Inside Financial Services

Think Tanks on Dodd-Frank: Repeal It!

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If Congress really wanted to undo the financial excesses that led to the panic of 2008, it should have, rather that pass the misbegotten Dodd-Frank financial “reform” bill, simply shifted Federal housing policy away from its weird obsession on promoting home ownership. Simple. Not pushing home ownership would have meant, for instance, that Fannie and Freddie wouldn’t have lowered their underwriting standards in order to encourage more subprime mortgage lending.  And the FHA wouldn’t have been handing out money to borrowers who were putting just 3% down. Rather, just get the government out of the way and let the market do its work.

That’s the conclusion, anyway, of a new report put out by a group of Washington think tanks that looks at the effect Dodd-Frank has had since its enactment six years ago. Its conclusion is not positive: Dodd-Frank has crimped the creation of credit while not doing much to fix the problems that led to the last crisis. The best way to improve the law would be to repeal it entirely.

I agree! First, the benefits of home ownership (which the government is still pushing) are way overrated. On the one hand, owning a home is a great way to build wealth over the long term, using leverage. But that leverage can be a two-edged sword. As we saw during the recession, economically stressed underwater borrowers found themselves burdened with debt and chained to their homes when they might have otherwise moved to cities with stronger labor markets. Nor is it clear that there’s much of a correlation between home ownership and per-capita wealth. On Wikipedia’s list of homeownership rates of 47 countries, the bottom five are Austria, South Korea, Germany, Hong Kong, and Switzerland. All have ownership rates below 60% (the U.S. rate is 64.8%), but the people in those countries seem to be doing pretty well.

Yet the underlying assumptions of Dodd-Frank seem to be that a) pushing home ownership is still a good idea, and b) the main cause of the 2008 panic was that the financial system was too lightly regulated and so spun out of control. As the think tanks’ report points out, both those assumptions are wrong. The report suggests three main reforms: close the GSEs, stop Fed bailouts, and shutter the Consumer Finance Protection Bureau. I’m not sure I agree with all three (although the thought of killing the CFPB in particular puts a spring in my step), but the report overall offers plenty of very worthwhile insights.

What do you think? Let me know!

10 Responses to “Think Tanks on Dodd-Frank: Repeal It!”

  1. Bill Demmin

    You are correct, the cause of the crisis was the governments push to lower underwriting standards – the market then went overboard to keep politicians happy and make themselves rich by creative rather than prudent lending.

    • Allan S.

      The government never pushed lenders to put people into ARMS they could not afford when the teaser rate expired. Banks brought Dodd-Frank on themselves. They made their bed…………….

  2. etoleary

    No one should be surprised at the mess created by Dodd-Frank. The measure is one part curative to 99 parts punitive. The proof of this is that Dodd-Frank was enacted into law the same month that the President’s council on the causes of the financial crisis held its FIRST meeting. The Congress apparantly saw no need to burden the legislative hearings with facts.

    The major irritant in Dodd-Frank is the CFPB. The agency should be reformed but bankers need to remember that their collective behaviors created the political environment that enabled this monster in the first place.

  3. Anonymous

    Wealth building isn’t the only advantage to US subsidized housing of the last 70 years. The US has the largest homes per capita in the world and you could argue the highest quality
    housing stock. Why do you think Brits and Europeans are so consumed on going on holiday. The citizens of the US have as an electorate constantly endorsed interest deduction and the 30 year mortgage which are the main mechanisms for subsidizing the country’s preference for larger better homes over almost anything else save their family car.

  4. PureDakota

    DFA: Another example of passion overtaking reason.

  5. Anonymous

    Convoluted history! The first initiative was post WWII on the premise that we( USA) would be in the war/policing business perpetually and homeownership would reinforce the draft and volunteer pools more reliably than renters. Ergo Levittown and derivatives around the country. Secondly, US highway program, cheap gasoline & taxes and automobile credit pushed middle- class out of core cities to suburbs and beyond. Does anyone remember the four-family inner-city mortgage? These two factors plus the myth that real estate only goes up were compounded by the murder of the credit concept of “Eligibility” in the first euphoric Clinton term and the civil service bureaucratization of the FDIC at the same time.
    None of Dodd Frank can reverse this history, or the sorry state of the FDIC, nor was that it’s intent.
    Consequently, ” Housepoor” continues to be a politically-incorrect term and absent from the lexicon of two generations. Our best hope is in urban rehab for a new investor/ renter dynamic in key Millenial markets and bankers willing to do some heavy lifting.

  6. R. Goleniewski

    Repealing Frank Dodd would be a great economic stimulus…no one in DC seems to understand the damage it has done to the financial markets and economy.

    • Allan S.

      I don’t know who understands what in D.C., but Main Street America understands greedy and under regulated banks cost them their livelihoods, their homes, their savings and their retirements. Mr. & Mrs. America is in no mood to again give the banks free reign.

      • Anonymous

        exactly, that’s why the economy is going to be weak for a long time to come.

  7. Dale Jacobs

    The politicians always refuse to accept blame for anything that went wrong. There were many guilty parties that led to the housing and financial mess, but it all started with the Washington goal to expand home ownership beyond sensible lending standards. Once this goal was in place, the financial players piled on and helped Washington realize its goal, at the expense, ultimately, of all players in the economy. Dodd-Frank was not a well conceived solution but it allowed Washington to escape any responsibility for the crisis and place the blame on the banks, which current politicians and the media continue to endorse.

    CFPB may have some limited virtues, but with no accountability and no check on its budget or funding, it seems to be totally out of control and maybe even unconstitutional. Heaven forbid that Elizabeth Warren becomes Hillary’s VP or some cabinet secretary.

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