The #DoddFrankRollback: Bad Policy, Worse Politics

December 7, 2017

The recent deal reached between Senate Banking Committee Chairman Mike Crapo (R-ID) and nine Senate Democrats, which the Senate Banking Committee approved earlier this week, is bad policy—and even worse politics. Americans understand they are being taken advantage of by the banks they depend on, and they fear that Wall Street lobbyists are rigging the rules against them to make the system even worse. If this bill becomes law, they’ll once again be proven right.

First, the policy. Over the past 40 years, and continuing today, banks have come to play an outsized role in our economy. The financial industry is one of the best examples we have of the ways businesses are making profits by extracting wealth from the economy, rather than contributing to the kinds of productive investments the economy needs to be healthy.

A well-functioning financial sector is necessary to make sure that people with funds can distribute them efficiently to people without and to allow people and companies to make the kinds of long-term decisions that allow them to thrive. But that’s not what’s happening today.

Today, the financial sector makes up roughly 7 percent of our total economy, up from roughly 2 percent of our total economy in 1950. The average cost of supplying $1 of credit has increased from 1.6 cents at the end of World War II to 2.4 cents on the dollar in 2011, despite the obvious ways that technology has made such transactions easier and less costly. And while the financial sector certainly has gotten more complicated, there is robust evidence that there is little to show for the increased costs the financial sector has imposed on the rest of us.

The Dodd-Frank Act, passed by Congress in 2010, began the process of restructuring the financial sector. But even as it passed, it was a compromise, and its rule writing and enforcement hasn’t done enough to tackle the shadow banking system, the complexity of the financial system, and the problem of too-big-too-fail banks. But the most notable thing about this reform is that it focused on preventing the financial sector from doing harm to the rest of the economy, taking advantage of consumers, and engaging in reckless risk-taking. It was not directed at ensuring that the financial sector actually does what it is supposed to do: make money available for economically productive uses.

So that’s the policy we need. But instead of taking steps to strengthen the rules so consumers aren’t harmed or continuing efforts to make sure the financial industry is working in the service of our economy, and not the other way around, a bipartisan bill that would roll back major parts of the Dodd-Frank Act is moving forward in the Senate. There are many good reasons to oppose this bill, but here’s the topline: The Crapo bill would expose consumers and the economy to serious, unnecessary financial risks—many of the same risks that resulted in Americans losing nearly $16 trillion in net worth, with disproportionate long-term effects on the net-worth of lower-income families and people of color. Even it’s basic premise, that community banks need these reforms in order to survive, is flawed; in fact, according to my colleague Katy Milani, “community banks are thriving and more profitable than ever.” The Crapo bill is bad policy, and it should be stopped on its merits.

But the bill is also bad politics. According to a survey from April 2017 by Hart Research, 58 percent of voters think big banks are taking unfair advantage of consumers and are not being held accountable, and more than half think large banks are having a negative impact on our economy. Good work, American voters—you’re right. But here’s what Democrats should pay attention to: it’s not just that the Crapo bill is on the wrong side of the issue. It’s that weakening Dodd-Frank is exactly the opposite of what most voters want to see. In fact, according to the same survey, only 23 percent of voters think there is too much regulation, while 53 percent think there is too little. And 65 percent say federal regulations don’t go far enough to protect consumers from being taken advantage of, versus only 35 percent who say federal regulations go too far. It’s not even close.

So far, voters are on to something, because their sense of the role of the financial sector is right. Now here’s the kicker: Nearly 90 percent of Americans believe that the richest 1 percent have used their influence to shape the economy to their advantage, including 74 percent of self-identified conservative Republicans. So when a flawed bill that will roll back much-needed reforms—with justifications that do not stand up to scrutiny—gets bipartisan support, perhaps it’s time to wonder if there’s wisdom in the majority.

Trump Republicans had a chance to stand with the majority of Americans and take real steps to turn our country’s well-placed populist anger into change. They squandered it, revealing themselves to be who most said they would be. Now, Democrats have a chance to take up the mantle. In fact, the right politics here is to stand up for the right policies and fight for affirmative steps to restructure the financial sector, so that it strengthens, rather than extracts from, our economy. Nearly a dozen of them have already forfeited their chance to be on the right side of the issue. For their sake and ours, let’s hope the remaining Democrats speak up, fight back, and choose a different path.