The Dodd-Frank financial overhaul law—also known as the “Federal Reserve Empowerment Law”—recently marked its first anniversary. Last summer, we fought this unconstitutional power grab tooth and nail. The lead sponsors of the bill Rep. Frank (D-Mass.) and former Sen. Dodd (D-Conn.) claimed that the 2,300-page bill would end “too big to fail.” But as we noted last July, “the financial overhaul bill sets the stage for future financial meltdowns.” Dodd-Frank has stifled job growth while doing absolutely nothing to rein in key instigators of the current economic fiasco.
Dodd-Frank has granted the federal government unprecedented regulatory powers. Economic writer and real estate investor Jeff Harding says that “the new financial overhaul bill is the greatest government takeover of the financial sector of the economy since the National Recovery Act of 1933 when Franklin Roosevelt attempted to introduce central planning in America.” It will eventually create at least 17 new bureaucracies with powers to regulate small businesses and consumers including the so-called Consumer Financial Protection Bureau.
The Dodd-Frank law even grants a federal bureaucracy the authority to monitor every single consumer transaction including credit card purchases. Despite the fact that the Federal Reserve was to a large degree responsible for the present financial mess, Dodd-Frank illogically makes them a primary financial regulator. The new financial regulation law will not prevent another fiscal crisis but it may be responsible for one.
Instead of allowing free-market mechanisms to set the right incentives for banks to make prudent lending decisions —where those who may profit are also the ones who will pay the cost of their own failure—the law sends the wrong message. It institutionalizes moral hazard by giving banks an incentive to partake in risky and high-reward lending choices. The market will reward banks if they succeed but taxpayers are forced to foot the bill if they fail. It’s a win-win scenario for banks.
The government sponsored enterprise (GSEs) Fannie Mae and Freddie Mac also played a major role in the financial crisis. Fannie and Freddie are entities created by the federal government to make and guarantee mortgage loans. These mortgage giants are a classic example of crony capitalism, where big government and business get in bed together. Frostburg State University economics professor William Anderson states that “in a free market, there would be nothing like these entities, or if something like them existed, there would be no guarantee that losses would be covered by taxpayers.” Instead of ending taxpayer support from the house GSEs, the Dodd-Frank financial overhaul law will continue to allow them to function without consequences.
Austrian economists predicted the housing market crash long before 2008. During a House Financial Services Committee meeting on September 10, 2003, Rep. Ron Paul (R-Texas) asserted that Fannie and Freddie distortions in the housing market would lead to an inevitable housing bubble burst in the near future. He concluded his speech with these words, “Congress should act to remove taxpayer support from the housing GSEs before the bubble bursts and taxpayers are once again forced to bail out investors who were misled by foolish government interference in the market.” Wouldn’t we be better off if we listened to Ron Paul’s advice in the first place?
Do you know who didn’t see the financial crisis coming? (Or at least didn’t publicly acknowledge a problem?) Chris Dodd and Barney Frank. Time and time again Dodd and Frank denied that a housing burst was on the horizon. In a 2003 hearing, Barney Frank said that “I do not think we are facing any kind of a crisis. That is, in my view, the two government sponsored enterprises we are talking about here, Fannie Mae and Freddie Mac, are not in a crisis. . . . I do not think at this point there is a problem with a threat to the Treasury.” We shouldn’t trust the same politicians who got us into this mess to show us the way out.
Both Chris Dodd and Barney Frank have serious conflict of interests with Fannie Mae and Freddie Mac. As a Boston Globe headline reads, “Frank’s fingerprints are all over the financial fiasco.” Throughout the 1990’s, Barney Frank had a romantic relationship with Herb Moses, an executive at Fannie Mae lobbying for relaxed lending restrictions. Moses worked at the GSE for seven years, while Frank was on the Housing Banking Committee, which had jurisdiction over Fannie Mae.
As you may have already predicted, Barney Frank spent years blocking efforts to impose tougher regulations on Fannie Mae and Freddie Mac. As Fox News reports, “In 1991, the year Moses was hired by Fannie, the Boston Globe reported that Frank pushed the agency to loosen regulations on mortgages for two- and three-family homes, even though they were defaulting at twice and five times the rate of single homes, respectively.” These loose lending programs help lead to the financial meltdown. Barney Frank claims that his close relationship with Moses was not a conflict of interest but common sense says otherwise.
Chris Dodd took generous bribes from politically connected banks. In 2008, Countrywide Financial, a major beneficiary of the Fannie and Freddie’s loan programs, and its Chief Executive, Angelo Mozilo were finally busted for loaning at lower than market rates to key politicians involved with regulation and oversight of Countrywide Financial through a group called the “Friends of Angelo.” Senate Committee on Banking, Housing and Urban Affairs member Chris Dodd received $780,000 in loans below the market rate of interest. Whose side do you think this guy is on? The taxpayers or the big banks?
The underlying belief behind the Dodd-Frank financial overhaul law is that the free market is to blame for the financial crisis. Barney Frank has foolishly said that “the private sector got us into this mess. The government has to get us out of it.” The free market has not failed since we’ve never had free market capitalism. Neither the Federal Reserve nor government sponsored enterprises would exist in a true free market society.
The current financial mess is not a result of too little government regulation, but too much. Henry Hazlitt once wrote that “worse than the slump itself may be the public delusion that the slump has been caused, not by the previous inflation, but by the inherent defects of ‘capitalism.’” Dodd-Frank is a misguided approach that will stifle economic growth while infringing on personal liberty. We must repeal the Dodd-Frank Act and end all taxpayer support of government sponsored enterprises.