In 2010, President Obama promised that the new Dodd-Frank Wall Street Reform and Consumer Protection Act would “help lift our economy and lead all of us to a stronger, more prosperous future.” Six years later, Vice President Joe Biden reaffirmed this promise in Georgetown University’s Gaston Hall.
“On almost every measure, Americans are better off today than they were years ago, but there are still a lot of people being left behind,” Biden claimed. “It wasn’t an accident. It happened because we made some very tough, very unpopular decisions, and things turned out to be the right call on balance.”
Both Biden and Obama have argued that the regulatory policies of their administration brought the United States from the brink of financial ruin back into prosperity through harsh regulation of the “shameful” Wall Street banks that destroyed our economy. Yet, many economists claim that our economy recovered in spite of Dodd-Frank, not because of it.
Biden’s defense of Dodd-Frank comes on the heels of President Elect Trump’s claim that he will dismantle the Obama administration’s economic regulations and replace them with “new policies to encourage economic growth and job creation.” Despite Biden’s best efforts in Gaston Hall to defend the legislation, all evidence indicates that Dodd-Frank has been an significant hindrance to the recovery and growth of the U.S. economy.
Dodd-Frank was intended to address the alleged lack of regulation on Wall Street. During the fallout of the Great Recession, media outlets and politicians created a narrative that since 1999, Alan Greenspan and George W. Bush worked to dismantle financial regulations that would have prevented the crisis. Yet according to George Mason University’s Mercatus Center, regulatory restrictions on financial services grew every year between 1999 and 2008. The financial crisis cannot be explained by a lack of Wall Street regulation.
“I spend a huge chunk of my revenue on compliance,” the financial adviser said. “You wouldn’t believe the hurdles that small financial services firms have to go through to do something so incredibly simple.”
Due to this perception, Congress sought to restrict and punish the financial sector for the role they played in the financial crisis. However, they failed to regulate Wall Street properly. While Dodd-Frank was aimed at regulating Wall Street, the people and institutions most effected by the legislation are community financial institutions like local banks and credit unions. According to data from the FDIC and the National Credit Union Administration, the country is losing one community bank or credit union every single day.
Dodd-Frank hurt not only local financial institutions but also consumers. Before Dodd-Frank, 75% of banks offered free checking. Two years later, only 39% offer free checking. Economists attribute this additional consumer expense to the “Durbin Amendment” of Dodd-Frank, which imposes price controls on retailers.
Similarly, small financial advising teams are struggling to survive in today’s regulatory environment. Financial advisors have to navigate the SEC, FINRA, State Consumer Protection Offices, the Federal Trade Commission, the Bureau of Consumer Protection, and a number of other regulatory agencies.
One financial advisor described the obstacles of navigating the regulatory landscape.
“I spend a huge chunk of my revenue on compliance,” the financial advisor said. “You wouldn’t believe the hurdles that small financial services firms have to go through to do something so incredibly simple.”
Dodd-Frank has harmed community banks, financial advisors and consumers, and it isn’t protecting the U.S. economy from another financial crisis either. According to several economists and industry leaders including CEO of Blackstone Group Stephen Schwarzman, Dodd-Frank may cause the next recession through the Volcker rule.
Introducing Vice President Biden on Monday, former chairman of the Federal Reserve Paul Volcker advocated for this section of the legislation—the Volcker Rule. The rule bans proprietary trading by banks, so that banks act more in line with the interests of the economy and their clients. However, an unintended consequence of this rule is that banks now have far less liquidity and are less able to react to shocks in the economy. This gap in U.S. liquidity could plunge the United States into the next financial crisis.
In 2010, Obama said, “In the end, our financial system only works—our market is only free —when there are clear rules and basic safeguards that prevent abuse, that check excess, that ensure that it is more profitable to play by the rules than to game the system. And that’s what these reforms are designed to achieve—no more, no less.”
Vice President Biden’s speech at Georgetown was another attempt to protect the legacy of the Obama administration. Yet, Dodd-Frank is an overreaching growth killer that makes the financial sector more volatile and dangerous. President Trump has an opportunity to advance a much-needed conservative reform of financial regulations. Rolling back federal regulations is not only a much-needed policy but also one that seems easily in reach for the Trump administration.