Back to the good ol’ days of 2008.
Immediately after the GOP took the House last year, Alabama Republican and chairman of the House banking committee Spencer Bachus made the mistake of saying what he actually believes about financial regulation. “In Washington, the view is that the banks are to be regulated,” he told the Birmingham News, “and my view is that Washington and the regulators are there to serve the banks.” This view is consistent with thirty years of Republican-backed financial deregulation as well as with the conservative explanation of what went wrong in the financial crisis. And if the Republicans manage to take both elected branches of the government next year, this is likely to be the spirit in which they’ll approach the post-Dodd-Frank era.
On July 21, 2010, President Obama signed the Dodd- Frank Wall Street Reform and Consumer Protection Act into law. A large reworking of the financial economy, it was opposed by Republicans from the beginning. House Republicans voted in committee against crucial planks like derivatives reform and throughout the entire process added loopholes and exemptions, including one that removed auto lending from the consumer financial protection umbrella. With few exemptions, notably on the matter of auditing the Federal Reserve, there was no bipartisan support for new regulations.
Going forward, the Republicans’ intentions with respect to Dodd-Frank are already clear: in Congress, they have introduced repeal legislation, and every major Republican presidential candidate has pledged to repeal Dodd- Frank in its entirety. It’s fair to take them at their word. Even if a Republican majority set out to kill the bill in one fell swoop but was blocked by a Democratic filibuster, it wouldn’t really matter. That’s because there are a series of simple steps Republicans can take to pull apart Dodd- Frank piece by piece. The collective effect would be similar to that of an overall repeal and would leave the global financial system in serious peril.
Why does the GOP view Dodd-Frank as an unnecessary overreach? In their minds, there’s no problem to solve where the financial system is concerned. While the vast majority of economists and financial experts view the 2008 collapse of the banking sector, and the ensuing Great Recession, as the result of decades of unrestrained, unregulated experimentation by Wall Street firms, the right rejects this view. Conservatives see the crash as a cautionary tale about government intervention in the housing markets, in which the subprime mortgage boom was egged on by community organizers and government-sponsored enterprises like Fannie Mae. That George W. Bush was one of the biggest backers of “the ownership society” and that the much-maligned community activists were actually shouting early warnings about problems in the housing market are inconvenient facts to be ignored. As if suffering from a form of ideological color blindness, wherever there are large market failures in the current infrastructure of our financial system, conservatives can’t see the problems themselves, only the presence of the government.
It has long been the case that, in the conservative imagination, the best market is one with the least amount of rules. In the 1990s, Senator Phil Gramm infamously told SEC Chair Arthur Levitt that “unless the waters are crimson with the blood of investors, I don’t want you embarking on any regulatory flights of fancy.” This guiding principle led many at Alan Greenspan’s Federal Reserve to ignore signs of fraud in subprime lending early on, despite the warnings. At the same time, there was a very conscious effort to tie state regulators in knots whenever possible, mostly by overruling, or “preempting,” state laws on behalf of large national banks. And in the years since the crisis, even without controlling the White House and the Senate, Republicans have managed to block key presidential appointments, tighten budgets, and harass regulators at every turn. All of these strategies— softening federal oversight, hampering regulatory institutions, and interfering in any state-level attempts to provide tough oversight of the financial industry—would surely be reprised by a Republican White House and Congress in each of the major battlegrounds on financial reform.
Take the issue of consumer protection. The root cause of the financial crisis was an abusive, predatory, unregulated lending market that drove lots of bad mortgages to unknowing consumers as well as investors. Though most regulatory agencies list consumer protection among their goals, no regulator was dedicated explicitly to the task until Dodd- Frank mandated the creation of the new Consumer Financial Protection Bureau. Reformers were careful to structure the CFPB for maximum clout and independence. It has a single director, and its budget, a guaranteed appropriation from the Federal Reserve, cannot be cut by Congress.
These features are exactly what the GOP wants to dismantle. Senate Republicans have signed a letter declaring that they’ll oppose any candidate for director of the CFPB unless the bureau is subjected to the congressional appropriation process, allowing the next aspiring Phil Gramm to slash its budget at first chance. They also want to replace the director with a board and muddle the mission of the bureau away from its consumer focus. All these moves will lead to gridlock, creating a much weaker CFPB.
Republicans would also like to undo the components of Dodd-Frank that force hitherto unregulated, “over the counter” derivative trading into open exchanges that are transparent and well regulated. During the decade leading up to the financial crash, derivatives, once mainly used by companies to hedge risk on commodities with fluctuating prices (e.g., oil for airlines), were seized upon by Wall Street, and the size of this potentially explosive market skyrocketed. By 2003, Warren Buffet was calling derivatives “financial weapons of mass destruction.” When the markets crashed in 2008, derivatives transactions had gotten so large yet so murky that it was nearly impossible to know who was on the hook for the tremendous losses. In an attempt to prevent a repeat of these circumstances, Dodd-Frank requires derivatives trading to take place in public exchanges, and obliges firms to put up enough collateral to ensure that, if their bets go bad, they can pay back investors (unlike AIG, which required billions of taxpayer funds to do so).
During negotiations over the law, there was a big fight over what kinds of derivatives would be exempted from these rules. There was also a battle over which kinds of nonfinancial firms, “end users” like airlines and industry, would be exempt. Republicans will try to expand these end user exemptions and narrow the types of derivatives that have to follow the new rules laid out in Dodd-Frank, bringing us closer to the pre-crisis status quo. There’s already movement in the House to try to rewrite the parts of Dodd-Frank dealing with price transparency in derivatives trading so that less information has to be disclosed.
Feed the Political AnimalDonate
Washington Monthly depends on donations from readers like you.