The calls for repealing the Dodd-Frank financial reform bill are more than a little bizarre. It was only three years ago that the whole financial system was at the brink of collapse, with President Bush warning us of a second Great Depression if Congress didn’t quickly approve a massive bailout bill.
This crisis was the result of a poorly regulated financial system that was issuing millions of mortgages that they did not expect to be paid off. It was packaging these bad mortgages in mortgage-backed securities and more complex instruments and passing them off to gullible buyers all over the world. And we had companies like AIG issuing hundreds of billions of dollars credit default swaps that they had no ability to support.
This is the pre-Dodd-Frank world. Is this the world that those demanding repeal want us to bring back?
Dodd-Frank is far from a perfect piece of legislation. It could have been much stronger. For example, it could have required that the too-big-to-fail banks break themselves up, so that they could no longer freeload on an implicit government guarantee of support if they get into trouble. It could also have reinstituted a strict Glass-Steagall type separation that prohibited banks that take government-insured deposits from engaging in risky investment banking or hedge fund type activity.
But it does make the risks of the financial system more transparent. And, it give regulators an alternative to bailouts to deal with the sort of Lehman-AIG situation we faced in 2008.
Given the economic disaster that was brought on by the mismanagement of the financial system, Dodd-Frank is actually a very mild piece of legislation. Its opponents have highlighted the paperwork requirements imposed by the law. In fact, smaller banks will not be forced to deal with most of the requirements since they are explicitly exempted. The Goldman Sachs and the J.P. Morgans of the world specialize in creating paperwork and therefore will have little difficulty dealing with the requirements of the law.
However, the more important issue is the logic of this complaint. There is plenty of needless paperwork in the Defense Department, by the logic of the Dodd-Frank repealers we should just shut it down and start from scratch.
That doesn’t make sense and it doesn’t make sense to repeal Dodd-Frank. The proponents of repeal should put their specific complaints on the table and argue the case. That is the way serious people do things.
This article originally appeared in Debate Club (U.S. News & World Report).
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