This month marks the 45th anniversary of man landing on the moon, and the fourth anniversary of the signing of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The two events couldn’t be more different.
The moon landing was a rousing, tangible achievement that millions watched on TV. Dodd-Frank was an amorphous piece of legislation that failed to get the scrutiny it deserved. Even Congress and federal regulators can’t agree on what the bill requires.
Most people believe Neil Armstrong and Buzz Aldrin walked on the moon, but a fringe movement insists the U.S. faked the landing in a movie studio. The size of that contingent stands in contrast to the large numbers of people who insist financial market deregulation caused the 2008 crisis.
One recent poll even suggests that most Americans think more regulation is the answer, that Dodd-Frank solved the problems that caused the crisis, and that the law didn’t go far enough to punish private firms responsible for the crisis.
But a new House Financial Services Committee report shows just how ill-conceived these opinions really are.
For starters, financial markets have been regulated for at least a century, even in the years preceding the recent crisis. The notion that our markets were free from regulation is false. In fact, various statistics suggest that financial market regulation has been increasing, even in the decade leading up to the crisis.
For instance, the committee report identifies five key pieces of legislation passed between 1991 and 2003 that expanded regulations. Furthermore, federal financial regulators’ budgets (adjusted for inflation) increased from 2000 to 2008.
The total budget of these regulators, excluding the Securities and Exchange Commission, increased from about $2 billion to almost $2.3 billion. The SEC’s budget almost doubled from $357 million in 2000 to $629 million in 2008.
Still, critics have pointed to the so-called repeal of Glass-Stegall, the Depression-era law that separated commercial and investment banking, as deregulatory. But all the 1999 Gramm–Leach–Bliley Act did was allow bank holding companies to affiliate with firms engaged in activities such as securities and insurance underwriting — both of which are regulated businesses.
The notion that GLBA allowed commercial banks to take in deposits and invest that money in the stock market is completely wrong. Further, allowing holding companies to own separate asset-management firms presents no risk to the banks’ traditional deposits.
Basically, Dodd-Frank’s answer to everything was to institute more regulation and oversight even though that approach has failed.
For example, Dodd-Frank created the Financial Stability Oversight Council, a committee of regulators that can force new regulations on financial firms in the name of safeguarding financial stability. The bill also created the Consumer Financial Protection Bureau, an agency bent on controlling virtually all aspects of the home mortgage market under the guise of “protecting” consumers.
Dodd-Frank has made the financial system even more fragile than it was prior to the 2008 crisis. Hopefully, the number of its defenders will be as small as the moon-landing deniers before the next crisis hits.
Norbert J. Michel and Diane Katz are research fellows at The Heritage Foundation, a Washington think tank.