Congress debates repealing pro-consumer Dodd-Frank Act

After the financial crash in 2008, lawmakers wanted to ensure that a catastrophe of that magnitude would never happen again. As a result, former President Barack Obama’s administration passed a bill called the Dodd-Frank Wall Street Reform and Consumer Protection Act. This bill, commonly referred to as Dodd-Frank, was enacted in July 2010 and has been implemented as a means of regulating Wall Street. Recently, the House of Representatives pushed to repeal Dodd-Frank, claiming that the regulation has hindered both the economy’s growth and the profits of various banks. Similarly, President Donald Trump has made it clear that he is in support of Dodd-Frank’s repeal.

For years, financial institutions had a large sum of investment capital placed in risky mortgage-backed securities. At the time, the housing market seemed to be unstoppable, since house values kept increasing annually. However, the housing bubble broke in 2006-2007.

When interest rates rose and housing prices started to drop, borrowers were unable to refinance. Mass defaults and foreclosures soon followed. The mortgages that backed the securities that banks had been invested in so heavily soon became worthless and the banks suffered heavy losses, which lead to the financial meltdown. The banks were considered “too big to fail” by the U.S. government, which meant that their failure tanked the U.S. economy and they were subsequently bailed out by the government.

Funds owned by banks that were tied in risky investments, like mortgage backed securities, became inaccessible. This became a problem when large companies, as customers of the banks, could no longer access their money to run their activities. With these events in mind, lawmakers responded with Dodd-Frank and other regulations in an attempt to prevent a similar financial meltdown in the future. Although Trump’s administration has repeatedly stated that Dodd-Frank’s provisions need to be reduced, it is not exactly clear what parts of the law are currently stifling the economy, as they claim.

Before Dodd-Frank, banks were able to trade with their own money, aiming to invest in increasingly risky assets and potentially increase profits. A major provision of Dodd-Frank is the Volcker Rule, named after former Federal Reserve Chairman Paul Volcker. This rule has banned banks from trading with their own money, with the intention of stopping them from assuming too much risk with their investments. However, now that Dodd-Frank may have its regulations reduced—or even repealed entirely—the Volcker Rule could also go.

In response to the possible Wall Street deregulations, Volcker warned, “There is no possibility of international ‘bailout’ of the American financial system.”

Volcker means that because bank activities and investments are international, if another bailout were necessary, it would be beyond the capability of the U.S. federal government. Volcker, who believes in strong regulations, supports Dodd-Frank.

Another major provision of the bill requires that banks invest their wealth in more liquid assets, such as cash. This allows regulators to both carefully dismantle failing banks and conduct annual stress tests, designed to determine whether a certain bank is still in a position to continue lending. These rules are to ensure that transparency is present, in the hopes of preventing a future bailout. By investing in safer assets, banks reduce their risk and maintain steadier growth, but attain less profit compared to riskier investments.

Arguments have risen between Democratic and Republican parties over Dodd-Frank. House Democrats are largely against Dodd-Frank’s repeal because they believe that it both protects consumers and has put into place regulations that will prevent a future financial catastrophe similar to the one in 2008.

On the other hand, Republicans have claimed that Dodd-Frank has hindered the United States’ economic recovery, putting a limit on economic growth. A new bill was proposed as a replacement to Dodd-Frank, which would eliminate the Volcker Rule, decrease the authority of the Consumer Financial Protection Bureau and remove the Durbin Amendment.

The Durbin Amendment limits the fees charged to retailers for debit card processing. Low transaction fees for debit card purchases allow retailers to charge consumers lower prices on goods. If there were no limits like this, banks would charge a high price for debit card transactions, a fee that retailers would also incur and subsequently pass onto the consumer. If Dodd-Frank were rolled back or repealed, these laws meant to protect consumers would also go. However, critics have claimed that the government should take a hands-off approach and not set prices.

The main argument against Dodd-Frank is that it has hurt U.S. households in making it more difficult and costly to both borrow money from banks and save. Regulations protect consumers, but it also prevents risky investments from banks and companies, stifling economic growth.

The bill that aims to replace Dodd-Frank will drastically reduce the amount of regulations implemented on banks. Since both political parties are on opposing sides regarding this issue, it is unknowable if any progress will be made.  However, the potential effect that Dodd-Frank has on the economy must be quantified before any political action is to be taken.