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 undermine it. Whether they are intentionally misleading or just misguided, they are wrong about the law’s purpose and impact
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 drove 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.
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.
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 trillionderivatives 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.
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.