Taking on the Dodd-Frank critics

There have been two broad assaults, from opposite ideological directions, on the financial-reform bill known as Dodd-Frank, which was signed by the president five years ago.

Contrary to the familiar phrase, I have found that, in public-policy debates, a strong defense is usually the best offense, especially when the subject of the argument is a policy that has been in effect for some time. I confess that this view may be colored by my personal preference: I find it much more interesting to refute criticism than to restate my basic position.

Barney Frank
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Barney Frank

The harshest complaint from the left has already lost most of its force — its internal contradictions weakened it early on. They argued that our bill did virtually nothing to reform a deeply flawed financial system.

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Many of my usual allies then switched to lamenting that the regulators were gutting provisions they had previously dismissed as meaningless — to stick with anatomical metaphors, some on the left went seamlessly from objecting that the law had no teeth to protesting that its teeth were being pulled.

There are, of course, advocates who believe further important reforms are necessary. But they recognize that what was enacted is of real benefit and must be defended. Elizabeth Warren, for example lobbied strongly and effectively for passage of the bill, and has been equally forceful in opposing congressional efforts to repeal it — either entirely, or piecemeal.

Meanwhile, the right-wing broadside, which has shown an impressive resistance to the facts, argues that the law and the rules implementing it have devastated the ability of financial institutions to perform their job, and, in consequence, have severely damaged the economy.

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I thought of this while I read the headline in the New York Times this week, quoting Morgan Stanley CEO James Gorman as crediting "the American economy" for the firm's stronger-than-expected earnings report. Since the bill became effective, the U.S. has grown more rapidly than any other developed country, with banks, securities firms, hedge funds and private equity continuing to thrive. Meanwhile, the right-wing insistence that we had insured economic calamity channels Marx: Recall Chico and his immortal question to Groucho, "Who ya gonna believe; me or your own eyes?"

As with the left, this is not to dismiss claims that particular provisions have retarded short-term profitability for some financial institutions. Indeed, in some cases that is an intended consequence of tightening the rules on the sale of credit-default swaps a la AIG, and the requirement for higher capital standards. But only Texas Congressman Jeb Hensarling's unshakable faith in free-market fundamentalism can transmogrify this into the assertion that we have crippled our economy.

Hensarling's continuing crusade for a return to the pre-2009 golden era of unrestrained derivative trading and freely-granted subprime mortgages includes many particulars.

Incredibly, he re-chants his mantra that a major failing of our law was that it did not deal with Fannie Mae and Freddie Mac. True, he did offer an amendment to the bill in conference to abolish them, which I ruled was non-germane, not having been in either the House or Senate versions. For reasons he has not shared with me, the Republicans did not use the opportunity they had to offer it as their re-committal motion on the House floor, moving instead to kill any new regulation. But, he has been first, a subcommittee chair, and then, head of the full committee since January 2011, meaning that we will soon mark the fifth anniversary of his failure to do, while in the majority, what he argued for so forcefully from the minority.

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And he also blatantly ignores what Democrats successfully did to end the negative impact Fannie and Freddie were having, along with many other actors in the mortgage market. After twelve years —1995 through 2006, when the Republicans controlled the House and did nothing regarding the two government-sponsored enterprises — the first bill the committee adopted when I became chairman was one strongly requested from Bush Treasury Secretary Paulson significantly tamping down their activity, and giving him the authority, which he used in 2008 to put them in receivership.

Also in 2007, we began an even more important process: outlawing the reckless subprime loans that were being issued by lenders and then packaged into securities — not just by Fannie and Freddie, but — by many other firms.

Most relevant for this discussion, these restrictions were included in the comprehensive bill in 2010 over Hensarling's vigorous objection that we were unduly restricting the ability of poor people to buy homes. In other words, wholly contrary to the Republican critique, the financial-reform bill absolutely prevented — not just Fannie Mae and Freddie Mac, but — every other entity from damaging the economy by spreading packages of securities consisting of imprudently granted loans. And, we did it over the objection of the Republicans, who have an unblemished record of inaction on Fannie, Freddie, and subprime loans whenever they have been in power.

Commentary by Barney Frank, chair of the House Financial-Services Committee from 2007 to 2011, during which time Congress enacted the TARP program and the financial-reform bill known as Dodd-Frank. Follow him on Twitter@BarneyFrank.