Republicans on the House Financial Services Committee last Thursday celebrated the fifth anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act by inviting a panel of handpicked experts to parrot the view that the act has been catastrophic for the U.S. economy and that we will be lucky to get through the next decade without a regulation-spurred financial meltdown.
The Republican narrative that unfolded through the hearing, “The Dodd-Frank Act Five Years Later: Are We More Stable?,” reveals that they still can’t seem to grasp what exactly caused the last financial crisis and are mistaken about the threats facing the U.S. economy today. They have, however, concocted some stories that conform to their worldview:
The Federal Reserve
According to Dr. Mark Calabria of the libertarian Cato Institute, the Federal Reserve is to blame for the housing bubble that burst in 2008. Prior to the recession, the Fed apparently encouraged all of the risky borrowing with its extraordinarily low interest rates.
This story is mainly to distract us from asking why such risky borrowing was legal in the first place. The truth is that all the financial chicanery that enabled the bubble would not have been allowed just a decade earlier.
Government Housing Policy
The blame for the crisis once again lies with the government in this popular story, according to panelist Paul S. Atkins, former U.S. Securities and Exchange commissioner under President George W. Bush. In it, the short-sighted Democrats forced otherwise level-headed bankers to make loans to the uncreditworthy.
This actually bears some resemblance to reality, but it skips out on who was responsible and how it was done. In a bipartisan effort, Congress passed a banker’s wish list of deregulation actions, including one that was supposed to make lending easier – too easy, as it turned out, considering how fast banks made and flipped bad mortgages at the height of the bubble. But since Republicans don’t accept this reality, their prescription to bring affordable banking to the rest of us involves yet more deregulation.
Fannie Mae and Freddie Mac
Rep. Sean Duffy (R-Wis.) theorized that Fannie Mae and Freddie Mac are responsible for the bubble, and the hand-picked-by-Republican panelists gave their obligatory confirmation. In this story, greedy and negligent government-backed corporations permitted and even encouraged mortgages to people who could not pay them back. Duffy and the panelists fret that by focusing on Wall Street, regulators are missing what Duffy sees as real cause of the crisis: Fannie Mae and Freddie Mac.
This ignores the fact that most subprime loans were “non-conforming” to Fannie and Freddie’s standards and were sold through Wall Street institutions. But the Republican committee members cannot fathom that unregulated financial markets could occasionally fail, let alone that bankers and financiers might have behaved badly.
This is a stark lesson on why understanding history is important. The Committee’s historical revisionism has left its members clueless about the present. (The hearing did have one person who could present a dissenting view: economist Damon Silvers, representing Americans for Financial Reform and the AFL-CIO. But the committee members avoided calling on him because he wouldn’t pay lip service to the prevailing narrative.) If a majority on the House Committee on Financial Services still believe that regulation causes financial crises and that Wall Street hosts neither flaws nor criminals, they will continue to press for less regulation. Those of us who inhabit reality understand where that path takes us.