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I'm taking an online test to renew my loan origination license. The test is a riot! We're now discussing the cost of implementing the Dodd-Frank Act. Here's only a portion of the commentary.Budget / Tax CostSo far, the benefits of Dodd-Frank are largely speculative, but the costs on the American economy have been quite real. During a period of economic uncertainty and staggering debt and deficits, the Government Accountability Office (GAO) has estimated that by this time next year the budgetary cost for Dodd-Frank will exceed $1.25 billion, which has the effect of siphoning off resources that might otherwise have gone toward deficit reduction or private sector job creation.15 Moreover, the Congressional Budget Office has estimated that over the next ten years, the Dodd-Frank Act will take $27 billion directly from the economy in new fees and assessments on lenders and other financial companies.16GAO likewise estimates that Dodd-Frank will create more than 2,800 new jobs17—government jobs that is. According to agency submissions and the President’s own budget, the Dodd-Frank Act will add 2,849 new government positions. These are positions in agencies where six figure salaries are common. The SEC, FHFA and CFTC have the highest average salaries in the federal workforce according to the Congressional Research Service.18 The average salary at the Securities and Exchange Commission is $147,595. The FDIC has the seventh highest average salary.And Dodd-Frank has been a boon for lawyers, who have seen demand for their services explode as companies seek assistance in understanding and complying with the Act’s 2,000-plus pages and the more than 400 federal regulations mandated by the Act. The lobbyists have also done quite well, as companies seek help in influencing Congress and the regulators charged with implementing the hundreds of the Act’s regulations.But outside the Beltway, there is no evidence that the Dodd-Frank Act has created any private sector jobs. In fact, as the June unemployment numbers starkly demonstrate, job creation as a general matter remains anemic, despite the claims of Dodd-Frank’s proponents at the time the law was enacted that it would foster “robust growth in our economy.” According to the Economic Research Division of the Federal Reserve Bank of St. Louis, the last year the ratio of employed civilians to the population was lower than it is presently—58.24%—was in 1983.19At a time when the economy is faltering and Americans are struggling to make ends meet, the Dodd-Frank Act takes money out of the pockets of American workers to fund expanded government bureaucracy.Operating the Consumer Financial Protection Bureau (CFPB), a brand new agency created by the Dodd-Frank Act, will cost $329,045,000 for 2012 alone.20This amounts to all of the income and payroll taxes paid by 26,000 average American workers.21That means 26,000 Americans will work all year to offset the cost of this new government bureaucracy.The Dodd-Frank Act also creates the Financial Stability Oversight Council (FSOC) and the Office of Financial Research, which together will add 142 government employees to the federal payroll at a cost of $82,353,000 in FY 2012.22 After July 21, 2012, the Office of Financial Research will fund itself and the FSOC through assessments on “financial companies” and there is no limit on the amount of money it can take in.23 The bulk of these costs will be passed on to consumers in the form of higher fees and/or fewer services.The costs of Dodd-Frank are clear. Because of the Dodd-Frank Act, every single American worker will have a portion of his or her hard-earned tax dollars go to funding expanded bureaucracy and increasing wealth and prosperity in Washington rather than on Main Street.Compliance Cost“Has anybody done a comprehensive analysis of the impact on [credit markets, businesses, and job creation]? I can’t pretend that anybody really has. You know, it’s just too complicated. We don’t really have the quantitative tools to do that.” - Ben Bernanke, (Chairman of the Federal Reserve System Board, answering a question from a bank CEO in Atlanta, GA.)While Chairman Bernanke might not believe that it is possible to calculate the impact of the Dodd-Frank Act on credit markets and job creation, the compliance costs of Dodd-Frank rulemaking are beginning to become clear. The Dodd-Frank Act will require small community and mid-sized regional banks to spend thousands of man-hours on regulatory compliance, leaving them less time for focusing on the needs of their customers. The rulemaking agenda covering the last 12 months listed thirty new rules written to implement the Dodd-Frank Act25—less than 10% of the over 400 rules required by the law.26 [...]More broadly, the President’s Executive Order of January 18, 2011, urged independent agencies to “propose… a regulation only upon a reasoned determination that its benefits justify its costs.”29 But Inspectors General from the CFTC, SEC, FDIC and OCC found that these agencies failed to conduct rigorous, cost-benefit analyses that considered the effect of agency regulations on economic growth, job creation, or international competitiveness. In fact, one report found that within the CFTC, the Office of General Counsel appeared to have a greater say in the proposed cost-benefit analyses than the Office of the Chief Economist. [...]Of all the claims made by the proponents of the Dodd-Frank Act, the most important are these: that the Dodd-Frank Act ends “too big to fail” and that it protects the American taxpayer “by ending bailouts.”False Claims On Dodd-Frank Ending Bailouts:“This legislation makes common-sense reforms that end the era of taxpayer bailouts and 'too-big-to-fail' financial firms.” - Rep. Nancy Pelosi floor remarks, 6/30/10“Because Of This Reform, The American People Will Never Again Be Asked To Foot The Bill For Wall Street’s Mistakes. There Will Be No More TaxpayerFunded Bailouts Period.” - President Obama, remarks on passage of regulatory reform, 7/15/10 ***Bottom line: Our government is dysfunctional and the only plausible cure got defeated in the 2012 election.
The Persistence of Too Big to FailAnyone who looks at the rationale offered for the bailouts of 2008—that certain financial institutions were “too big to fail” and therefore had to be rescued at taxpayer expense, no matter how incompetently run they were or how big the risks they took—has to be puzzled at the structure of the financial services industry in 2011. Surely, if the problem was that these institutions were “too big to fail,” the solution cannot be to make these institutions even bigger. Yet that is exactly what has resulted from the bailouts, the misguided policies adopted by panicked regulators, and the implicit subsidies that the Dodd-Frank Act offers to behemoth financial institutions to stay as large as they possibly can.When the financial crisis struck the nation in 2008, officials pumped hundreds of billions of dollars into the country’s biggest financial institutions because these officials feared that their failure would crash the entire financial system. But in 2011, the country’s financial system is far more concentrated and less competitive than it has ever been. The five largest financial institutions control more than half of the industry’s assets, which is equal to almost 60% of GDP. The largest 20 institutions control 80% of the industry’s assets, which amounts to about 86% of GDP. Common sense says that “if they are too big to fail, make them smaller.” No one can say with a straight face “if they are too big to fail, make them even bigger.” Yet that is exactly what has resulted from misguided government policies and the Dodd-Frank Act.The proponents of the Dodd-Frank Act will tell you that the Act bans bailouts. That government will never again come to the rescue of a large financial firm that finds itself in trouble. That taxpayers will never again be on the hook for paying off the creditors of an AIG or a Bear Stearns. There’s just one small problem with that assertion: no one believes it. Not the creditors of these giant firms: they continue to lend to the too-big-to-fail firms—and they continue to lend more cheaply to these giant firms than they do smaller, less risky banks—because they continue to believe that when push comes to shove, government officials will intervene, no matter how much they say they hate bailouts and want to protect the taxpayer. Not the credit rating agencies: although the credit rating agencies make noises about possibly downgrading the too big-to-fail firms in light of the Dodd-Frank Act, those noises are not a downgrade. Moody’s, for example, has said that it will not likely withdraw its assumption that government will support a too-big-to-fail firm from its ratings for these firms. And Standard & Poor’s has made it quite clear: they don’t believe that the Dodd-Frank Act ends too-big-to-fail. As they explained, the government’s “when in doubt, bail it out” policy trumps whatever good intentions the drafters of the Act may have had in mind. On July 12, S&P wrote that “We believe that under certain circumstances and with selected systemically important financial institutions, future extraordinary government support is still possible.” To put it slightly differently, S&P has said that government still has the motive and the means to commit another bailout; the only thing that’s missing is opportunity, and that will come soon enough.And a higher rating makes it cheaper for a too-big-to-fail firm to borrow, which makes it even bigger. We’ve all seen this picture before. The difference is that the proponents of the Dodd-Frank Act think that it will end differently this time around. The American people know better.But the most frightening fact of all: not even the Secretary of the Treasury, Timothy Geithner, believes that the Dodd-Frank Act ended “too big to fail.” When asked about the multiple rescues of Citigroup and whether the Dodd-Frank Act ended “too big to fail” by the Special Inspector General for the Troubled Asset Relief Program, Secretary Geithner said out loud what everyone already knows to be the truth: “In the future we may have to do exceptional things again if we face a shock that large.” But the Dodd-Frank Act was supposed to save government officials from doing “exceptional things”; that is the reason for its existence. If the Dodd-Frank Act means that “in the future we may have to do exceptional things,” then the Dodd-Frank Act cannot credibly be said to have ended “too big to fail.”You Say You Want a Resolution?But the proponents of the Dodd-Frank Act point to Title II of the Act—the “resolution authority” that gives the Federal Deposit Insurance Corporation the ability and the wherewithal to wind down in an orderly way a “too big to fail” firm. The reasoning that the supporters of the Dodd-Frank Act offer us is this: the FDIC can wind down a small bank with no problem at all; therefore, the FDIC can wind down a behemoth, multinational, complex financial institution, no problem at all. It doesn’t matter how big, how complex, how international the firm is: the FDIC can “resolve” it. And this “resolution” can be done without costing the taxpayers a single dime. After all—the Dodd-Frank Act banned bailouts.But Dodd-Frank’s “resolution authority” has a couple of problems that its supporters would rather you did not notice. The first is that it simply won’t work for the largest, most complex financial institutions. Remember how the supporters of the “resolution authority” told you not to worry, because this was just like “resolving” a small bank? Let’s take that claim seriously. This is how the FDIC resolves a “small bank,” according to a 2009 article in The Economist magazine:If the FDIC agents had tear gas rather than briefcases, we’d understand them to be a SWAT team. Eighty of them flew into Clark County, checked into hotels under assumed names, gave false reasons for their visit, and around 6 P.M. on that Friday, walked in and assumed control of the bank. By all accounts—including those of the employees at the Bank of Clark County—the FDIC was almost startlingly competent, professional, and sophisticated. Even the workers who were seeing their labor dismantled and their jobs destroyed sound impressed by the cool efficiency of the Feds.That sounds pretty good. In on Friday, out by Monday. There’s just one small problem:The Bank of Clark County had 100 employees and assets of $440 million which, if you’re not used to bank numbers, is a really small bank. But it took 80 FDIC agents, 50 bank employees, and 100 employees [from the neighboring bank that assumed control] working round-the-clock for three days to take it over and have it reopen for business.Most of the largest banks in trouble right now—Citibank, Bank of America—are about 6,000 times the size of the Bank of Clark County, not to mention much, much more complicated.For those who don’t have calculators handy 80 multiplied by 6,000 is 480,000. On the bright side, that’s one hell of a stimulus opportunity.30But let’s leave aside, for the moment, the “you and whose army” problem that the “resolution authority” poses. Let’s look at the “you and whose money” problem. That one is easy to answer: whose money? The American taxpayers’, that’s whose.Those who believe in the “resolution authority” are fond of telling you that it won’t cost you a dime: the Dodd-Frank Act bans bailouts, and it mandates that no taxpayer funds be used in resolving a financial institution. But remember Secretary Geithner and the “exceptional things” that “we” may have to do? That “we” means regulators and government officials (they decide) and you (more specifically, your dollars). Here is how it works.****Pretty funny test.
The Dodd-Frank Act and Housing: The Debacle ContinuesThe financial crisis of 2008 began with housing: after decades of misguided government policy based on the mistaken idea that everyone should own a house—and that government should do everything within its power to make homeownership possible, even if the homeowner couldn’t afford to pay the mortgage—credit markets seized up as people began to realize that when you lend money to those who are not creditworthy, who may have fudged their credit applications, against inflated home prices, you might not get repaid. Rather than let the market find its own equilibrium, government rushed in with bailouts and programs to stave off the inevitable write-offs and fall in housing prices and succeeded only in making matters worse.The government’s policy was, at all costs, to keep the market from finding its bottom in order to re-inflate the housing bubble: prop housing prices up, in order to rescue homeowners who had borrowed too much and financial institutions who had loaned too much. The government’s strategy of immunizing financial institutions from the consequences of their poor lending decisions through bailouts and government subsidies, and offering homeowners false hope through poorly designed foreclosure mitigation programs, has been a singular failure.The Dodd-Frank Act compounds the government’s disastrous foray into housing policy. First, the Dodd-Frank Act simply overlooks the proximate cause of the financial crisis: the government’s efforts to support an affordable housing policy through the government sponsored enterprises Fannie Mae and Freddie Mac. Hundreds of billions of dollars into the GSE bailout without end, there is nary a word about the GSEs in the two-thousand plus pages of the Dodd-Frank Act.So while the Dodd-Frank Act goes to great lengths to regulate every single facet of the financial system, including many things that had nothing to do with the financial crisis, the single biggest contributor to the collapse of the financial system went unaddressed. The GSEs continue as wards of the state, underwriting virtually all of the mortgages in the United States: Fannie Mae, Freddie Mac and Ginnie Mae account for 97% of mortgage-backed securities issuance in the United States. As the Financial Times columnist Gillian Tett put it on July 1, “By the time you read this column today, a fascinating shift will almost certainly have occurred in the nature of US finance: for the first time the government will be the biggest source of outstanding home mortgage and consumer credit loans in the US, eclipsing private sector banks or investors.” And yet, the Dodd-Frank Act trains its 2,000 pages and hundreds of rule-makings and studies not on the government, but on the private sector.While government becomes the biggest source of consumer credit in the United States, the Dodd-Frank Act hobbles the private mortgage market through onerous regulations with unintended consequences, thereby ensuring that housing will remain in limbo for some time to come, as investors, securitizers, and lenders try to navigate its cumbersome and unworkable rules.The negative consequences of the Dodd-Frank Act on housing markets could not come at a worse time. As home prices continue to fall, the only hope for a sustained recovery is if creditworthy borrowers can take advantage of lower housing prices and the large inventory of foreclosed properties on the market. When this happens, housing starts will begin again, and a recovery in the housing market will power a broader economic recovery, as it always has. Given the tremendous importance of the housing industry to the U.S. economy, a broader economic recovery will not take place until the housing industry stabilizes.Of the hundreds of new requirements contained in the Dodd-Frank Act, perhaps none is more cumbersome than the “risk retention rule” and the exception to that rule for “qualified residential mortgages.” Because most mortgages will fail to meet the overly stringent standards to qualify as a “qualified residential mortgage,” most mortgages will fail to qualify for the exception. As a result, thousands—if not millions—of qualified borrowers may find themselves shut out of the mortgage market, which means that housing prices will continue to fall and the overhang of unsold and foreclosed properties will persist.Although the requirement that securitizers retain some of the risk of the loans they bundle and sell off seems relatively straightforward, the Federal Reserve found in a study that the issue is anything but straightforward. As the Federal Reserve put it, “simple credit risk retention rules, applied uniformly across assets of all types, are unlikely... to improve the asset-backed securitization process and protect investors from losses associated with poorly underwritten loans.” The risk-retention requirement thus has a lot in common with the rest of the Dodd-Frank Act: a complex rule, pressed into the service of a benefit that is unlikely to materialize, all with a cost to consumers, homeowners, the financial services industry, and the broader economy. As foreclosures mount, home prices continue to plummet, and the government has all but taken control over the issuance of mortgage credit in the United States, it is time to step back and think about whether the Dodd-Frank Act has put us on the wrong track.****Who presided over this insane law? One Barack Hussein Obama.
Bottom line: Our government is dysfunctional and the only plausible cure got defeated in the 2012 election.The only possible cure is to get the people to realize what is happening, and that starts with teaching kids to think for themselves, not just be good libtards (as our current education system teaches them).
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