Cause of the Crisis Still Central to Dodd-Frank Debate

As the Dodd-Frank Act approaches its sixth anniversary in July, Republicans—perhaps sniffing a victory in the White House this November—have amped up their efforts to roll back and chip away at the controversial financial reform law.

At the center of the continuing fight between political factions over Dodd-Frank nearly six years after the law passed is the debate over who, or what, actually caused the financial crisis in 2008. The framers of Dodd-Frank, and its supporters today, clearly believe that the banks and large financial institutions were responsible. Dodd-Frank’s detractors believe that it was regulators, and not banks, that were the main cause of the crisis.

Former Rep. Barney Frank (D-Massachusetts) said last July of the law he co-sponsored that he expects Dodd-Frank to exist in its current form five years from now and that “financial entities are a vital part of our economy and we never thought that it wasn’t and we never tried to stop them from doing the things they were doing. We did argue they should do them in a more responsible way.”

Sen. Elizabeth Warren (D-Massachusetts), architect of the equally controversial Consumer Financial Protection Bureau (CFPB) that was created out of the pages of Dodd-Frank, has been one of the law’s fiercest defenders.

“(The financial system) was a world where the game was rigged,” Warren said, reflecting on Dodd-Frank five years after its passage. “And the big banks were making money hand over fist. They’ve done it on credit cards, they’ve done it on mortgages, they’ve done it on payday loans. They’ve done it pretty much throughout the economy. With Dodd-Frank, we began to unrig the game.”

“With Dodd-Frank, we began to unrig the game.”

Sen. Elizabeth Warren

Critics of Dodd-Frank believe that the banks are not to blame and that they engaged in risky behavior only because regulations forced them that way—which includes housing policies that pushed people into homes they could not afford. In May 2015, a hearing in the House Financial Services Subcommittee on Oversight Entitled “The Dodd-Frank Act and the Regulatory Overreach,” Subcommittee Chairman Sean Duffy (R-Wisconsin) characterized Dodd-Frank as a “crushing regulatory regime.”

“Those who supported Dodd-Frank have been more concerned with helping special interests in Washington than their constituents back home and the proof is in the numbers,” Duffy said.

One of the witnesses at that Subcommittee hearing, Hester Peirce, Director of the Financial Markets Working Group at the Mercatus Center at George Mason University, said that the drafters of Dodd-Frank were working without full information, since the Financial Crisis Inquiry Commission which Congress charged with determining the cause of the financial crisis did not issue a report until six months after Dodd-Frank was passed into law. Peirce said the Dodd-Frank Act that was eventually signed into law was “the product of fear and fury, not of careful analysis” and that it as “grounded in an inaccurate market failure narrative.”

Dodd-Frank has come under even more scrutiny in the last couple of months. In late March, a judge ordered the removal of the “systemically important financial institution” (SIFI) tag from insurance provider MetLife, which was originally placed by the Financial Stability Oversight Council (FSOC), another Dodd-Frank created agency. The constitutionality of the CFPB is being challenged in court by non-bank mortgage lender PHH Corp. and a decision is expected by the end of this year. In April, the FDIC and the Federal Reserve jointly rejected the living wills of five of the country’s largest banks. Living wills are plans as to how the banks would enter bankruptcy without causing widespread damage to the U.S. financial industry, i.e. plans to prove to the government they are not “too big to fail.”

“Those who supported Dodd-Frank have been more concerned with helping special interests in Washington than their constituents back home and the proof is in the numbers.”

Rep. Sean Duffy

In April, the House Financial Services Committee passed a bill to repeal Dodd-Frank’s bailout fund for large, complex financial institutions. At the same time, the Committee passed a bill to put the CFPB’s spending on a budget in an attempt to make the Bureau more accountable to taxpayers.

Also in April, Dodd-Frank received another blow when a federal judge ruled in a case where the CFPB was demanding information from the Accrediting Council for Independent Colleges and Schools as to how it decided to approve certain for-profit colleges, that the CFPB “lacks authority to investigate the process for accrediting for-profit schools.”

“The legal setbacks are ultimately a failure of a law that has proven too unwieldy to implement,” wrote Christopher Whalen, senior managing director and head of research at the Kroll Bond Rating Agency. “Before the next financial crisis, Dodd-Frank is badly in need of review and revision.”

While Dodd-Frank’s detractors clearly believe the law overregulated the financial industry, the law’s supporters do not think it was enough.

“Dodd-Frank has done good things, but let’s not kid ourselves,” Warren said. “The banks in 2008 that were too big to fail are now substantially bigger than they were. They continue to pose a real threat to this economy. We need to stand strong behind Dodd-Frank and we need to expand Dodd-Frank.”