the report of the Financial Crisis Inquiry Commission (FCIC), which the president had created by signing into law Fraud Enforcement and Recovery Act in May 2009.
Given the rush, it is hardly a surprise that there was a fundamental misdiagnosis of the origins of the crisis. The simple mantra that drove the debate - Wall Street greed and under-regulation -led to legislation known as The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Dodd-Frank turns six on July 21, and, given its manifest flaws, it is fair to wonder about what might have been and whether a more stable financial system could have been achieved at lower regulatory and economic cost.
Dodd-Frank was a sweeping reform. It created new agencies and bureaus: the Financial Stability Oversight Council (FSOC), the Office of Financial Research in Treasury, the Consumer Financial Protection Bureau (CBPB), the Federal Insurance Office in Treasury, an Office of Credit Ratings within the Securities and Exchange Commission and others. It revamped securitization rules; changed the oversight of derivatives; changed the prudential standards for risk-based capital, leverage, liquidity, and contingent capital; imposed the Volcker Rule; had provisions for corporate governance, and more. And, in the process of being implemented, it required roughly 400 separate rulemakings that remain incomplete 6 years later.
These myriad reforms are united by a single proposition: the solution was more regulation and bigger government. That is a fundamental misreading of the crisis, which was born of under-regulation (e.g., mortgage origination, largely by the state), over-regulation (e.g., the affordable housing standards imposed on Fannie Mae and Freddie Mac), and poor regulation (e.g., prudential regulation by the Securities and Exchange Commission). In the process, Dodd-Frank was also filled with provisions that had nothing to do with the crisis per se, whether it is the expensive Volcker rule (which limits proprietary trading that had nothing to do with the crisis) or the conflict minerals rule (which has served only to inflict economic damage on the Congo), or others.
By failing to develop a nuanced understanding of the crisis, the administration birthed a bad law. And by doing so in a partisan fashion, it ensured that Dodd-Frank would become a political lightning rod until President Obama departs office.
The public understands this. More voters surveyed believe that "big government" has had more of a negative impact on their personal financial situation than "big Wall St. Banks." A majority of voters also believe the avalanche of new federal regulations issued under Dodd-Frank is strangling our economy, killing jobs, and eating away at our freedoms. And a vast majority surveyed agree with the statement "Although the Obama Administration claims that lack of regulation caused the financial crisis of 2008, the real cause was misguided federal policy that encourage banks to offer loans to people who could not pay them back, leading to a nationwide real estate crash." All of this is true even though 63 percent of those surveyed said they are unfamiliar with Dodd-Frank. They may not know the name, but they understand the actions and their implications.
Dodd-Frank turns six this year and, essentially untouched, will represent President Obama's financial regulation legacy. It is a legacy of excessive cost, economic damage, and overly intrusive government that is out of proportion to the economic stability it contributes.