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The True Origins of This Financial Crisis
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Special Report
Could the Republicans Survive Dodd-Frank?
Without its repeal, the economy will continue to struggle.
There are always people who believe that Washington’s actions are immutable. Yes, they say, the people can elect Republicans who pledge to overturn Obamacare, but when the smoke clears much of it will still be standing. And sure, we have a deficit crisis, but Paul Ryan’s budget — or any other entitlement reform — will never get 60 votes in the Senate.
And Dodd-Frank? Mitt Romney has pledged to repeal Dodd-Frank. Legislation has been introduced by Republicans in both the House and Senate to bring that about. Yet sophisticated commentators tell us that the buzz cut we need will really be just a light trim around the edges.
If that’s how it goes, the Romney administration and the Republican Congress that might take office in 2013 are likely to find themselves in as much economic and job trouble in 2014 and 2016 as Barack Obama finds himself today. That’s because this law may be the primary reason the economy continues to struggle.
After the financial crisis and the resulting recession, the U.S. economy actually did begin a recovery. By the fourth quarter of 2009, the GDP was growing at an annual rate of almost 4%. At that point, economists were predicting the V-shaped recovery that usually occurs after a sharp recession. Although 4% was not a Reagan-like growth number (the economy grew an average of 8% for the first three quarters of recovery in 1983), at least it suggested an economy on the move.
But as the Dodd-Frank Act took shape in the first two quarters of 2010, the economy began to slow. By the time the law was enacted in the third quarter of 2010, the average rate of growth of the three prior quarters had slowed to 2.5 percent. But the worst was yet to come. After Dodd-Frank, the average annual growth rate of GDP for the seven following quarters has been only two percent, with the most recent quarter growing even more slowly at only a 1.7 percent annual rate.
Other components of the economy also began to sink. Although the housing market had just passed its historic 3.3% trend line for growth in the second quarter of 2010, the Case Shiller Home Price index shows that it fell sharply beginning in 2010’s third quarter and has not yet recovered the level it had reached before Dodd-Frank. The same is true for manufacturing. Production there had grown to 8% by mid-2010 according to Fed data, but after Dodd-Frank it fell continuously through the rest of 2010 and into the middle of 2011. It too has never recovered its pre-Dodd-Frank level.
Much of the commentary about the weak Obama recovery has focused on the policy uncertainties created for business firms by Obamacare and, more recently, the so-called fiscal cliff. Cost uncertainties increase risks for business, reducing the willingness to invest and hire. But the Obamacare and fiscal cliff uncertainties can be computed arithmetically. All the data is there; what’s uncertain is which scenario will play out.
The policy uncertainties of Dodd-Frank, however, are of a different order, and why they pose such a danger for the future. It is impossible for anyone in business to know what is meant by the “stringent” regulations — including exposure limits — that the act requires the Fed to impose on large banks and other large financial firms; or what new regulations and costs will be imposed by the Consumer Financial Protection Bureau on small banks and others — from retailers to check-cashers — that have financial relations with consumers. No one can tell whether firms that hedge their financial and supply risks through derivatives will be able to do so in the newly regulated derivatives markets. No one can be sure there will be a liquid and robust market for fixed income securities — or the ability to issue commercial paper and other short-term securities — after the Volcker rule restricts trading by banks. No one can tell whether any but the most creditworthy borrowers will be able to get a mortgage when lenders will suffer significant penalties if borrowers can’t pay, and when private securitizers (but not the government agencies with which they have to compete) will be required to retain 5% of the mortgage pools they sell.
Finally, significant parts of Dodd-Frank are being challenged on constitutional grounds, and just about every major regulation will be challenged in court on grounds that the agency did not have authority under Dodd-Frank to impose it, that the regulation is arbitrary, capricious or unreasonable, or that it cannot pass a reasonable cost-benefit test.
In other words, the uncertainties associated with Dodd-Frank will go on for years. So the question must be asked: if Dodd-Frank is not repealed, will even the Republicans be able to revive the economy?
Letter to the Editor View all comments (30) | Leave a comment
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Joellen| 9.24.12 @ 7:01AM
Isnt it interesting that both Dodd/Frank have left their seats during this time? WHY? You cant crowbar these "POLITICKS" out, yet these two left on their own - again, WHY?
Aristocat| 9.24.12 @ 7:08AM
I believe repeal would take 60 votes in the Senate, which Republicans won't have unless some Democrats support repeal.
The Avenger| 9.24.12 @ 7:28AM
We can always hope that some democrats aren't as stupid and Dodd, Frank, and Obama. Doubtful, but possible.
Trinacria| 9.24.12 @ 1:33PM
If stupidity were the only problem, I'd be more optomistic. Unfortunately, the genesis of these policies can be traced not to stupidity (which most assuredly exists), but to arrogance, self-interest, and a profound lack of ethics.
There's simply no way that an adult with even a modest intellect couldn't reasonably foresee the consequences of such legislation. Individuals like Dodd and Frank (and their fellow democrats) simply don't care, because they've done the math and figured out that there are more voters who identify themselves as the "little guy" (and therefore will tend to support politicians who appear to be sticking it to the man).
Bottom line: if you're counting on democrats to act contrary to their own self-interest....don't hold your breath.
JD| 9.24.12 @ 4:32PM
Persistent stupidity manifests as arrogance.
Von Mises Jr| 9.24.12 @ 8:01AM
If Obama is re-elected, the Courts will not likely overturn the law, and if they do, Obama regime would likely ignore the Federal Ruling just as they have ignored Judge Feldman overturning the oil drilling moratorium.
But if Romney wins, Obama with 923 Executive Orders has established the precedent of simply "exempt" en masse as Barry has exempted liberal states and Public Unions from ObamaCare. The Courts would also be more likely to overturn since the people will have rejected "socialism" in an election.
Why is everyone so damn defeatist? As Paul Ryan keeps saying: “We can do this.”
c. j. acworth| 9.24.12 @ 8:27AM
You've hit on my #1 hope for a Romney 1st day on the job. So much of the damage Obama has caused was not legislated, but dictated by executive order. What was dictated can be just as easily un-dictated, if Romney will do it.
Al Adab| 9.24.12 @ 12:47PM
Cancellation of existing executive orders would require BOLD moves by a republican. That is about the first time those two words appeared together in a sentence since 1994. If the GOP was bold, their candidate would be leading instead af floundering about. Sadly that is too much to expect from the mainline accomodationist GOP.
JD| 9.24.12 @ 4:38PM
This point can't be understated. While Democrats insist that we can't tie problems to their legislation and that we're obstructing all their legislation, the reality is that their legislation never does anything except grant powers to non-legislators. The acts of those so empowered are what matter.
The housing bubble can't be tied to the CRA (legislation) nearly as much as it can be tied to the acts of regulators who already existed. That's why Democrats smugly counter CRA-blaming accusations. They WANT us to focus on the CRA - it's the diversion.
Similarly, we'll never find nearly as much scandal in ObamaCare or Dodd-Frank legislation as we'll find in the acts of the regulatory authorities created by that legislation. But such acts have scant paper trails compared to acts of congress.
Through the creation of "regulatory infrastructure", Democrats have removed almost the whole act of governing from elected officials, giving it instead to bureaucrats who function in a corrupt, ambitious environment invisible to the man on the street. It's worse than all the slander they spew about corporations, and they own it.
Trinacria| 9.24.12 @ 1:44PM
VM,
With respect, I'm defeatist about this because it is contingent upon my fellow americans making an informed choice - the same americans who were so profoundly intellectually vacant and derelict in their responsibility to take their vote seriously that they blindly and foolishly cast their votes for the single most unqualified, ill-prepared, and unimpressive candidate in the history of the United States (despite the fact that the consequences were entirely foreseeable).
I could l canvass the homes in my neighborhood and identify a half dozen individuals who had a stronger resume than Obama (which is not to say that any of them would be qualified to run the country, but rather to demonstrate how utterly unqualified Obama was/is), and yet my fellow americans didn't hesitate to put their nickel down on this laughably incompetent con artist. Doesn't exacly inspire confidence...
Trinacria| 9.24.12 @ 1:56PM
uh, that's "exactly" (spell check union on strike...)
Jacob McCandles| 9.24.12 @ 3:08PM
My thoughts exactly. Just when I start trying to think positive, I'm reminded how hopelessly ignorant most of the country is. Rather than speaking facts, Romney would probably garner more votes by going "2016" on the campaign. Just start putting that doubt in people's minds about BHO's true motives.
Von Mises Jr| 9.24.12 @ 3:10PM
Trinacria, if your man (assuming you are a woman) was a cheating, lying stealing philanderer, would you eventually figure it out?
I think American women are very smart.
Perhaps some liberals and OWS types, not so much. But we are counting on you gals.
Trinacria| 9.24.12 @ 5:09PM
VM,
100% male, with a lovely wife. If I were cheating, lying, and philandering, she would most assuredly figure it out. But she's not a liberal; she has a mind of her own (and a job, too!) and the ability to think critically (she's even willing to have us foot the bill for our own contraception). Not so for most americans.
I respect your right to believe american women are smart, though I hasten to submit for your consideration the likes of Sandra Fluke and the other babbling ninnies who actually buy into the "war on women" crap. In fact, women have long been successfully exploited by liberals who know that they are far more likely to respond to emotional appeals than logic. That's not my opinion; the polls are conclusive in this regard.
I hope you're right, but when I see that Romney has essentially 0% support among african americans who have seen their unemployment rate nearly triple and median income nose dive under Obama, I have scant evidence to suggest that they're going to figure it out...
rpersing | 9.24.12 @ 7:51AM
This arguement is immediately flawed when in the first paragraph a misstatement is made: budgets do not require 60 votes in the senate.
rpersing | 9.24.12 @ 7:53AM
....and since the SCOTUS deemed Obamacare penalties taxes, only 51 votes will be necessary for its repeal
John Navratil| 9.24.12 @ 11:39AM
rpersing,
And you don't think the Dems will fillibuster anything they don't like?
JD| 9.24.12 @ 4:31PM
EVERYTHING requires 60 votes in the Senate until filibuster rules are changed.
Mike G| 9.24.12 @ 9:11AM
"Yet sophisticated commentators tell us that the buzz cut we need will really be just a light trim around the edges."
It's not just the commentators--the history of the past few decades also tells us that when Repubs tell us their going to give government a buzz cut, it only gets a light trim at most, and often, no cut at all.
Who Knows?| 9.24.12 @ 10:47AM
Ain’t high productivity grand?
We’re so proud that it only takes 2% or so of the work force to produce the food we need. And, that for most people jobs requiring mostly physical labor---got to move those muscles!---are being buggy whipped to the fringe, with only the dumbest humans needed. Or, illegals.
Service jobs---yea, yea, yea. Hip, hip, hooray!
Movies at the beginning of the last century riffed on how factory work would turn out robots, as people. Cogs in the machine.
Welcome to 2012!
The “machine” has turned out to be all kinds of service “jobs”, financial, personal, clerical, delivery, insurance, on and on it goes. Second order, to third order, to fourth order.
Dodd-Frank---policing the policemen who are policing the police.
How long has it been, since the legal profession---the ultimate service industry---took control of the country? How many congressmen are lawyers? QED
Then, there’s the entertainment “service” industry. How may of the pretty faces, and the hundreds of average ones behind the scenes, are truly essential to your survival? To your awakening to Reality?
An epithet---Dodd-Frank you!
Or, “Fluck you very much!”
Who Knows?| 9.24.12 @ 11:34AM
Google Pat Condell and watch his Muslim riot youtube---awesome!
biomedlives| 9.24.12 @ 12:52PM
"...when private securitizers (but not the government agencies with which they have to compete) will be required to retain 5% of the mortgage pools they sell." If they don't retain some percentage of the mortgage pools they sell (and 5% seems like a small percentage to me), the incentive they will have is to generate as many mortgages as possible without any regard for whether or not the borrowers can repay. I agree that the government agencies should have to play by the same rules, though.
Trinacria| 9.24.12 @ 1:53PM
I have no beef with this aspect of the law, as it doesn't materially affect my access to capital. Those with marginal to average credit scores, however, won't get close enough to a loan to sniff it - so like most liberal policies that purport to help the lower and middle class, this one bends them over and gives 'em the high hard one.
One would think they'd learn after a few decades of being shtuffed. Oh well, let them eat cake (or is that government cheese?).
JD| 9.24.12 @ 4:18PM
There does not need to be a retention requirement. Simply prevent government ratings guidelines from overrating subprime mortgage securities in the name of helping the poor buy houses, or from buying said securities, and bad securities will no longer be sellable. If they can't sell them, people won't issue them. Thus we would return to the pre-1990s state, in which the mortgage sector was fine.
Eduardo| 9.24.12 @ 4:42PM
Take a close look at the photo used for this feature. What do you suppose Barney is thinking as he gazes longingly at BO............................never mind, I don't want to know.
Trinacria| 9.24.12 @ 5:12PM
Once you go black....
Bob Grant| 9.24.12 @ 10:44PM
I think he was oogling that pen, sizing it up.
Tex Expatriate| 9.24.12 @ 5:12PM
It's not just Dodd-Frank but ObamaCare, EPA regulations, and all of Obama's "Executive" orders that must be repealed. Further, a way must be found to return the United States to government by the constitution by eliminating all of the unconstitutional agencies created by both Democrat and Republican administrations.
Put me down as someone who doubts that the elected class has the courage and collective cojones to do what needs to be done, or the electorate the good sense to drive them to it. Rather, I predict that a majority of states will rebel, begin to nullify illegal and unconstitutional federal laws, and eventually be forced to secede. I hope that's not my preference talking here, although I admit it is my preference, having no love for the USA as it has evolved. But I do believe that's the only way a republic can be restored.
ONTIME| 9.25.12 @ 1:36AM
The RINO's are ready to take a dive right now, their lib buddies are promising them the moon should they do so....