Dodd-Frank Act tries to keep Wall Street from depending on taxpayer-funded governemnt bailouts
Dodd-Frank essentially says Wall Street can no longer take risky bets that might require the government to bail it out with taxpayer money when something goes wrong. It was passed in the wake of the 2008 financial crisis and is named for Congressman Barney Frank (D-MA) and Senator Chris Dodd (D-CT) who are now retired but, at the time chaired the House and Senate committees where it originated. Passing the legislation took nearly two years but was widely seen as a major victory for the Obama administration, which had vowed to bring the U.S. out of the recession it inherited from President George W. Bush.
However, when the bill passed, almost everybody was unhappy with it. Some politicians from both parties said it didn’t go far enough to rein in reckless Wall Street behavior, while Wall Street felt it went too far.
Now portions of Dodd-Frank face potential repeal, an idea that was buried in the spending bill, drafted with language coming directly from Citigroup lobbyists. Critics say that it will let banks take even bigger gambles, but the banks say the new rules are necessary to promote economic growth.
Although the White House did not support the rollback of the protection offered by the Dodd-Frank Act, it was willing to ignore the new rules threatening it just to get the spending bill passed.
During Al Jazeera America’s Sunday night segment, “The Week Ahead,” Thomas Drayton spoke to Richard McGahey, professor of public policy and economics at The New School and a former executive director of the Congressional Joint Economic Committee; and to Peter Morici, a business professor at the University of Maryland, who joined the discussion from Washington, D.C.
McGahey says, “It is surprising to see how easily this was done. The provision is important in and of itself, but it’s equally important as a signal that Republicans are going after Dodd-Frank when they have their full majorities in place next year.”
One person who has been a vocal advocate of the Dodd-Frank Act is Sen. Elizabeth Warren, the Massachusetts Democrat. She says there are people on both sides of the aisle who support the act. “Democrats don’t like Wall Street bailouts. Republicans don’t like Wall Street bailouts. The American people are disgusted by Wall Street bailouts. And yet, here we are five years after Dodd-Frank with a provision that would do nothing for the middle class, do nothing for community banks, do nothing but raise the risk that taxpayers will have to bail out the biggest banks once again.”
But Morici says Dodd-Frank took aim at the wrong target. “In the case of Citigroup, what brought the bank down was its reckless lending, the mortgages that it underwrote, not derivatives trading. In fact, the trading helped bail them out. It generated profits which helped them get back on their feet.”
Morici says the Dodd-Frank Act didn’t solve the problem, but just imposed a restriction that didn’t address the problem.
McGahey says, “Regulation may be inadequate, but to simply say we aren’t going to regulate at all, you can’t get away from it.” He says Dodd-Frank is meant to address some of the problems that led to the near global economic meltdown seven years ago, but there will be new crises which require a strong regulatory apparatus.
Morici says that, “Dodd-Frank is so complex, convoluted, and contradictory that a lot of small banks that just can’t cope with it—banks that had nothing to do with the crisis. As a consequence they’ve sold out to bigger banks. So now the five or six largest banks have about 50-60 percent of the deposits. They’re not interested much in making loans on Main Street; they’re interested in gambling on Wall Street. Dodd-Frank didn’t shut down the casino. It gave it a monopoly and made it bigger.