7 years in, Dodd-Frank still protects Main Street from Wall Street risk

The Dodd-Frank Financial Reform and Consumer Protection Act was signed into law by President Obama seven years ago today. While seventh anniversaries are not often significant events, it is for the Dodd-Frank law, which is under unrelenting assault and a misinformation campaign.

With the House passage of the Financial CHOICE Act, the release of the first report from the Treasury Department on financial regulations and the deregulation agenda of the Trump administration and its appointees, Dodd-Frank is targeted for significant changes, if not a wholesale gutting. Critics would like to pretend that the law was not needed, that it hasn’t worked and that it has stifled lending and economic growth. However, the evidence is indisputable: These claims are wrong. 

{mosads}Less certain, however, is where the country goes from here. One path keeps us moving toward a safe, stable and rebalanced financial system that supports the real economy, enables broad-based prosperity and provides American families with sufficient savings and investments for a home, education and a secure retirement.

The other path leads us back to the recklessness, unrestrained risk-taking, Wall Street gambling and illegal and criminal activity that deregulation enabled and that directly contributed to the 2008 financial crash — likely leading to another, even worse economic crisis. 

In late 2008, the nation’s financial system teetered on the brink of collapse, brought there by the worst financial crisis since the Great Crash of 1929. The economic wreckage that followed was the worst the country had experienced since the Great Depression. Indeed, the Great Recession, as it has come to be known, will end up costing the country more than $20 trillion in bailouts, lost jobs, foreclosed homes, drained savings, interrupted retirements and so much more. Put differently, the 2008 financial crisis will cost every American man, woman and child more than $170,000. 

The Dodd-Frank Act was passed in response to this horrific financial, economic and human catastrophe. The law overhauled or enhanced virtually every aspect of America’s financial protection rules: banking, securities, commodities, derivatives and consumer protection. While there were over 6,000 banks in the U.S., the law was focused on the 50 or so largest and most dangerous financial institutions. In re-regulating those too-big-to-fail financial firms, the law also sought to rebalance Wall Street’s biggest banks so they supported the real economy rather than being a threat to it.

Today is the 7th anniversary of the #DoddFrank financial reform law & middle-class America is better off today because of it. (1/11) pic.twitter.com/QF2rpib5BG

— Better Markets (@BetterMarkets) July 21, 2017

This is like what the country did following the crash of 1929: It passed laws and regulations to create layers of protection between Wall Street’s activities and Main Street’s livelihoods. Wall Street claimed in the 1930s that these protections would destroy banking, our economy and capitalism itself. Yet, America enjoyed a booming economy in the ensuing decades, the financial industry thrived and the country prospered, creating the largest middle class ever. 

Until decades of deregulation, beginning in the 1980s, brought down these protections while allowing giant, dangerously interconnected financial institutions to engage in excessive risk-taking. The resulting 2008 crash exposed numerous weaknesses and flaws that had developed in nearly every level of the financial system, many because of deregulation. It further revealed that the regulatory system, which to that point had been adequate to oversee the simpler financial system of the 20th century, was incapable of monitoring the more complex and interconnected 21st century financial system.   

The facts prove that Dodd-Frank has made us safer and that financial reform is working. For example, former Federal Reserve Board Chair Paul Volcker, speaking to the Bretton Woods Committee in April, observed that:

“[C]laims that Dodd-Frank and other regulatory approaches have somehow gravely damaged the effective functioning of American financial markets, the commercial banking system and prospects for economic growth simply do not comport with the mass of the evidence before us. Here we are in 2017 with a near fully employed economy, close to stable prices, bank profits at a new record and the return on banking assets again exceeding 1 percent. Loans at both large and small banks are at new highs, double the pre-crisis years. In fact, loan growth has again been exceeding growth in nominal GDP.”

Further evidence can be drawn from the fact that while U.S. banks are flourishing, European banks are not. According to the European Banking Authority, “The EU banking sector continues to struggle with high levels of non-performing loans (NPLs), low profitability and efforts to restore confidence, notwithstanding the steady strengthening of the capital base.”

Just days before the 7th anniversary of #DoddFrank, Wall St. banks reported: lending to Main St. is up which = more jobs & economic growth. https://t.co/IYjyK0krvs

— Better Markets (@BetterMarkets) July 19, 2017

What accounts for the difference? The U.S. took comprehensive action to stabilize the financial system, as explained by National Economic Council Chairman Gary Cohn, who spoke to Bloomberg TV in 2016 when he was serving as president of Goldman Sachs, “Almost all U.S. banks took our medicine [recapitalizing, restructuring and implementing financial reform rules] early…We really built our balance sheet up. We really de-leveraged ourselves. We really built enormous excess liquidity…And we made ourselves as financially secure as we could.”

While it isn’t perfect (no law is), there is no doubt that the Dodd-Frank Act is working: It has reduced the likelihood of another financial crisis, protected investors and consumers and rebalanced Wall Street’s biggest banks to focus on financing businesses and jobs rather than bonus-driven gambling. Contrary to the self-serving but baseless sky-is-falling predictions, banks have thrived under the law and economic growth has risen.

As to those who would risk economic growth, employment and broad-based prosperity for the sake of the myth that banks and the economy are struggling under Dodd-Frank, there are 20 trillion reasons why that is a bad idea. 

Dennis M. Kelleher is president and CEO of Better Markets, a Washington-based, independent organization that promotes the public interest in financial reform, financial markets and the economy.

The views expressed by contributors are their own and not the views of The Hill.