The Dodd-Frank Wall Street Reform and Consumer Protection Act has done too little to address the real causes of the financial crisis and too much to add red tape that hamstrings consumers, investors and entrepreneurs who had nothing to do with it.
Indeed, some provisions of the law have virtually nothing to do with ensuring financial stability. Take Section 1502, the “conflict minerals” provision. This requires public companies to disclose in their annual reports any use of five minerals – including gold, tin and tungsten – that may have been sourced from the conflict zones of the Democratic Republic of Congo and adjoining countries. Although this provision concerns a serious moral and geopolitical issue, no one can plausibly claim it would help avert the next financial crisis.
Moreover, shoehorning the conflict minerals provision into a bank bill and placing enforcement into the hands of a governmental entity – the Securities and Exchange Commission – that lacks foreign policy expertise has hurt the very people it was intended to help. As journalist David Aronson wrote in a poignant New York Times Op-Ed, since manufacturers often can’t be sure of the sources of their materials, many now avoid the Congo region altogether. According to Aronson, this created “a de facto embargo on the minerals mined in the region” that impoverished poor villagers and made warlords more powerful.
Meanwhile, left untouched by Dodd-Frank are the government-sponsored enterprises Fannie Mae and Freddie Mac. While there is debate on whether these entities, which have implicit taxpayer backing and purchase mortgages from banks, were a principal cause of the financial crisis, there is widespread agreement that they at least played a significant role. The 2010 majority report of the Financial Crisis Inquiry Commission called Fannie and Freddie the “kings of leverage” in the years leading up to the crisis.
Yet Dodd-Frank does nothing to shore up Fannie and Freddie’s capital requirements and contains a host of exemptions for them in its new mortgage rules. And Fannie and Freddie backed roughly 60 percent of new mortgages from 2008 to 2013, leaving taxpayers holding the bag.
Almost six years on since Dodd-Frank’s passage, big banks continue to dominate, while community banks’ loss of market share has accelerated dramatically.
Though Dodd-Frank may not be solely to blame for this decline, community banks and credit unions have become increasingly vocal about the costs of compliance, which are much more easily absorbed by large banks that can hire armies of attorneys, accountants, and information technology specialists.
Dodd-Frank should be changed so it does more to prevent the next financial crisis and less to harm innocent investors, entrepreneurs and consumers.
Originally posted at the New York Times.