House Republicans Hope to Reduce Financial Regulations, Reform Dodd-Frank
This Tuesday, a task force of House Republicans released a regulatory policy agenda outlining what policies Congress should enact to help jumpstart the economy.
Entitled “A Better Way,” this task force agenda offers significant policy proposals that would improve our economy by empowering real estate professionals to succeed. Good ideas are not enough. Congress must take legitimate action to pass legislation.
Heritage Foundation research fellow in financial regulations, Norbert Michel, takes an in-depth look at the financial regulations section of “A Better Way”:
It’s fitting that financial market regulations are one of the main targets of this reform effort because financial regulations have moved away from these core principles for decades. There’s no doubt that this shift away from free enterprise contributed to the 2008 financial crisis, and it’s also clear that the 2010 Dodd-Frank Act extended the dangerous policies of the past.
The authors of the report clearly understand what’s wrong with financial regulations. On page 39, they noted that:
Regulators have an important role to play in making sure consumers and investors have all the facts necessary to make informed decisions, but excessive regulation has empowered regulators to substitute their judgment for that of consumers and investors, and make decisions for them about what financial products or services they should be able to access.
The report provides pages of solutions to these problems, many of which are similar to those in House Financial Services Committee Chairman Jeb Hensarling’s, R-Texas, recently announced legislation. A key component of both plans is to move toward a new regulatory framework that “offers highly-capitalized, well-managed financial institutions an option for relief from excessive regulatory complexity.”
The basic idea is very simple: Strongly-capitalized financial firms should only have to comply with a simple set of rules, not dozens of all-encompassing rules. History has proven that these extensive rules mainly serve as barriers to entry for new firms, and that they don’t really keep financial markets safe.
It’s very hard to argue, especially in the wake of the 2008 crisis, with providing highly capitalized firms relief from government micromanagement. Here are a few of the sensible reforms the task force is promoting.
Repeal much of Title I of Dodd-Frank. Title I created the Financial Stability Oversight Council, a council that consists of the federal regulators that entirely missed the last financial crisis. The council designates firms that regulators view as systemically important, thus enshrining too-big-to-fail. Aside from these designations, the council is wholly incompatible with free enterprise.
While it would be better to fully repeal Title I, the task force recommends repealing the council’s ability to designate systemically important firms. Such a change is sorely needed because allowing the government to explicitly identify these firms is entirely incompatible with ending too-big-to-fail.
Repeal Title II of Dodd Frank. One of the most troubling aspects of Dodd-Frank is known as orderly liquidation authority, and it’s found in Title II. Though the name sounds pleasant, orderly liquidation authority gives federal regulators the authority to seize troubled financial firms—with minimal judicial review—and close down their affairs. Title II also authorizes the Federal Deposit Insurance Corporation to hold taxpayers responsible for the most worthless assets on a company’s books.
The time-tested bankruptcy system, with its legal protections and judicial supervision, is a far better system. The task force rightly supports dumping Title II in favor of enhanced bankruptcy for large financial institutions.
Strengthen penalties for wrongdoing. The task force recommends several key reforms that would hold financial firms accountable to investors and capital markets. For instance, the plan would expand the Securities and Exchange Commission’s and the Department of Justice’s authority to obtain monetary penalties for the most serious securities law violations. The report also suggests increasing the maximum civil penalty amounts that can be assessed for violations involving financial institutions.
Modernize the Federal Reserve. The task force suggests several key reforms based partly on Rep. Bill Huizenga’s, R-Mich., Fed Oversight Reform and Modernization Act (the FORM Act), a piece of legislation that already passed the U.S. House. The FORM Act would protect the Fed’s independence from short-term political interference, and would require the central bank to conduct monetary policy based on a transparent rule of its own choosing. The House Republicans would also subject the Fed’s regulatory activities to congressional appropriations.
Though it would be better to get the Fed completely out of the regulation business, this change would arguably hand “the people’s elected representatives an important tool with which to hold these bureaucracies accountable and achieve greater transparency in government operations.”