After a worldwide financial meltdown — and a $700 billion taxpayer-funded bailout — the need for common-sense financial reforms was clear. But now, even though the Wall Street Reform and Consumer Protection Act of 2010 (known as Dodd-Frank, after Rep. Barney Frank and me, its sponsors) is only beginning to take effect, critics are launching false attacks against the law in an effort to u ndermine it. Whether they are intentionally misleading or just misguided, they are wrong about the law’s purpose and impact.
Myth No. 1: Dodd-Frank is deepening the economic slowdown.
Critics who charge that the law is aggravating the recession have forgotten where our economic woes came from in the first place.
The 2008 financial crisis was devastating: Banks stopped lending to one another, the credit market froze, and our largest financial institutions neared collapse. Had Dodd-Frank been in place, the damage could have been contained. Instead, the financial crisis sparked a recession, cost Americans millions of jobs and trillions of dollars in savings, forced small businesses to close and dro ve homeowners into foreclosure.
Today, other challenges complicate our recovery: Our housing market is slumping, a gaping budget deficit threatens America’s fiscal future, and a sovereign debt crisis hangs over the world. But Dodd-Frank didn’t create these challenges.
Meanwhile, even though only 10 percent of Dodd-Frank’s provisions have been implemented so far, critics claim that the law perpetuates “job-killing uncertainty.” In fact, it was the uncertainty inherent in a non-transparent and reckless financial system that made Dodd-Frank necessary in the first place.
The truth is that this catastrophe was years in the making — caused by regulatory neglect and Wall Street gambling. We can’t expect to rebuild our prosperity overnight, but we can’t rebuild it at all if we let false political talking points undermine our efforts to restore confidence in our financial system.
Myth No. 2: Dodd-Frank hurts small businesses and community banks.
The law is squarely aimed at better regulating the largest and most complex Wall Street firms, the ones that were most responsible for the crisis and still present the most risk.
Small community banks were victims of the crisis, with hundreds failing as a result of the big banks’ risky gambles. That’s why they came to Congress and asked us to modernize and strengthen financial regulations, leveling the playing field against the shadow banking industry, entities such as payday lenders and mortgage brokers that had been created to avoid regulation.
In one of the recent GOP debates, former Massachusetts governor Mitt Romney said that Dodd-Frank is “a killer for the small banks.” In fact, community banks, which were not responsible for the crisis, will pay lower premiums for deposit insurance and continue to work with their existing regulators. And in a nation with more than 6,000 banks, the bulk of the bill’s new regulations apply only to a few dozen of the largest ones, each holding more than $50 billion in assets.
Many community banks are concerned that regulators such as the FDIC have become overzealous. But that is a product of the post-crisis environment and not a result of this law, which, by design, will help community banks continue to serve as a lifeline to small businesses.
Myth No. 3: Dodd-Frank failed to truly reform Wall Street.
The protests about the law emanating from Wall Street tell you all you need to know about this claim.
Dodd-Frank fundamentally transformed our financial system. It requires banks to keep more capital on hand as a buffer against bad loans. It establishes a process for unwinding firms if they fail — and prohibits the Federal Reserve from bailing them out. It brings more transparency and accountability to the $600 trillion derivatives market. It shuts down ineffective regulators and insists that the remaining ones share information to expose the next financial trouble spots. And it finally establishes a single agency whose mission is to protect consumers.
This all adds up to a systematic overhaul of a regulatory structure that hadn’t been sufficiently updated since the 1930s. Much still needs to be done to ensure that the law succeeds: Regulators must implement reforms aggressively, and Congress must continue to provide vigorous oversight. But Dodd-Frank is a comprehensive solution to a comprehensive problem.
Myth No. 4: Congress didn’t fix Fannie Mae and Freddie Mac.
There are two issues to address here: the financial problems at Fannie and Freddie, and the future of mortgage finance in America.
Congress addressed the first — not with Dodd-Frank, but before the crisis, when the George W. Bush administration asked us to take on the issue. I worked with Rep. Barney Frank, D-Mass., and with Sen. Richard Shelby, R-Ala., to pass bipartisan legislation creating a regulator with real teeth. That law gave the government the authority to put Fannie and Freddie into conservatorship, where they remain while Congress determines how to finance mortgages in the future.
Meanwhile, in Dodd-Frank, we took aim at the riskiest practices in the housing market. Unscrupulous lenders can no longer make loans to people who they know can’t pay them back. Brokers can’t steer borrowers to higher-rate loans in exchange for compensation from lenders. And those who sell risky securities must maintain a financial stake in their success.
The problems in our housing market — as well as the debate over the future roles of Fannie and Freddie — remain complex and contentious, but they have hardly been ignored.
Myth No. 5: It’s time to repeal Dodd-Frank.
Imagine legislation that authorizes regulators to prop up failing institutions; makes consumer protection an afterthought once again and allows predatory lenders and other unscrupulous brokers to take advantage of vulnerable Americans; lets Wall Street banks make risky bets backed by taxpayer money; allows hedge funds to trade derivatives in secret; and prevents regulators from getting t he information they need to stop another meltdown before it happens.
That’s what repealing Dodd-Frank would do.
Whether you agree with the law’s provisions, repealing it would return us to a time in which nobody — not consumers, not regulators, not even other banks — knew what the Wall Street gamblers were doing until it was too late. It would destroy confidence in our markets and faith in our financial system, certainly hindering our recovery. It would again leave Americans at the mercy of those who have already ripped off too many families and businesses.
In short, repealing Dodd-Frank would invite disaster, putting working families, American businesses and the global economy at risk of an even worse meltdown.
Christopher Dodd, a Democratic former senator from Connecticut, served as chairman of the Senate Banking Committee from 2007 to 2010.