Dollars & Sense
Trump gives a needed jolt to small biz
IT shouldn’t take an outsider president to dismantle a largely ineffective law that was sold as a way to protect ordinary Americans from unscrupulous lenders and prevent another financial crisis. But apparently it does. Last week, President Trump took the first steps toward repealing one of the many economic disasters of the Obama years, the financial regulatory scheme known as Dodd-Frank. We can only hope Trump continues down this path.
Messing with bank and Wall Street regulation carries substantial political risk: Banks will always do stupid things, so a substantial portion of the left and its bank-hating supporters in the media will be happy to blame the next crisis on a lack of regulation, no matter how tenuous the relationship.
But the president is nothing if not a risk taker, and ditching Dodd-Frank is a risk worth taking. Recall, there were plenty of banking laws on the books before the financial collapse and the subsequent bank bailouts.
Signed into law by President Barack Obama in 2010, DoddFrank was a disaster from the start. The economy was struggling to regain its footing from the financial crisis when the feds threw at the banks a slew of new rules and regulations. They were forced to kill off profitable lines of business and hold huge amounts of capital all while the new rules effectively cut off financing to businesses that could grow the economy right when they needed it.
Perversely, Dodd-Frank negated the Federal Reserve’s massive monetary stimulus at the time and any positive benefit from Obama’s own spending. Then came years of tepid economic growth, low wages and an unemployment rate that fell in part because people dropped out of the workforce.
The reason Dodd-Frank failed is because it ignored the government’s actions that contributed to the financial crisis, instead blaming “predatory lending,” the idea that it was purely the banks’ fault that people took out loans they couldn’t afford.
This isn’t to absolve the banks of any role in the housing bubble, but consider: The left wants us to believe banks just wanted to lend money to people who couldn’t pay it back so they shoved money down people’s throats in order to foreclose on homes no one wanted to buy during the housing slump. In reality, Dodd-Frank was named after two veteran lefty pols, former Connecticut Sen. Chris Dodd and Massachusetts Rep. Barney Frank, who enabled the feds’ failure. They sat by and allowed years of recklessness by Fannie Mae and Freddie Mac, the quasi-government agencies that were created to expand home ownership. Through Fannie and Freddie’s financial engineering, banks gave out home loans like candy.
Housing prices then exploded until the market imploded. But instead of getting rid of Fanny and Freddie, Dodd-Frank kept both doing much of the same stuff that got them and the housing market in trouble to begin with.
Like Fanny and Freddie, much of the structure of the pre-crisis banking system remains. There are fewer banks, but they’re bigger and no less prone to risk taking. Banks are forced to keep more capital as a buffer for another crisis, but that’s also a dou- ble-edged sword: the more capital they sit on, the less they can lend to legitimate borrowers like small businesses.
Dodd-Frank didn’t even do away with the problem of banks being “too big to fail.” In fact, it’s nearly codified into law because taxpayer-funded bailouts of big banks aren’t ruled out. The feds can now step in “for an orderly liquidation” of troubled banks before they explode like Lehman Brothers, but as everyone on Wall Street knows an orderly liquidation of such large entities is nearly impossible, ensuring that “too big to fail” will remain banking policy.
Plus, the prospect of a bailout encourages risky behavior yet again. Lather, rinse, repeat.
At a press briefing with big business executives, including JP Morgan chief Jamie Dimon and Stephen Schwarzman of private equity powerhouse Blackstone Group, Trump said: “Frankly, I have so many people, friends of mine that had nice businesses, they can’t borrow money.”
He wasn’t talking about the men and women in the room, but small-business owners and entrepreneurs who drive our economy and have been complaining for the past eight years they can’t get enough access to capital to expand and create decent high-paying jobs.
With that, the markets rose nearly 200 points. See what a little common sense in the White House can do?