Economics, Regulation

Jeb Hensarling’s excellent Dodd-Frank analysis

Dodd-Frank Signing Ceremony

Photo Credit: Leader Nancy Pelosi's Flickr Stream

Jeb Hensarling (R-TX) has an important article in today’s WSJ (“Dodd-Frank’s Unhappy Anniversary”)—important because it focuses on the right issue: that Dodd-Frank has substantial adverse consequences for the U.S. economy. It’s true, of course, that the act creates enormous regulatory costs, but it’s how these costs translate into economic harm that counts, and that’s what the article emphasizes.

Hensarling also begins at the right point—what caused the financial crisis. He writes:

Federal regulations were not the solution to the crisis but its principal cause. Federal policy pushed financial institutions to lend money to people for home purchases they couldn’t afford. This dramatically eroded historically prudent underwriting standards. Of the subprime and Alt-A mortgages that led to the 2008 financial crisis, more than 70% were backed by the federal government through government- sponsored enterprises (GSEs, such as Fannie Mae and Freddie Mac), the Federal Housing Administration and other programs. An accommodative monetary policy, in turn, allowed an inflated housing bubble that finally burst.

Having incorrectly diagnosed the problem, Dodd-Frank’s authors wrote 400 new regulations. These generally fall into one of two categories: those that create uncertainty and those that create economic harm.

If you start with the wrong diagnosis, it’s no surprise that the prescription will be ineffective or even harmful. In the case of Dodd-Frank, the act was not directed at the problem at all; instead, it was the product of the left’s continuing ideological effort to gain political control of the financial system and the economy. Recall Rahm Emanuel’s iconic remark that “You never want a good crisis to go to waste.” So when Hensarling begins with the causes of the crisis, and shows that the real causes have no connection to what Dodd-Frank does, he is showing that the law is in fact illegitimate, a powerful reason for its repeal.

But wait? Wasn’t there a need for more regulation? Wasn’t Dodd-Frank supposed to control the big Wall Street banks? Hensarling’s answer is simple and conclusive:

Before the crisis, regulatory mistakes and incompetence abounded—but almost no examples of a lack of regulatory authority can be found.

This is also a powerful point, and one conservatives should have in mind: If the JPMorganChase hedging effort was really speculation in disguise, or the Libor matter was the result of banks manipulating the numbers, bank regulators had all authority they needed, without Dodd-Frank, to deal with these issues. Now, of course, when these issues arise, they are used as additional reasons to rush Dodd-Frank into place. They are not; they are reasons to insist that the regulators make better use of their powers, not reasons to give them more powers.

In the end, however, Dodd-Frank is not just an issue of excessive regulation; it is, as Hensarling makes clear, primarily an economic issue. Republican should keep in mind that they have a chance to gain control of the presidency and the Senate because of Dodd-Frank and ObamaCare. But that proposition has a corollary: If—after November—Republicans have the power to repeal Dodd-Frank, their failure to do so will leave them in the same position in 2014 or 2016 as Barack Obama is today.

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