By Matt Stoller, a Roosevelt Institute fellow (on Twitter at @matthewstoller). Cross posted from New Deal 2.0
A former Congressional staffer sees Dodd-Frank as a lost opportunity to rebuild a financial system in line with public needs.
I was a staffer on the Dodd-Frank legislative package, and the whole process seemed odd from the very beginning. There was no attempt initially to ask the question, “what happened and what should we do about it?” There was no examination of the purpose of a banking system, and how to rebuild a system that aligns the public with the financial industry. There was no attempt to build legitimacy through a public education campaign about what Congress and the administration was doing, and why. Instead, legislators and very serious men in suits started throwing around terms like “systemic risk regulator” and “resolution authority”, and then used the idea of a Consumer Financial Protection Bureau as a palliative for liberals.
My specific focus on the bill was the provision to audit the Federal Reserve, which was one of the bright spots (another could be the Consumer Financial Protection Bureau). This provision opened up the Fed’s emergency lending facilities and its discount window to the spotlight, allowing for the beginning of a real debate over our monetary system. But overall, the Dodd-Frank bill was significant for its lack of significance.
In retrospect, this was by design. Congress created a panel — the Financial Crisis Inquiry Commission — to examine the cause of the financial crisis. But this panel had a mandate to deliver its recommendations after the passage of Dodd-Frank. In other words, Congress and the administration did not design Dodd-Frank to prevent another financial crisis. So what was the purpose of the bill? I suspect this can only be answered by looking at the overall policy thrust of the government since the beginning of the financial crisis.
The clearest explanation is by Roosevelt Institute Fellows Tom Ferguson and Rob Johnson in their series on the Paulson Put. While a shadow bailout took place through the Federal Home Loan banks and the Federal Reserve from 2007 onward, eventually a fiscal and regulatory solution would become necessary. The first significant legislation in this thrust was the famous Bazooka bill (or Housing and Economic Recovery Act) signed in June 2008 that allowed Treasury Secretary Hank Paulson to take over and pump unlimited sums into Fannie and Freddie. The second was the TARP. Both of these bills were pivotal to providing the government with enough firepower to overcome the solvency crisis.
After the immediate crisis was contained, losses were socialized, and profits returned to financial executives, Congress had to put together a “solution”. It would have a giant bite at the apple in restructuring our regulatory apparatus. But in order to perpetrate the oligarchic banking structure, it would be important that no structural changes to the industry be implemented. Not one regulator was fired for his or her part in the crisis. The Justice Department adopted a posture of legalizing financial control fraud by refusing to prosecute anyone involved in the meltdown, and continues to allow millions of cases of foreclosure fraud to continue. Ben Bernanke was renominated, and the administration fought a bitter below-the-radar battle to secure his confirmation. With a few modest exceptions, the risk-taking and leverage in our financial markets continues apace, and the deregulatory neoliberal mindset is still dominant. The Federal Reserve has been audited, but the system is now accountability-free for high level operatives in finance and politics. And now that Elizabeth Warren has been thrown overboard by the administration, the lockdown of the financial system is nearly complete.
And mostly, that’s what Dodd-Frank accomplished. It rearranged regulatory offices and delivered a new set of mandates, but effected no structural changes to our banking system. Congress never asked what happened, or why, or even, what kind of banking system do we want? And that’s because Obama’s Treasury Secretary already had the answers to these questions.
The one dangling thread, and this is what worries the administration, is the housing market. But we’ll save that problem for another day.