Dodd-Frank regulatory overreaction

Just as we were told that World War I was the war to end all wars, we were told that the Dodd-Frank Act, passed in 2009 at the end of the Great Recession, would prevent all future bank bailouts, and stop the banks from ever again plunging the country into another deep recession. The means of achieving these ends was to be pervasive federal bank regulation, as if federal bureaucrats would understand the banking business better than the banks themselves.

In fact, instead of Dodd-Frank pre-empting the need for any future bank bailouts, the legislation established a legal framework institutionalizing bank bailouts, establishing in law the means of financing and the authority for such bailouts. And the pervasive federal regulation of banking only served to drive many banks out of business altogether, especially smaller local and regional banks that provided credit to small business.

The supposed need for comprehensive federal regulation of banking was based on a self-serving interpretation of what caused the financial crisis and recession. That self-serving interpretation justified more federal power effectively to take over private banking precisely through pervasive, comprehensive, costly regulation.

But it was not deregulation that caused the crisis. The cause was first overregulation, forcing banks to make mortgage loans they did not want to make, under traditional lending standards.

The liberal Left decided that it was somehow unfair to deny people mortgages just because they didn’t have the funds and credit history that could be counted on to pay the mortgages back. And once the standards were debased for low and moderate income borrowers, the same debased standards could not be denied to more creditworthy borrowers, who found they could now get mortgages for more risky housing and real estate speculation, with second and even third homes.

The second cause involved debased Fed monetary policy, replacing the standards that ended the Great Inflation of the 1970s, with easy money that served to inflate the housing and real estate bubbles. Those bubbles inevitably popped, leading to the horrendous downturn and severe recession.

While perceptive conservative economists and legal scholars have documented these as the real causes of the crisis and recession in several books and studies, these causes justified less, not more federal power and control. So establishment media and academia quickly discarded them, favoring instead to pin the blame on what would justify more federal power and control.

Conservative foundations and organizations have been too lax about entering into this essential Great Debate about the true causes of the crisis and recession.

Dodd-Frank ended up contributing greatly to the bleak growth and stagnation coming out of the recession, by squelching essential small business and consumer financing. Adding still more to this stagnation was new special interest overregulation piling onto the new federal overregulation gravy train.

Exhibit A is Dodd-Frank federal price controls on debit card transaction fees charged to merchants by bank card issuers. Before Dodd-Frank, card issuers charged merchants 1-3 precent per transaction, 1.15 percent on average, to cover their costs maintaining debit cards.

But Illinois-based Walgreens complained to Minority Whip Sen. Dick Durbin of Illinois that these fees were their fourth-largest cost item. Durbin responded to his major contributor with a Dodd-Frank amendment empowering the Fed to adopt regulation limiting those fees. The Fed imposed a national limit on debit card fees of 21 cents plus 0.05 percent of the customer’s charge to the card.

Card issuers tried to recoup by charging the maximum process fee allowed on every purchase, regardless of how much the merchant’s customer charged. That greatly increased the cost to small businesses. So a bakery now pays the same 22 cent fee for a customer purchasing a $3.50 bagel as a jewelry store does for a customer charging a $350 watch.

This arbitrary, unfair, special interest regulation should be repealed along with the entire Dodd-Frank legislation, liberating banks to provide financing for small business and consumers once again. That would be one component of any comprehensive, pro-growth, reform package.

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