Dismantling the Business Oppressive Dodd-Frank Act

The new minority leader in the Senate, Democrat Chuck Schumer, has been chortling that he has the votes to prevent the repeal of the anti-business growth Dodd-Frank Act.  Dodd-Frank was passed by Democrats on the heels of the Great Recession as a means of deflecting criticism from the government and its policies on home mortgages to pretend that the causes of the Great Recession were entirely or mostly due to private financial institutions.  Senator Christopher Dodd and Congressman Barney Frank had been among the most vociferous advocates of the government policy of easy credit for home loans and had explicitly claimed before the financial crash that there was no looming credit risk.  President-elect Trump has pledged to repeal Dodd-Frank, which is a very good idea.

A very interesting article in the 17 November Wall St. Journal by Peter Wallison discusses both the false pretenses that were used to justify the Dodd-Frank Act and the harm done to recovery from the recession and to economic growth rates by that act.  On the matter of whether the act actually addressed the causes of the recession and a few of its consequences:

Signed into law in 2010, Dodd-Frank was based on the idea that insufficient regulation, particularly of Wall Street, had allowed a buildup of subprime mortgages, a housing bubble and, ultimately, the 2008 financial crisis. The Democrats who controlled the Congress elected in 2008 acted quickly to follow out the implications of this diagnosis by adopting Dodd-Frank, the most restrictive financial legislation since the New Deal. 

Strikingly for such important legislation, there was no significant debate in Congress about whether the cause of the crisis had been correctly identified.

A later study, in 2014 by my colleague at the American Enterprise Institute Edward Pinto, showed that by 2008 more than half of all mortgages in the U.S. were subprime or otherwise risky, and 76% of those were on the books of government agencies. This leaves no doubt that government housing policies—and not a lack of regulation—created the demand for these risky mortgages. But by then it was too late. 

It is not difficult to find connections between Dodd-Frank and the historically slow recovery from the financial crisis. Here’s a sampling. 

The Financial Stability Oversight Council, a Dodd-Frank invention, was empowered to designate large financial firms as systemically important financial institutions, or SIFIs, turning them over to the Federal Reserve for “stringent” regulation. One of the council’s earliest actions, in July 2013, designated GE Capital as a SIFI. 

GE soon recognized that its huge financial subsidiary was wilting under the Fed’s control. Seeking an exit, GE wound down GE Capital, eliminating from the market an important source of funding for small and innovative firms. 

The Volcker rule, another Dodd-Frank provision, prohibited banks and their affiliates from trading securities for their own account, although there was no evidence that this activity had any role in the financial crisis. 

Soon, trading desks all over Wall Street were closing down, and traders were complaining that the debt markets were dangerously short of liquidity. The Treasury Department, deeply tied into Dodd-Frank, said it was “studying” the issue. It still is, and spreads are still historically wide. 

Small banks, the credit sources for small businesses and startups, faced new and costly regulation, requiring them to hire compliance officers instead of lending officers. 

One regulation on mortgage lending from the Consumer Financial Protection Bureau—a Dodd-Frank agency—was over 1,000 pages long. Imagine that landing on your desk in a small bank. 

No wonder, as this newspaper recently reported, banks are no longer the nation’s principal mortgage lenders. Worse still, as reported last week, job gains at startup firms, which are major sources of new employment and technological innovation, are at their lowest level in 20 years.

I added the bold to the sentence in the quoted portion of the article.

Krugman and Schramm: The Fool and the Wise Man

Paul Krugman, post-election: "It is true that we've been adding jobs at a pretty good pace and are quite close to full employment."

Prof. Carl J. Schramm, Opinion in 16 Nov 2016 Wall St. Journal:  "Despite the addition of 161,000 jobs in October, the labor-force participation rate fell to its second lowest level in nearly 40 years, according to the St. Louis Federal Reserve.... America needs at least 325,000 new jobs every month to stanch the growing numbers of discouraged workers, according to the Bureau of Labor Statistics."

How low the left sets the bar for employment!  High employment is clearly not one of their premier goals.

Prof. Schramm, of Syracuse University, once headed the Kaufmann Foundation, which promotes American entrepreneurship.  He notes that:

• Firms less than 5 years old create more than 80% of new jobs.
• Fewer than 500,000 new businesses were started in 2015, which is a 30% decrease since 2008.
• Over the last 8 years, the number of new businesses has decreased by more than 1 million.  The missing new businesses mean 7 to 10 million missing jobs, which would have been enough to provide jobs to the millions of discouraged workers.
• New businesses are more likely to be started when the economy is growing at a 4% rate than when it is growing at a 2% rate.  The faster growth rate gives consumers the confidence to buy the innovative products of start-up companies.
• Too much attention is given to Silicon Valley whose start-ups are only about 5% of all start-ups and have higher failure rates and create proportionally fewer jobs than the businesses started by franchisees, which are 40% of all new businesses.
• Dodd-Frank suppressed the financing by local banks of local businesses in their communities, whose business prospects they are best qualified to gauge.
• Municipal regulations are particularly protective of older businesses and likely to discriminate against new businesses.

Address these problems and he says we can enjoy 4% economic growth.  The first step was to remove the anti-jobs, anti-business party from the presidency.

What is Bad About a So-Called Government Shut-Down?

A so-called government shut-down is not really a shut-down of all government activities.  The defense of the country will continue to be provided.  Even Social Security checks and payments for Medicare will continue.  Yes, the employees of some meddling government regulatory agencies will be marked as non-essential and will be sent home.  That is the very least most of them are.  It is not at all essential that government interfere with the sovereign rights of the individual to life, liberty, and the pursuit of happiness, which is the mission of the government regulatory agencies.

Aside from defense, even the few powers the Constitution grants the federal government, are not very essential over short periods of time.  The power to establish post offices and post roads can surely go without exercise for a few months with no great consequences.  The power to establish a uniform rule of nationalization is already established in law, albeit not very good law.  Uniform laws on bankruptcy have also been established.  The regulation of commerce with foreign nations needs only to glide along established paths for a few months.  Protection against counterfeiting requires but a small group of specialists and it is clear that counterfeiters cannot even begin to compete with the Federal Reserve in watering down the value of the US currency in any case.  The Patent Office is also a small operation by the standards of the federal government.  Even the management of the federal courts is a very small fraction of the manpower used by the federal government.  The next Census is not to be held until 2020.  So, basically there is very little of the present mammoth government that is needed to perform its constitutionally granted functions, aside from the military.

And still the Social Security and Medicare checks will be also be issued, despite these activities clearly being beyond the constitutional grant of powers.  But, the EPA, NLRB, FEC, FAA, NOAA, NASA, NIH, FDA, the Agricultural Dept., the Energy Dept., the Education Dept., the Housing and Urban Affairs Dept., the Labor and Commerce Depts., SEC, HHS, and other agencies whose primary purpose is to control our lives and infringe upon our individual rights will have to designate many employees as non-essential and furlough them.  That is a very good thing.

Perhaps, these furloughs will even set aside many of the people writing regulations to implement such awful laws as ObamaCare and the Dodd-Frank cover-up of the government culpability for the financial melt-down of the Great Socialist Recession.  Perhaps Obama will not have enough aides to do the paperwork to give his supporters special subsidies and exclusions from laws such as ObamaCare.  Now that would be a most excellent consequence of a government slow-down.

In fact, let us make the government slow-down a permanent thing!  It will do much to return our government to its legitimate function of protecting our sovereign individual rights.  It will do much to decrease its many tyrannical activities.  If the slow-down lasts long enough, any of the slowed activities with any justification will be taken up by the private sector and performed much better than our incompetent government does them.