What Democrats Can Learn From Dodd-Frank
With Congressional Republicans and the Trump administration ready to dismantle as much of Dodd-Frank as they can, now is a good time to assess how Democrats fared in trying to reform Wall Street and putting an end to “too big to fail.”
It’s hard to believe that it’s been almost a decade since a series of bets by the largest financial firms in the world nearly took down the entire American banking system. But here we are, a nation that once demanded the heads of Wall Street bankers on a platter, now standing idly by as some of the very same people most responsible for the crisis take positions of power in the executive branch.
So, what did Congressional Democrats get right and wrong about Dodd-Frank? And what can they do in the future to improve?
Make sure you solve the underlying problem. As a Senate staffer who read the entire bill and hundreds of proposed amendments, my take on Dodd-Frank is this—think of our banking system as a nice car. Dodd-Frank installed air bags, put in seat belts, made the brakes more robust, and generally made the car safer. But Dodd-Frank did nothing about the drunk driver behind the wheel. In other words, we put in a lot of safeguards, but we never tackled the underlying problem of “too big to fail.” Even with some very practical tools (such as Orderly Liquidation Authority), there’s nothing in Dodd-Frank that really prevents a series of large interconnected firms from taking huge bets and calling for a medic when things go wrong. Worst of all, bankers and markets now expect a bailout while politicians see how their careers can be ended supporting one. That is a recipe for disaster. Maybe there were never votes in Congress for the kind of steps (such as breaking up the big banks) needed to end “too big to fail”, but not solving the underlying problem means the costs of repealing parts stay relatively low.
Legislate as if half of it will be gone in a decade. Democrats have an odd way of legislating. They get together, negotiate the finer points, and try to find a middle ground that pleases all parties involved. Now, that’s all well and good for a 9th grade civics class, but Congressional Democrats know that within a decade, Republicans will be in power and try to roll back everything they do. Contrast that with the way Congressional Republicans approach issues like gun rights. They take the maximum amount of legislative ground possible and barely worry about the policy implications. I don’t think many Congressional Republicans really believe that the mentally ill should have access to assault rifles, but they know that it’s just one more thing Democrats will have to spend political capital on to roll back. Congressional Democrats played a fairly naïve game on Dodd-Frank. They wanted a good compromise bill that ran down the middle, when, in the long term, they’ll get half of even that.
Punting to regulators is rarely a good idea. Reading through Dodd-Frank, you would think that whenever the authors got to a point where they actually needed to make a decision on whether some activity or product should be outlawed, they said, “I know, let’s the <insert regulatory body here> decide!” This may have delayed moments of reckoning and kept together a coalition of 60 votes in the Senate, but it put the keys to success in the hands of people who are just as uneager to make big decisions. This resulted in 300-page rules that only a team of regulators and lobbyists working together would consider a good idea. All of that, and the next Republican President could simply decide not to enforce those rules or withdraw them altogether. Countries like Canada weathered the financial crisis so well because they had strict rules making sure everyone from bankers to homeowners had the capital necessary to cope with a downturn. The lesson: legislate your solutions. Idiot-proof the system whenever possible.
At the end of the day, I still believe that Dodd-Frank is a highly underrated piece of legislation. It really does protect consumers (mostly through the Consumer Financial Protection Bureau) and at least gives regulators the tools to help prevent and deal with the next financial crisis. But real banking reform is—at its heart—telling people who stand to make a lot of money they can’t engage in short-term profitable activity. That runs counter to a lot of guiding principles in a capitalist society like ours.
But remember this: bridges collapse. Nuclear reactors meltdown. The Patriots come back from 25 points down. And there are runs on banks. It’s unpopular to stop fun and profit for a payoff that no one will ever see, but the alternative is economic collapse and taxpayer-funded bailouts. We’ll see how whatever is left of Dodd-Frank fares when the next collapse inevitably comes.