By Representative Spencer Bachus
Last week, following the presidential debate, national attention was again focused on the Dodd-Frank Act, the Obama administration's response to the financial crisis. The attention is well deserved: Dodd-Frank, Obamacare and the threat of higher taxes brought on by January's fiscal cliff are among the chief reasons why the U.S. economy is stuck in its weakest recovery on record.
While Democrats claim Wall Street was their target, the truth is the regulatory burden of Dodd-Frank is inescapable no matter where you live or work. If you buy food, consume energy, use a debit card, want to start a small business or buy a home, you will experience some of the red tape that emanates from Dodd-Frank's 400 new regulations. These regulations will cost the private sector money and time. The regulators themselves report it will take companies 20 million work hours each year to comply with just the first 224 of these 400 new rules -- a figure that is especially staggering when one considers it took 20 million hours to build the Panama Canal.
Unlike the low-paid workers who built the Panama Canal, high-priced lawyers, lobbyists and accountants charging hundreds of dollars per hour for their services do much of the work on Dodd-Frank. At least with the canal, we gained a valuable strategic asset. With Dodd-Frank, we'll see employment of financial examiners grow faster than the average for all other occupations, the Bureau of Labor Statistics reports. This must be the administration's idea of a "jobs bill.
Mitt Romney has pointed out that the heavy burden of such onerous regulation holds down our economy in part by hurting community banks and hindering a full housing recovery. Mr. Romney also noted that Dodd-Frank's designation of some institutions as "too big to fail" gives these large firms advantages over smaller ones.
Supporters of Dodd-Frank promised that their 2,300-page bill would end "too big to fail" and make bailouts a thing of the past. The consensus, across the ideological spectrum, is that Dodd-Frank did not succeed in achieving either goal. In fact, it has made matters worse. By establishing a regime for designating firms as "systemically important financial institutions" (SIFIs) -- a designation that may as well read TBTF -- Dodd-Frank guarantees competitive advantages for the biggest of these firms.
Does Dodd-Frank end bailouts? No, it writes them into law. Title II of Dodd-Frank authorizes the Federal Deposit Insurance Corporation (FDIC) to borrow up to 100 percent of the book value of a failed firm's total consolidated assets a month after the FDIC's appointment as receiver. In practice, this money would be used to pay off the firm's creditors and counterparties in the name of containing "systemic risk." This effectively shifts the risk of failure from the firm's lenders to taxpayers and promotes the practice of privatizing profits and socializing losses that is the hallmark of "too big to fail." Can you say taxpayer guarantee? House Republicans have voted to repeal this bailout authority and have long advocated a simple resolution: Require a failed financial firm to file for bankruptcy, thereby removing any suggestion of a federal bailout for these firms or their creditors.
Did Dodd-Frank succeed in ending "too big to fail"? No, in fact the biggest banks have gotten even bigger in the wake of the financial crisis. Half of the banking industry's assets are now held by five institutions, and the largest 20 institutions now control 80 percent of the industry's assets. This amounts to 86 percent of our Gross Domestic Product. Additionally, the biggest banks continue to enjoy significant funding advantages over smaller institutions, which is attributable at least in part to the assumption by creditors that the firms remain "too big to fail" and are thus less risky.
According to the FDIC, banks with more than $10 billion of assets -- of which there are 107 -- enjoy a 29 basis point funding advantage over their smaller competitors. In the first quarter of 2012, these large banks paid an average annual interest rate of around 0.53 percent to their depositors, whereas the country's 7,200 smaller banks paid on average 0.82 percent. In other words, large banks are, on average, paying more than 35 percent less interest to depositors than their smaller competitors, an advantage that has remained virtually unchanged since 2010. Finally, credit rating agencies such as Moody's and Standard & Poor's continue to assign the largest banks a higher credit rating than they might otherwise merit on the belief that, notwithstanding the promises of Dodd-Frank, these firms still enjoy an implicit federal backstop.
Is Dodd-Frank impeding a housing recovery? Proponents of Dodd-Frank claimed that the law would help borrowers and make mortgage markets more stable by prohibiting creditors from making mortgage loans without first determining that the borrower has a reasonable ability to repay the loan. This "Qualified Mortgage" concept sounds perfectly reasonable and justified in light of the lax underwriting practices that helped inflate the housing bubble in the first place. According to a report in Mortgage News Daily, however, it has become more difficult for "even the most qualified consumers" to obtain a home loan since Dodd-Frank was enacted. Why? Because, as Mr. Romney pointed out, it has been more than two years since Dodd-Frank was signed into law and there is still no definition of what a Qualified Mortgage is. So lenders still do not know what will or will not be an allowable mortgage under Dodd-Frank, and the very business uncertainty that was preventing many borrowers from obtaining mortgages at the peak of the credit crisis remains unresolved nearly four years after President Obama was elected.
This is not to argue that we don't need regulations. We do. No sensible person has ever argued otherwise. Reasonable regulations provide clear rules of the road for businesses so they have some certainty and know what to expect. Clear and reasonable rules that provide certainty are not what we've gotten with Dodd-Frank. As Sen. Chris Dodd, one of its chief sponsors, said: "No one will know until this is actually in place how it works."
There is one thing we already know for certain about Dodd-Frank: It layers more bureaucracy and red tape on top of old, and the increased uncertainty it has caused results in a weaker economic recovery and sustained high unemployment. That's the unfortunate truth, and that is just one more reason why the negative impact of Dodd-Frank must be addressed.