You might have thought, listening to the general political discourse, that the Affordable Care Act is the single greatest economic threat foisted on us by Congress in recent years.
Silly you. The real threat comes from the Dodd-Frank Act, the 2010 measure designed to stem risky banking practices, improve consumer protections on financial products such as mortgages and credit cards, and provide regulators with more authority to deal with troubled big banks.
But according to Rep. Jeb Hensarling (R-Texas), chairman of the House Financial Services Committee, Dodd-Frank is the reason that "we are in the slowest, weakest recovery in the history of our nation." Hensarling declared during a hearing last week that it's the reason "tens of millions of our countrymen are now unemployed" and why we had "negative economic growth in the last quarter." Et cetera, et cetera.
That would be a heavy burden for a statute to bear, if Hensarling's assertion weren't undermined by the dubiousness of his figures. For example, the Bureau of Labor Statistics places the number of unemployed Americans at 9.5 million; throw in 835,000 "discouraged" workers and you're still not at "tens of millions." And the first quarter of this year was only the second with negative growth in the 15 quarters since Dodd-Frank was signed into law, four years ago last Monday. Anyway, the stock market has been hitting new highs, which suggests that something about the economy is looking up.
So what's the real source of conservative hostility to Dodd-Frank? We can look to the banking sector's ritual resistance to regulation, to a curious historical amnesia about the causes of the 2008 crash, and even to the traditional animosity between small-market banks and their behemoth-scale money-center brethren.
Dodd-Frank was passed in July 2010, having secured all of three Republican votes, from Sens. Olympia Snowe and Susan Collins of Maine and Scott Brown of Massachusetts. The rest of the GOP has been trying to gnaw away at it ever since. The Center for Public Integrity found at least 30 bills to limit or overturn the act. Almost all will be dead on arrival at the Democratic-controlled Senate.
Dodd-Frank cast a wide net to put a collar on irresponsible banking practices that helped bring the economy to its knees in 2008. Hensarling's committee heard at length from companies that genuinely use commodity contracts to hedge risk — and who resent paying the cost of regulating markets. They heard from small banks that resent becoming subject to mortgage regulations targeted at the predatory lending pushed by big firms such as Countrywide Financial.
These complaints can be met by legislative adjustments. Hensarling, however, wants to throw out the entire law: "We can never, ever accept a Dodd-Frank world, nor should we," he declared in a recent speech.
One criticism of Dodd-Frank's implementation is fair: The rollout of regulations has been painfully slow. But the blame should be directed at the financial industry, which has sedulously fought every proposal, and Congress, which has hobbled rule making. Former Rep. Barney Frank of Massachusetts, whose name is on the act, told Hensarling's committee last week that the Securities and Exchange Commission and the Commodity Futures Trading Commission "receive vast amounts of comments for each proposed rule, while the Republican House Appropriations Committee starves them of funding."
The gestation of the so-called Volcker rule illustrates the process. Named after former Federal Reserve Chairman Paul Volcker, who proposed it, this regulation would restrict big banks' trading in risky markets for their own accounts. The idea was to protect taxpayers and depositors, who could be on the hook for major losses. Critics say the Volcker rule wouldn't have prevented the 2008 crash, but that's misdirection: This sort of behavior contributed to the weakness of the banking system and made it more difficult for regulators to figure out and unwind the damage. In essence, plain-vanilla commercial banks, like Bank of America and Citigroup, were having a wild party paid for with a blank check from the government.
Bankers inundated regulators with tens of thousands of comments on the rule, delaying its completion by more than two years, or until December 2014. It's now scheduled to go into effect in July next year.
The most popular target of Dodd-Frank critics may be the Consumer Financial Protection Bureau, which is thoroughly detested by the financial services industry, with good reason. The bureau has extracted billions of dollars in fines and consumer refunds from financial services companies, including a massive $772-million settlement from Bank of America in April for deceitful credit card practices. Most of that sum was returned to 2.9 million customers.
In his speech, Hensarling attacked the CFPB as "an assault on the fundamental economic liberties of the American consumer." He said: "Consumers want and deserve control over their economic decision-making.... Yet when it comes to their credit cards, auto loans and mortgages, the CFPB director has unbridled, unilateral and unprecedented discretionary power not only to make them less available and more expensive, but to absolutely take them away."
Well, yes. To take away deceptively marketed and scandalously overpriced products.
Whether Dodd-Frank can achieve some of its most ambitious ends is uncertain. The act aimed to keep institutions from becoming "too big to fail." But the question of how big is too big remains unresolved, and whether Dodd-Frank's heightened regulatory scrutiny will safeguard the financial system can only be conjectured.
The nation's biggest banks have grown only bigger since the 2008 crisis — by as much as a third, according to some estimates. But their business has also become less complex, which may be more important. Bank of America, Citigroup, JPMorgan Chase and Goldman Sachs, among other big firms, have all cut back their trading or shed "noncore" assets in recognition that in the post-Dodd-Frank world, simpler is better.
Some have spent billions on legal compliance efforts, though perhaps not as much as they lost through risky, illicit or imprudent activities. JPMorgan, for example, has hired thousands of new compliance officers in the last year, but recorded $17 billion in "litigation expense" for 2011 through 2013.
"To the extent that we are responsible for JPMorgan beefing up its compliance staff," Frank testified last week, "I am not embarrassed. Frankly, if they had done this earlier, they would have saved themselves in the tens of billions of dollars."
Michael Hiltzik's column appears Sundays and Wednesdays. Read his blog, the Economy Hub, at latimes.com/business/hiltzik, reach him at firstname.lastname@example.org, check out facebook.com/hiltzik and follow @hiltzikm on Twitter.