You are here

OpenMarket: Banking and Finance

  • Supreme Court Refuses to Make Dodd-Frank More Draconian

    January 20, 2015 5:16 PM

    Today, the Supreme Court lifted a cloud of uncertainty that had been hanging over consumers, community banks, and credit unions by refusing to take a case that threatened to make the stifling Dodd-Frank pseudo-financial reform legislation even more draconian than it already is.

    The Court let stand a unanimous ruling from a three-judge D.C. Circuit Court of Appeals panel that overturned district Judge Richard Leon’s 2013 ruling that the Federal Reserve had not made the price controls stemming from Dodd-Frank’s Durbin Amendment were not stringent enough. Today’s decision, authored by Clinton-appointed Judge David Tatel, found that the Federal Reserve “reasonably construct[ed]” the law in considering costs in setting the price caps.

    In the wake of cybersecurity attacks on credit and debit cards, this ruling may have come in the nick of time. In a show of incredible chutzpah, the trade associations for some of the nation’s largest retailers argued in federal court—even after the Target breach—that retailers should pay even less for fraud prevention and cleanup after fraud losses than they currently are under a federally imposed limit.

    That would mean that innovation would continue to lag behind and even more of the costs of payment processing would be shifted to consumers—as they have since the passage of this amendment, which was inserted into the 2010 Dodd-Frank financial overhaul by Senate Majority Whip Dick Durbin (D-Ill.).

  • Free to Prosper: Top Priorities for the 114th Congress

    January 14, 2015 9:29 AM

    With the start of the 114th Congress comes a fresh opportunity to address the challenges created by a broken government. To kick off this new congressional session, the Competitive Enterprise Institute (CEI) recommends numerous reform proposals to strengthen the U.S. economy, increase transparency, and foster fair and open competition instead of favoring special interests.

    CEI’s top policy proposals center on substantive regulatory reforms needed to improve America’s economic health. In 2014 alone, 3,541 new regulations hit the books, and the burden is constantly growing. If federal regulations were a country, their cost would amount to the world’s 10th largest economy.  

    In addition to reining in burdensome regulations, CEI recommends that Congress continue to conduct fundamental oversight to protect Americans from executive overreach. Over the last six years, federal agencies have sought to usurp power from the legislative branch. Congress has a responsibility to demand honesty and accountability from our leaders and defend the rule of law.

  • Obama Should Help Borrowers by Shedding Dodd-Frank, Not Pumping FHA

    January 8, 2015 12:24 PM

    “If it keeps moving, regulate it. And if it stops moving, subsidize it.” So said Ronald Reagan in 1986.

    Reagan was describing the unintended effects of government policy. But for the Obama administration, this formula seems to be the modus operandi of its policy making.

    Take mortgages, for instance. After the Dodd-Frank financial overhaul was rammed through the Democrat-controlled Congress in 2010, the Consumer Financial Protection Bureau—a bureaucracy created by the Dodd-Frank to be unaccountable almost by design—implemented the law’s “qualified mortgage” (QM) provisions.

    The QM provisions were so costly and complex that community banks and credit unions—as far away as one could get from the causes of financial crises—sharply decreased or even abandoned altogether the creation of new mortgages. The U.S. House of Representative responded last year by passing overwhelmingly bipartisan legislation to scale back Dodd-Frank’s QM, but the bill became one of over 400 that never moved from then-Senate Majority Leader Harry Reid’s desk.

    Yet today, in a much-heralded speech on housing in Phoenix, President Obama is expected not to join the bipartisan effort to take on the Dodd-Frank regulations keeping mortgages from moving, but to create new subsidies that not only may be ineffective at moving the housing market but would be harmful to the nation’s fiscal health, as they bulk up the government-backed housing agencies that fueled the housing crisis.

    According to press reports, the administration’s plan consists of cutting premiums borrowers pay for mortgage insurance for mortgages backed by the Federal Housing Administration (FHA) by 50 basis points. This move comes despite the FHA’s insurance reserves being already below required levels.

    Not only did the FHA have to get a direct $1.7 billion public bailout from the Treasury last year, it has received—according to a new Politico investigation—an estimated $73 billion in hidden bailouts through budget “reestimates” that don’t require official action.  In the Politico expose of the FHA and other government credit program, reporter Michael Grunwald explains that “reestimates don’t require a public announcement or a congressional appropriation; agencies just use what’s known as their ‘permanent indefinite authority’ to stick the shortfalls on the government’s tab.”

  • Lame Duck Quacks Needed Dodd-Frank Relief

    December 12, 2014 10:29 AM

    Waaaah! That’s the sound of former House Financial Services Committee Chairman Barney Frank (D-Mass.) crying about stinging, bipartisan rebukes to his legacy of the Dodd-Frank financial regulatory monstrosity rammed through the Democrat-controlled Congress in 2010.

    And it must be all the more painful to Frank that enough members of his own party had turned against provisions of the legislation that a couple much-needed rollback are on the verge of being signed into law in this month’s “lame duck” session.

    According to the Boston Globe, Frank called some of these rollbacks “the road map for stealthily undoing all this in the future.” We can only hope this is the case! Because even liberal Democrats are now discovering that Dodd-Frank did nothing to lessen the problem of too-big-to-fail banks and instead punishes “Main Street” business, investors, and consumers who had nothing to do with the crisis.

    As this is being written, it looks like three modest but significant measures of relief from Dodd-Frank are on the verge of passing; one by itself in a separate bill and two will be the proverbial “ponies” in the manure of subsidized terrorism insurance and “crominbus” spending bills.

    There is a fight brewing with measure of derivatives relief in the cromnibus, with progressive Sens. Elizabeth Warren (D-Mass.) and Sherrod Brown (D-Ohio), leading the charge against it. This is a good modestly deregulatory measure and will be discussed in a follow-up blog.

  • Rep. Leutkemeyer Moves to Choke off Operation Choke Point

    December 10, 2014 3:38 PM

    The release this week of a new House Oversight and Government Reform Committee staff report into Operation Choke Point provides another opportunity to underline just how egregious the behavior of executive agencies has been in this matter. As I outline in my in-depth report from earlier this year, Operation Choke Point has been a freelance operation by rogue members of staff at the Justice Department and the Federal Deposit Insurance Corporation (FDIC) in particular aimed at killing off industries they suspect might have high levels of fraud, on the grounds that they present “reputational risk” to financial institutions they do business with. It represents an end-run around all established legislative and judicial processes required by the constitution. As such it should be terminated immediately.

    The new report focuses particularly on the actions of FDIC officials, as revealed in their own words through e-mails obtained by the committee. For instance, the report found that, “Personal animus towards payday lending is apparent throughout the documents produced to the Committee. Emails reveal that FDIC’s senior-most bank examiners “literally cannot stand payday,” and effectively ordered banks to terminate all relationships with the industry.”

    The actions of FDIC officials also violated basic ethical standards. As the report found, “In a particularly egregious example, a senior official in the Division of Depositor and Consumer Protection insisted that FDIC Chairman Martin Gruenberg’s letters to Congress and talking points always mention pornography when discussing payday lenders and other industries, in an effort to convey a ‘good picture regarding the unsavory nature of the businesses at issue.’”

  • Towards a Humbler Monetary Policy

    December 1, 2014 2:59 PM

    Is it possible for opposite policies to both be wrong? Over at the Washington Examiner, I argue that it is. The U.S. is ending its quantitative easing program just as Japan is ramping its up. Those seemingly opposite policy paths are rooted in the same mistaken philosophy. I argue instead for a humbler monetary policy:

    Both Yellen and Kuroda should move their focus away from stimulus, exchange rates and constant tinkering, and toward stability, honesty and predictability in their price systems. Easing of $1.66 trillion has had almost no effect on the U.S. economy. How reality will stack up against the Bank of Japan’s predictions, no one knows.

    Along the way there are discussions of Keynesian liquidity traps, the Taylor rule, NGDP targeting, and Bitcoin. The larger point is that central bankers are barking up the wrong tree. Instead of manipulating various economic indicators with activist policies, they should concentrate on creating a stable, predictable, and honest price system that enables more investment, better investment decisions, and more innovation. That, not interest rate tinkering, is what causes economic growth and mass prosperity.

    Read the whole thing here; see also a facsimile of the print edition here, starting on p. 26.

  • Liberals and Conservatives Challenge Overreach of Dodd-Frank's FSOC on MetLife

    November 18, 2014 2:18 PM

    As CEI brings suit before the D.C. Circuit Court of Appeals tomorrow challenging the constitutionality of unaccountable bureaucracies created by the Dodd-Frank “financial reform” law of 2010, it looks like we may have some high-profile company in litigation against Dodd-Frank’s Financial Stability Oversight Council (FSOC).

    The FSOC is a secretive, unaccountable task force of financial bureaucrats of various agencies created to designate banks and other financial firms “systemically important,” or too-big-to-fail. In September, the FSOC preliminarily decreed insurer MetLife a “systemically important financial institution,” or SIFI.

    As CEI argues in our legal challenge to the Dodd-Frank Act (including the FSOC’s role of identifying risk), the SIFI designation confers on a firm a strong competitive advantage, as investors and creditors know the government won’t let it fail. That’s why big banks and MetLife competitor American International Group (AIG), which have already received billions in taxpayer bailouts, have eagerly embraced their SIFI status.

    But MetLife, to its credit, has publicly stated that it is not too big to fail and does not want the special privileges that come with SIFI status, nor the regulatory costs. MetLife chairman and CEO Steven A. Kandarian declared last year, “I do not believe that MetLife is a systemically important financial institution.”

    Now, The Wall Street Journal reports that “MetLife Inc. doesn’t want to be tagged as “systemically important” and is preparing to possibly take the U.S. government to court to avoid it, people familiar with the matter said.” The insurance firm has hired Eugene Scalia, attorney with Gibson, Dunn & Crutcher, who has put forth successful suits against other provisions of Dodd-Frank.

  • Crowdfunding Is Entrepreneurship’s History and its Future

    November 18, 2014 9:03 AM

    In America and around the world, aspiring entrepreneurs are meeting their colleagues and their mentors in official and unofficial sessions of Global Entrepreneurship Week. Created in 2007 by the Kansas City-based Kauffman Foundation and British organizations, Global Entrepreneurship Week, as stated on its website, “inspires people everywhere through local, national and global activities designed to help them explore their potential as self-starters and innovators.”

    And this year, enabling entrepreneurship through crowdfunding will be a huge focus. To coincide with Global Entrepreneurship Week’s events, the recently formed Crowdfund Intermediary Regulatory Advocates (CFIRA) is having its 2nd Annual Regulatory and Advocacy Summit on Capitol Hill on Friday, November 21. For more details on the public events, go here.

    And the Competitive Enterprise Institute is celebrating Global Entrepreneurship Week by release a paper by me entitled, “Declaration of Crowdfunding Independence: Finance of the People, by the People, and for the People.”

    Key points of the my report include:

    • Technology did not create crowdfunding, but it has widely broadened the size of the crowds and increased the potential of both charitable and entrepreneurial ventures to find funding.
    • Crowdfunding has positive effects on job growth, revenue for entrepreneurs, and follow-on interest from institutional investors. Firms that met their goals in crowdfunding campaigns hired, on average, two new employees by the end of the campaign. This is all the more remarkable considering that the firms had, on average, only one or two employees before the crowdfunding campaigns began.
    • The most potential comes from equity (ownership interest) and debt (specific rate of return)-based crowdfunding, both of which are either banned or heavily restricted in the United States due to arcane securities laws.
    • Due to fear of running afoul of arcane or vague SEC rules, there is frequently a de facto “millionaires only” rule for investment in new business that limits entrepreneurs’ capital-raising ability and deprives average investors the opportunity to grow wealthy through early-stage investment in a company.
    • While the U.S. leads the world in crowdfunding campaigns on popular sites like Kickstarter and IndieGogo, these campaigns are overwhelmingly donations- and rewards-based. The donors get nothing more than recognition, souvenirs like T-shirts, and or a sample of the product produced.
    • The Jumpstart Our Business Startups (JOBS) Act of 2012 was supposed to alleviate some of those problems, but the SEC has yet to implement provisions to allow crowdfunding offers of $1 million or less.
  • CFPBs Prepaid Debit Card Rules Will Harm Low-Income Consumers

    November 13, 2014 4:07 PM

    Today’s action by the Consumer Financial Protection Bureau to issue unprecedented burdens on providers of prepaid debit cards shows why the bureau needs to be held accountable to our elected representatives. This lack of constitutional accountability is why CEI, in partnership with the 60 Plus  Association seniors group and the tiny Texas community bank the State National Bank of Big Spring, is challenging the structure of the bureau created in the Dodd-Frank legislation of 2010 in a lawsuit to be heard before the D.C. Circuit on November 19.

    Though the CFPB says and many of the fawning headlines say the regulations are simply about consumer disclosure, the CFPB proposal—set to go into effect after a brief 90-day comment period—actually would subject prepaid cards to more stringent rules than checking accounts. It takes the very radical step of treating overdraft features on a prepaid card as an “extension of credit.”

    Under the new rules, as described by the CFPB proposal, ”prepaid cards that access overdraft services or credit features for a fee would generally be credit cards.” But, as noted in news articles on the proposal, most of the lower-income consumers are getting prepaid credit cards in place of debit cards and checking accounts. As Time notes, “almost 80% of unbanked households with prepaid cards used them to make everyday purchases, pay bills, or receive payments.”

    But under the CFPB, an express “ability to pay” rule would be added that is absent from checking accounts with overdraft features. This means another option lost by many of the unbanked.

  • The Long National Nightmare of Dodd-Frank Is Almost Over

    November 10, 2014 3:14 PM

    One of the prime reasons for the continuing economic uncertainty that bedevils so many ordinary Americans is the presence in law of the Dodd-Frank Act of 2010, which was meant to solve the problems of the financial crisis. In fact, by giving unelected bureaucrats Czar-like power over the financial system, it has caused the stagnation of that system, reducing the free flow of money through the economy and stopping businesses and citizens getting access to the credit that they desperately need.

    On November 19, however, a three-judge panel of the D.C. Circuit will hear arguments in a case brought by CEI and others challenging the constitutionality of this new bureaucracy. If the judges rule in our favor, Main Street and Wall Street should both breathe a sigh of relief.

    The grounds for our case are simple. CEI and our co-plaintiffs believe that the Consumer Financial Protection Board (CFPB) and the Financial Stability Oversight Council (FSOC) violate the Constitution in a number of ways. Most importantly, the CFPB has no checks or balances to its power, making it unaccountable to Congress, the Administration, the courts, or the people in general:

    • Congress exercises no “power of the purse” over the CFPB, because the agency’s budget – administered essentially by one person – comes from the Federal Reserve, amounting to approximately $400 million that Congress cannot touch or regulate.
    • The President cannot carry out his constitutional obligation to “take care that the laws be faithfully executed,” because the President cannot remove the CFPB Director except under limited circumstances. It is probable that neither the current President nor his successor will be able to remove Director Cordray until his term ends in 2018. Dodd-Frank goes beyond the "for cause" standard for removal from most independent agencies, and says the president may only remove the director "for inefficiency, neglect of duty, or malfeasance in office."
    • Judicial review of the CFPB’s actions is limited, because Dodd-Frank requires the courts to give extra deference to the CFPB’s legal interpretations.

    Our basic claim is that Dodd-Frank gives an agency of unelected government bureaucrats unrestrained power. We argue this unaccountable power over the daily lives of the American people results in a lack of public accountability, creating a power grab over every U.S. citizen.

Pages

Subscribe to OpenMarket: Banking and Finance