Trump
can either ‘bite the bullet’ now if he really wants to improve
the American economy or he can ‘kick the can down the road’ like
his predecessors have, noted financial commentator Peter Schiff tells
MintPress.
by
Whitney Webb
Part
3 - The failures of Dodd-Frank
In the
aftermath of the 2008 crisis, public outrage and anger at the
country’s financial sector was palpable. In order to temper public
sentiment, a massive piece of legislation known as the Dodd-Frank
Wall Street Reform and Consumer Protection Act was assembled with the
stated goal of minimizing risk in the U.S. financial system chiefly
through the creation of new regulatory agencies and the establishment
of certain consumer protections. While the current consensus holds
that Dodd-Frank made some individual institutions technically safer
due to the constraints it imposes, it is still widely regarded as an
imperfect piece of legislation.
Indeed,
prior to taking office, Trump joined a host of other conservative
politicians in slamming the landmark legislation, which he has
recently deemed a “disaster.”
The evidence
regarding the legislation’s ultimate impact paints anything but a
rosy picture. Despite Dodd-Frank’s well-stated intentions, things
have not gone according to plan. The legislation actually has
produced very few — if any — meaningful regulations, as the
agencies tasked with drafting new regulations quickly became the
focus of massive financial industry lobbying efforts. For example,
three years after Dodd-Frank’s passage, commercial banking
lobbyists had met with Dodd-Frank regulatory agencies 901 times,
compared to just 116 meetings with lobbyists of consumer protection
groups.
Nearly seven
years after Dodd-Frank was passed, massive loopholes remain in
derivatives trading, banks are still permitted to gamble with
FDIC-insured money, and credit-rating agencies have yet to be
reformed.
Further, in
the years since the bill’s passage in 2010, the top five “too big
to fail” banks continue to control the same share of U.S. banking
assets they possessed prior to the crisis, while smaller banks and
community banks suffered major losses, with some small banks losing
as much as 20 percent of their share of national banking assets.
These
smaller banks, which have great historical economic importance,
essentially lost any competitive advantage to the nation’s banking
behemoths. This is a concerning development, particularly because the
big banks who largely caused the crisis suffered few ill effects
while their smaller competition – who were largely uninvolved in
derivatives trading and other activities that contributed to the
crisis – has taken a major hit. A 2015 study conducted at the
Harvard Kennedy School of Government confirmed this, finding that
community banks had been absolutely crushed by Dodd-Frank regulations
which caused the decrease in their markets shares to double.
To make
matters worse, many of the “too big to fail” banks have ballooned
in size since the passage of Dodd-Frank. For instance, in 2013, the
country’s six largest banks owned an astounding 67 percent of all
assets of the U.S. financial system, a 37 percent increase from 2008.
Many
critics of Dodd-Frank, Trump included, have argued that the
legislation was doomed to fail from the beginning. Indeed, the
corruption scandals surrounding one of the bill’s co-authors
suggest that this could be the case. Barney Frank, a former
congressman from Massachusetts and chairman of the House Financial
Services Committee, was embroiled in several notable financial
scandals during his three decades in office, including some that took
place during the 2008 financial crisis.
Prior to
the crash, internal government documents obtained by government
watchdog Judicial Watch showed that Frank was well aware that
troubled lenders Fannie Mae and Freddie Mac were likely to fail, but
did nothing to stop it. In addition, internal Treasury Department
documents revealed that Frank sought to steer $12 million in federal
bailout funds to OneUnited Bank, a bank located in Frank’s
district, during the aftermath of the 2008 crisis. In 2015, Frank
further cemented his shady ties to the financial sector by joining
the board of Signature, a private bank with assets totalling $28.6
billion.
However, the
true reason for Dodd-Frank’s failure is neither the corruption of
one of its authors nor the weak and convoluted nature of the
regulations it enforces. Dodd-Frank, whether it is ultimately
repealed by the new administration or left largely intact, has failed
to produce a recovery or prevent a future crisis because it ignores
the true cause of the 2008 meltdown as well as that of the looming
financial crisis: over a century of misguided and self-serving
central bank policy.
As Schiff
remarked when speaking to MintPress, “The Federal Reserve is the
culprit.”
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