The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law by President Obama today. Anyone who follows my blog has heard me clamor for years about the need for these types of reforms. And, although this bill is far from perfect, it is very comprehensive and it addresses most of the critical areas where reform was necessary. To be honest, I didn’t think most of these provisions would make it past the banking lobby, but they have.
Credit Where Credit is Due
Although I didn’t vote for President Obama and I don’t agree with most of his policies, I applaud his effort to provide these reforms, which I believe are critical to the financial security of our nation. This is the third major financial reform, following the CARD Act and Overdraft Protection. I don’t think President Obama gets nearly enough credit for pushing these reforms and the positive impact they will have for America.
It probably won’t surprise anyone that I’m not a big fan of Barney Frank. And, I’m happy Chris Dodd is not seeking another term. In my opinion, the Sub-prime Crisis happened on their watch and they bear responsibility for the sad financial condition our nation is in. Having said that, I appreciate the hard work they put forth in bringing this reform and I think it is fitting their names are on the bill.
What this Means for Americans
Consumer Financial Protection Bureau – There is now a single consumer protection agency that will ensure all financial transactions are fair to consumers. The emphasis of this new agency will be to simplify contracts, so they are clear and understandable. Hopefully, the fine print and dirty tricks will be eliminated or at least greatly reduced.
Banking Institution Reform- Key elements of the Glass-Steagall Act have been restored which require the separation of deposit and investment banks. This law also requires the divestiture of hedge funds, beyond a 3% stake. Most important, failed institutions will now be wound down with shareholders taking the hit, instead of being bailed out with taxpayer money.
Oversight of the Federal Reserve- The way the Fed has been operating in secrecy is a huge problem for America. What most Americans don’t realize is that the Fed is actually a banking institution and not a true government agency. Huge sums of treasury money have been flowing from the Treasury to banks through the Fed. How much is anyone’s guess, since they refuse to open their books. The reform bill allows the Government Accountability Office (GAO) to audit the Fed, but their powers are limited.
Mortgage Reforms- Everyone knows that sub-prime mortgages were a primary cause of the Financial Crisis. What most people don’t know is that millions of customers were steered into sub-prime mortgages, even though they qualified for regular funding. The reason this happened is because brokers were paid yield spread incentives to do so. From now on, lenders cannot be rewarded for steering borrowers into higher cost loans. And, consumers will have to prove they can repay their loans. No document loans are a thing of the past.
Derivatives Reform- Derivatives will now be traded on a central exchange, which will be monitored by the SEC and CFTC. Regulators are also given greater enforcement authority to punish parties who use complex derivatives to defraud others. Finally, a new code of conduct is established for dealers, especially when dealing with pension, endowment and governmental entities.
Issues with the Reform Law
Increased Powers of the Federal Reserve- In addition to banks, the Fed can now regulate insurance and investment companies, if they are primarily engaged in financial activities. In my opinion, the Fed has proven to be a poor regulator and I have serious reservations about expanding their authority.
Over 2,300 Pages- I’m not sure why laws have become encyclopedias, but I suspect it is to hide all of the earmarks and loopholes. How much of this law was written by staffers and lobbyists? How much was read by the people who signed it? I believe 100 pages would have been sufficient.
Fannie Mae & Freddie Mac – These two quasi-government agencies are bleeding taxpayer dollars at an alarming rate. And this bill does absolutely nothing to reduce our liability or to stem the foreclosures. I believe the government should divest itself of Fannie and Freddie and leave the lending to the private sector.
Reach and scope of the Federal Government – One big issue I have with this bill is how much it increases the authority of the Federal Government. It is possible that it could be abused by agencies and officials. However, I believe incompetence is more likely problem.
The Republican Response
About 15 minutes ago, my Mom forwarded an email response to the reform law from one of our local members of Congress. This email was a whining diatribe, explaining how this reform bill will cost the country jobs and make credit difficult to obtain. It was mostly a partisan attack and some scare-mongering, along party lines. The final sentence pretty much tells it all.
“When all of this happens over the next year, remember who caused it – the people who voted for and supported this bill.”
John Campbell – Congressman (R-CA)
Here is my response to the Republican Response:
- If the Republicans have a reform plan, I would love to hear about it. So far, the Republican plan seems to be blame Democrats for everything and continue to let banks rip everyone off and destabilize our country.
- Deregulation during the past decade (since the repeal of Glass-Steagall) contributed to the dot-come bubble and the sub-prime crisis. During the Financial Crisis, 8 million jobs were lost, credit markets seized up and equity markets lost 40% of value. Unemployment and housing will take years to recover. How many jobs will be lost to reform?
Now you know why the approval rating for Congress is so low. This is your tax dollars at work, for the benefit of special interests. I couldn’t make this up.
The Bottom Line
The bottom line is that no legislation is perfect. What ensures the rights of one person places limitations on another. However, banks and financial institutions have shown complete disregard for business ethics and the rights of citizens. For their arrogance, recklessness and lack of integrity, they have brought reform upon themselves.
“History’s lesson is to make the most of reform opportunities when they arise because they do not arise often and they do not last long.”
Christopher Bond – British Playwright
This post was featured on the Carnival of Personal Finance over at Beating Broke. If you aren’t familiar with the Carnival of Personal Finance, it’s the premiere carnival of its kind. If you want to read informative articles from knowledgeable bloggers, this is the place.