Although the enemies of health reform will never admit it, the Affordable Care Act is looking more and more like a big success. Costs are coming in below predictions, while the number of uninsured Americans is dropping fast, especially in states that haven’t tried to sabotage the program. Obamacare is working.
But what about the administration’s other big push, financial reform? The Dodd-Frank reform bill has, if anything, received even worse press than Obamacare, derided by the right as anti-business and by the left as hopelessly inadequate. And like Obamacare, it’s certainly not the reform you would have devised in the absence of political constraints.
But also like Obamacare, financial reform is working a lot better than anyone listening to the news media would imagine. Let’s talk, in particular, about two important pieces of Dodd-Frank: creation of an agency protecting consumers from misleading or fraudulent financial sales pitches, and efforts to end “too big to fail.”
The decision to create a Consumer Financial Protection Bureau shouldn’t have been controversial, given what happened during the housing boom. As Edward M. Gramlich, a Federal Reserve official who warned prophetically of problems in subprime lending, asked, “Why are the most risky loan products sold to the least sophisticated borrowers?” He went on, “The question answers itself – the least sophisticated borrowers are probably duped into taking these products.” The need for more protection was obvious.
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Of course, that obvious need didn’t stop the U.S. Chamber of Commerce, financial industry lobbyists and conservative groups from going all out in an effort to prevent the bureau’s creation or at least stop it from doing its job, spending more than $1.3 billion in the process. Republicans in Congress dutifully served the industry’s interests, notably by trying to prevent President Barack Obama from appointing a permanent director. And the question was whether all that opposition would hobble the new bureau and make it ineffective.
At this point, however, all accounts indicate that the bureau is in fact doing its job, and well – well enough to inspire continuing fury among bankers and their political allies. A recent case in point: The bureau is cracking down on billions in excessive overdraft fees.
Better consumer protection means fewer bad loans, and therefore a reduced risk of financial crisis. But what happens if a crisis occurs anyway?
The answer is that, as in 2008, the government will step in to keep the financial system functioning; nobody wants to take the risk of repeating the Great Depression.
But how do you rescue the banking system without rewarding bad behavior? In particular, rescues in times of crisis can give large financial players an unfair advantage: They can borrow cheaply in normal times, because everyone knows that they are “too big to fail” and will be bailed out if things go wrong.
The answer is that the government should seize troubled institutions when it bails them out, so that they can be kept running without rewarding stockholders or bondholders who don’t need rescue. In 2008 and 2009, however, it wasn’t clear that the Treasury Department had the necessary legal authority to do that. So Dodd-Frank filled that gap, giving regulators Ordinary Liquidation Authority, also known as resolution authority, so that in the next crisis we can save “systemically important” banks and other institutions without bailing out the bankers.
Bankers, of course, hate this idea; and Republican leaders like Mitch McConnell tried to help their friends with the Orwellian claim that resolution authority was actually a gift to Wall Street, a form of corporate welfare, because it would grease the skids for future bailouts.
But Wall Street knew better. As Mike Konczal of the Roosevelt Institute points out, if being labeled systemically important were actually corporate welfare, institutions would welcome the designation; in fact, they have fought it tooth and nail. And a new study from the Government Accountability Office shows that while large banks were able to borrow more cheaply than small banks before financial reform passed, that advantage has now essentially disappeared. To some extent this may reflect generally calmer markets, but the study nonetheless suggests that reform has done at least part of what it was supposed to do.
Did reform go far enough? No. In particular, while banks are being forced to hold more capital, a key force for stability, they really should be holding much more. But Wall Street and its allies wouldn’t be screaming so loudly, and spending so much money in an effort to gut the law, if it weren’t an important step in the right direction. For all its limitations, financial reform is a success story.