Viewers watching yesterday’s Congressional hearings featuring Janet Yellen were met with fireworks as Congressman Sean Duffy excoriated the Federal Reserve Chairwoman for failing to end too big to fail. Duffy’s implication was that, despite the massive costs and burdens the Dodd-Frank legislation mandating the end of “too big to fail,” America is still burdened by the bad policy.
Mark Calabria, who I have met with and listened to at the Cato Institute, suggests that the failed Dodd-Frank be repealed altogether.
After the bank bailouts of 2008, the public was promised “never again.” Unfortunately the same congressional architects of that bailout, Sen. Chris Dodd and Rep. Barney Frank, enacted legislation giving regulators the permanent option of bailouts, as enshrined in the Dodd-Frank Act.
It is time for Congress to deliver on the “no bailout” promise. And Rep. Jeb Hensarling has a plan to do just that in his Financial Choice Act.
Core to the Choice Act is a move to improve financial stability by increasing bank capital, while reducing reliance on the same regulators who missed the last crisis.
While I would have chosen a different level of capital, the Choice Act gets at the fundamental flaw in our financial system: Government guarantees push banks to reduce capital that, unfortunately, leads to excessive leverage and widespread insolvencies whenever asset values (such as houses) decline.
Massive leverage still characterizes our banking system, despite the “reforms” in Dodd-Frank. Even ardent supporters of Dodd-Frank, such as economist Larry Summers, have recently concluded it has not made banks safer.