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The recently passed Dodd-Frank financial services reform bill is yet another example of power-grabbing legislation that fails to address the root causes of the current financial crisis. Countless studies have confirmed that the Federal Reserve played a major role in the fiscal collapse by artificially keeping interest rates low by inflating the money supply in the economy. Before the official recession began in December 2007, the economy appeared to be booming with an expansion of credit. Inevitably, the long period of unsustainable negative real interest rates gave individuals a tempting incentive to borrow from the banking system. Unfortunately, the artificially low interest rate misled millions of people to take out loans that they could not afford to pay back once the interest rates eventually rose.
Government-established central banks tampering with the market provoked the artificial boom followed by the current inescapable bust or crash. Following the boom-bust cycle, true financial reform legislation should seek to examine how the secretive Fed sets its interest rates. Yet, the Dodd-Frank bill grants the Fed significantly more power to oversee financial firms. According to Cato Institute scholar Mark A. Calabria,
The legislation's worst oversight is to ignore completely the role of loose monetary policy in driving the housing bubble. A bubble of such historic magnitude as the one we went through can only occur in an environment of extremely cheap and plentiful credit. The ultimate provider and price-setter of that credit was the Federal Reserve. Could anyone truly have believed that more than three years of a negative real federal-funds rate — where one is essentially being paid to borrow — would not end in tears?
Despite the fact that the Federal Reserve was partially responsible for the present financial mess, the new law illogically makes them a primary financial regulator. With this in mind, the new financial regulation bill will not prevent another fiscal crisis but it may be responsible for one.
The Dodd-Frank bill continues flawed banking regulations despite the will of the American people. A Rasmussen poll confirms that 80 percent of Americans want a comprehensive audit of the Fed. Instead, the Dodd-Frank bill only includes a watered down one-time audit of the Fed that will not disclose how the Fed sets its interest rates. Throughout the debate, proposals to end all of the special audit protections of the independent and secretive Fed were denied. An amendment introduced by Senator Vitter (R-LA) that had language identical to Rep. Ron Paul's (R-TX) comprehensive Federal Reserve transparency bill was rejected back in May. Undeniably, we need to reform America’s financial sector with more transparency in the Fed’s operations. However, the Dodd-Frank bill expands the power of the Fed while continuing to allow it to operate behind closed doors on the taxpayer’s dime.