House Financial Services Committee Chairman Jeb Hensarling (R-Texas) has released a discussion draft of the Financial CHOICE Act, legislation that would replace large parts of the failed Dodd-Frank Act. It has attracted some high-profile fans. Three Nobel Prize winning economists, a former U.S. Treasury Secretary, and a host of academics and policy officials have released a letter that states:
We support the reform principles that underlie the proposed Financial CHOICE Act which promote higher economic growth without bailouts, reduced risk of crises, and simplification of the regulatory process by emphasizing market mechanisms operating through the rule of law.
The very same day the bill was released, I had the privilege of moderating a panel with several of my think-tank colleagues (Chairman Hensarling gave a keynote address) to discuss our work related to the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Financial CHOICE Act. All the panelists had written extensively on what’s wrong with Dodd-Frank, and recently collaborated on a book titled The Case Against Dodd–Frank: How the “Consumer Protection” Law Endangers Americans.
A title-by-title take down of Dodd-Frank, the book discusses how it exacerbates and compounds the economy’s existing ills rather than deals with the causes of the financial crisis. It also proposes how to fix these problems, and many of those ideas are reflected in the Financial CHOICE Act.
Congress is probably still a long way from actually passing a bill like the Financial CHOICE Act, but the draft shows that Chairman Hensarling and members of his committee recognize how harmful Dodd-Frank has been. Indeed, the chairman has vowed his committee will not rest until “we toss Dodd-Frank onto the trash heap of history.” Though the Financial CHOICE Act does not repeal Dodd-Frank (the optimal fix), it stands as a pro-growth, pro-consumer alternative.
The first section of the Financial CHOICE Act emphasizes the key principle that should drive anyfinancial regulatory reform effort: there’s no justification for heavily regulating companies that bear their own losses. The section is titled “Regulatory Relief For Strongly Capitalized, Well Managed Banking Organizations,” and that’s a pretty good summary of what it does.
It provides regulatory relief for banks that choose to fund themselves with relatively higher equity capital. Think of it as a Dodd-Frank off-ramp.
Federal Reserve Chair Janet Yellen offered partial support for the off-ramp idea, but suggested only smaller banks should be given such an option.
Whether only small banks should get regulatory relief is a great topic for debate, as is the question of what the “right” equity level should be to qualify for such relief. Since the proposal is adiscussion draft, now’s the time to debate.
Already Dodd-Frank’s supporters have started attacking the proposal. Sen. Elizabeth Warren (D-Mass.), said it should be called “the Big Wet Kiss for Wall Street Act” and added:
It’s clear Congressman Hensarling and fellow Republicans think the poor Wall Street banks have suffered too much under the new rules and it’s time for them to return to the good ol’ days before the 2008 crisis, when these banks ran wild.
Sherrod Brown (D-Ohio), the top ranking Democrat on the Senate Banking Committee, issued similar statements blaming the crisis on deregulation. Of Hensarling’s plan, Brown said that it
underscores the collective amnesia of many in Congress and on Wall Street about how devastating the financial crisis was for an entire generation of working and middle-class Americans.
Dennis Kelleher, President and CEO of Better Markets, also disparaged the effort:
Missing an historic opportunity to propose a serious plan that would have received bipartisan support, the Chairman of the House Financial Services Committee, Jeb Hensarling, instead outlined the Republican vision for gutting the 2010 Dodd Frank financial reform law.
Such attacks are as predictable as they are wrong. Dodd-Frank’s most ardent supporters are heavily invested in the dangerous myth that deregulation caused the financial crisis, so they have to stick to their narrative. It’s only natural that they label Dodd-Frank critics as people who want to return to the wild west of financial markets.