House Subcommittee Says Bad Policy Caused Crisis, Dodd-Frank Missed the Mark

Witnesses at a House subcommittee hearing on Wednesday testified that the Dodd-Frank Act introduced new problems and may have even laid the groundwork for another financial crisis, according to an announcement from the House Financial Services Committee earlier this week.

In Wednesday's hearing titled "The Dodd-Frank Act and Regulatory Overreach," the Financial Services Subcommittee on Oversight and Investigations examined the causes of the 2008 financial crisis and the subsequent passage of Dodd-Frank in 2010 along with the regulatory burdens that Dodd-Frank created.

"Those who supported Dodd-Frank have been more concerned with helping special interests in Washington than their constituents back home and the proof is in the numbers," said Representative Sean Duffy (R-Wisconsin), chairman of the subcommittee. "Fewer people have returned to the work force than in any other modern recovery. Our community banks are closing every week, Main Street lenders are being slowly euthanized and the number one cause that I hear from people in Wisconsin is the excessive regulatory burden imposed by this administration. Dodd-Frank is a major cause of that burden."

Duffy said that the "crushing regulatory regime" of Dodd-Frank has perpetuated unemployment, stifled hiring, and made it harder for people to obtain loans to either buy a home or expand their business.

One of the witnesses at the hearing, Dean and Professor of Law at the University of Virginia School of Law Paul G. Mahoney, said a consequence of Dodd-Frank will be fewer and larger banks in the United States, because Dodd-Frank has layered on "costly new regulations that the large banks can afford but smaller ones cannot."

Key takeaways from Wednesday's hearing include: Dodd-Frank was hastily passed in reaction to the financial crisis and benefits big banks at the expense of consumers; the 2008 financial crisis was caused not by market failures but by bad federal government housing policies that pushed people into buying homes they could not afford, and that regulators charged with monitoring the financial system failed to act until it was too late despite having all the authority they needed to regulate the system; and that Dodd-Frank will be ineffective at preventing the next financial crisis because it failed to address the fundamental causes of the 2008 crisis, and it paved the way for the next financial crisis by passing "too big to fail" into law and allowing taxpayer-funded bailouts for financial institutions deemed as "systemically important."

Another witness at Wednesday's hearing, Hester Peirce, Director of the Financial Markets Working Group at the Mercatus Center at George Mason University, said that the drafters of Dodd-Frank were working without full information, since the Financial Crisis Inquiry Commission which Congress charged with determining the cause of the financial crisis did not issue a report until six months after Dodd-Frank was passed into law.

"As the failures and bailouts of the financial crisis accumulated, so too did the calls for a quick and thorough rewriting of the financial regulatory rulebook," Peirce said. "The resulting Act was the product of fear and fury, not of careful analysis. Grounded in an inaccurate market failure narrative, Dodd-Frank expands regulators’ authority to enable them to play a more central role in managing the financial system and identifying and mitigating systemic risks. This approach to financial regulation, while a natural response to a market failure narrative, only increases the vulnerability of financial system to regulatory failure."