Barr is right; Dodd-Frank law is the problem

As an admirer of Congressman Andy Barr, I was surprised by the recent attack on his op-edfrom Lexington accountant Calvin Cranfill.

Cranfill’s facts come straight from Obama administration handouts and don’t make the case he hopes to make.

For example, Barr’s op-ed pointed out that “we have had the weakest recovery from recession in our lifetimes.” Cranfill says we’ve had the “longest expansion since World War II” so “10 million jobs lost resulting from the 2008-9 downturn have been added back.”

If you read that closely, he said the same thing as Barr because almost all the jobs that have come back under President Barack Obama were only those lost in the financial crisis. There has been no new growth. That’s what makes the current “recovery” the weakest in our lifetimes.

The real question is why this recovery has been so weak.

Barr blames the Dodd-Frank Act along with Obamacare. As Barr points out, Dodd-Frank contains authority for 400 new regulations on banks and other financial firms. Six years after the law was enacted, about 25 percent of those regulations have not been adopted. The regulatory agencies have been overwhelmed by the tidal wave of demands from this single 800-page act.

But if we think the regulatory agencies have been overwhelmed, imagine how these new regulations have affected smaller banks and other financial firms.

They have been required to replace loan officers with compliance officers and lawyers, increasing their costs and reducing their ability to process loans and other financing arrangements. As Barr says, Dodd-Frank makes it more difficult for small businesses and start-ups to grow, invest and hire. Studies have shown that start-up businesses are the main drivers of new jobs in our economy, so there is a direct relationship between these new restrictive regulations and the slow economic growth under Dodd-Frank.

Cranfill argues that Barr is wrong to point out that 1,500 banks have disappeared since 2010 because of heavy new regulation, but his only data is that 167 of those were the lingering result of the 2008-9 downturn.

So, even if Cranfill is right, over 1,300 banks went out of business since Dodd-Frank was adopted. The fact is, banks are always going out of business through failure or merger, but they have always been replaced in large part by the formation of new banks. However, since Dodd-Frank, the formation of new banks has declined from about 100 a year to an average of three a year, according to the Richmond Fed. This is because the regulations have made it difficult to carry on a profitable business in banking.

But the silliest argument made by Cranfill is to blame the repeal of the Glass-Steagall Act for the financial crisis. Glass-Steagall’s repeal had nothing to do with the financial crisis — as even “progressive” Sen. Elizabeth Warren, D.-Mass., admits.

What really caused the financial crisis in 2008 wasn’t lack of regulation. It was U.S. government housing policies, which required government agencies like Fannie Mae and Freddie Mac to acquire a quota of mortgages made to low- and moderate-income homebuyers. To meet these quotas, the agencies had to buy huge numbers of subprime mortgage loans.

As a result, by 2008, more than a majority of all mortgages in the U.S. were subprime or otherwise risky, and 76 percent of these mortgages were on the books of government agencies. When the government poured money into the market for low-quality mortgages, it built an enormous housing price bubble, which collapsed and caused the financial crisis.

The idea that lack of regulation — or repeal of Glass-Steagall — caused the financial crisis was cooked up by Democrats in the 2008 campaign. If we are looking for the cause of the slow growth in the economy since the financial crisis, we need look no further than Dodd-Frank. Barr is right on target in blaming Dodd-Frank for the historically slow recovery.

Peter J. Wallison is a senior fellow at the American Enterprise Institute. His most recent book is “Hidden in Plain Sight: What Caused the World’s Worst Financial Crisis and Why It Could Happen Again”

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