Dodd-Frank Is Working – That's Why Congress and Wall Street Are Trying to Kill It

Last year the vampires of finance bought themselves a Congress. I know it’s not nice to call them that, but I have my reasons, which I’ll explain in a bit. For now, however, let’s just note that these days Wall Street, which used to split its support between the parties, overwhelmingly favors the G.O.P. And the Republicans who came to power this year are returning the favor by trying to kill Dodd-Frank, the financial reform enacted in 2010.

And why must Dodd-Frank die? Because it’s working.

This statement may surprise progressives who believe that nothing significant has been done to rein in runaway bankers. And it’s true both that reform fell well short of what we really should have done and that it hasn’t yielded obvious, measurable triumphs like the gains in insurance thanks to Obamacare.

But Wall Street hates reform for a reason, and a closer look shows why.

For one thing, the Consumer Financial Protection Bureau — the brainchild of Senator Elizabeth Warren — is, by all accounts, having a major chilling effect on abusive lending practices. And early indications are that enhanced regulation of financial derivatives — which played a major role in the 2008 crisis — is having similar effects, increasing transparency and reducing the profits of middlemen.

What about the problem of financial industry structure, sometimes oversimplified with the phrase “too big to fail”? There, too, Dodd-Frank seems to be yielding real results, in fact, more than many supporters expected.

As I’ve just suggested, too big to fail doesn’t quite get at the problem here. What was really lethal was the interaction between size and complexity. Financial institutions had become chimeras: part bank, part hedge fund, part insurance company, and so on. This complexity let them evade regulation, yet be rescued from the consequences when their bets went bad. And bankers’ ability to have it both ways helped set America up for disaster.

Dodd-Frank addressed this problem by letting regulators subject “systemically important” financial institutions to extra regulation, and seize control of such institutions at times of crisis, as opposed to simply bailing them out. And it required that financial institutions in general put up more capital, reducing both their incentive to take excessive risks and the chance that risk-taking would lead to bankruptcy.

All of this seems to be working: “Shadow banking,” which created bank-type risks while evading bank-type regulation, is in retreat. You can see this in cases like that of General Electric, a manufacturing firm that turned itself into a financial wheeler-dealer, but is now trying to return to its roots. You can also see it in the overall numbers, where conventional banking — which is to say, banking subject to relatively strong regulation — has made a comeback. Evading the rules, it seems, isn’t as appealing as it used to be.

But the vampires are fighting back.

O.K., why do I call them that? Not because they drain the economy of its lifeblood, although they do: there’s a lot of evidence that oversize, overpaid financial industries — like ours — hurt economic growth and stability. Even the International Monetary Fund agrees.

But what really makes the word apt in this context is that the enemies of reform can’t withstand sunlight. Open defenses of Wall Street’s right to go back to its old ways are hard to find. When right-wing think tanks do try to claim that regulation is a bad thing that will hurt the economy, their hearts don’t seem to be in it. For example, the latest such “study,” from the American Action Forum, runs to all of four pages, and even its author, the economist Douglas Holtz-Eakin, sounds embarrassed about his work.

What you mostly get, instead, is slavery-is-freedom claims that reform actually empowers the bad guys: for example, that regulating too-big-and-complex-to-fail institutions is somehow doing wheeler-dealers a favor, claims belied by the desperate efforts of such institutions to avoid the “systemically important” designation. The point is that almost nobody wants to be seen as a bought and paid-for servant of the financial industry, least of all those who really are exactly that.

And this in turn means that so far, at least, the vampires are getting a lot less than they expected for their money. Republicans would love to undo Dodd-Frank, but they are, rightly, afraid of the glare of publicity that defenders of reform like Senator Warren — who inspires a remarkable amount of fear in the unrighteous — would shine on their efforts.

Does this mean that all is well on the financial front? Of course not. Dodd-Frank is much better than nothing, but far from being all we need. And the vampires are still lurking in their coffins, waiting to strike again. But things could be worse.

Originally published by The New York Times