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Saturday, May 6, 2017

Ending Dodd Frank

In 2008, we had a financial crisis in the USA as some of the biggest banks got close to going under.  As a result, we had the bailout which saved them.  It also saved the economy from a depression.  There was a great deal of anger across the country at the idea that the government had to move in to save these banks from ruin.  We were told that the banks were too big to fail, so we had no choice.  Indeed, when Lehman Brothers -- which was far from the biggest investment bank-- went under in September of 2008, we almost had a national economic disaster.  Lehman's tentacles were everywhere, and even where it had no interests, its collapse sparked enormous fear.

In response to the financial crisis, the Democrats and the Obama administration who were in total control at the time did what they always do:  they put in place all sorts of government regulation that affected every bank, no matter how large or small, but they didn't solve the problem of "too big to fail".  Most of the big banks are far bigger today than they were in 2008.  There are fewer investment banks, so each one has a bigger percentage of the market.  The commercial banks are also more concentrated than in 2008.  The law the Democrats passed (called Dodd-Frank) actually made the problem of too big to fail worse.

One big failure of Dodd-Frank is that it put so many regulations in place for banks that only the biggest banks could afford to meet them.  Compliance costs are enormous.  For Citibank, Chase or Bank of America, these costs are just a small percentage of profits.  For a smaller bank, however, the compliance costs for Dodd-Frank form a much larger percentage of total expenses.  For new banks, the compliance costs of Dodd-Frank are prohibitively high.  As a result, the formation of new banks stopped.  In the ten years before Dodd-Frank there were, on average, over 100 new banks founded each year.  These small start-up banks focused mainly on lending to small businesses, thereby promoting the economic growth of the country.  In the years since passage of Dodd-Frank, the average number of new banks founded each year is less than one.  That's not a type, the number of new banks founded in the years since Dodd-Frank are less than one percent of the number founded in the same period prior to the passage of the law.  The lack of these new banks has resulted in greater concentration of assets in the big banks and a lack of lending possibilities for small businesses.

Another big failure of Dodd Frank also hit small businesses.  The costs of making a loan and complying with the regulatory paperwork increased.  So too did the lending standards which greatly reduced the ability of a new business to get a traditional loan.  There were loans available from non-traditional lenders, but these carry higher interest rates.  Again, this inflicted a major hit on the economic growth rate.

As I write this, Congress is about to consider laws that would repeal much of Dodd-Frank in order to get rid of these growth and job killing restrictions that make the problem of too big to fail worse.  Democrats like Elizabeth Warren and Bernie Sanders(whose motto is that they never met a regulation that they didn't like) are continually screaming that any change to Dodd Frank will leave the nation open to another financial crisis.  That is just not true.  In fact, just the opposite is true.  In many ways, Dodd Frank is the equivalent of a nationwide speed limit of 15 miles per hour put in place to reduce traffic deaths.  It sounds like it might work, but in practice it would just lead to nationwide frustration for drivers.  Most likely, there would be many deaths as drivers broke the speed limit.

This is not a theoretical discussion.  We've seen the effects of Dodd Frank.  We know it killed the formation of new banks.  We know it slowed economic growth by hurting the ability of small business to get loans.  It's time for Congress to take action and to get rid of the over regulation represented by Dodd Frank.

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