As National Taxpayers Union (NTU) has previously mentioned, the Republican National Committee released its 2016 platform this week. NTU will examine portions of the Platform from the perspective of America’s hardworking taxpayers.
America’s financial system and its capital markets are the envy of the globalized financial system, but our status as the financial capital of the world is in jeopardy thanks in part to bad public policies emanating from Washington, D.C.
After the 2008 financial crisis, Congress rushed through comprehensive reform of the financial services industry, aka Dodd-Frank. The cumbersome law has hindered job growth and capital formation. The Platform correctly points out that the number of community banks has significantly declined since passage of Dodd-Frank. Meanwhile, the Platform notes that the Consumer Financial Protection Bureau (CFPB) is an unaccountable agency that has severely clamped down on the financial system – limiting access to credit and making the financial services industry less competitive. The Platform calls for regulatory relief for small community banks and either elimination of the CFPB or at least subjecting it to the congressional appropriations process. Likewise, the Platform urges Congress to take steps to eliminate “Too Big to Fail” that was codified by Dodd-Frank – ensuring that failing financial firms will be resolved through the bankruptcy code, rather than through ad hoc measures that bail out failing firms, create regulatory uncertainty and further engrain moral hazard.
While the Platform is wise to call for regulatory relief for community banks, and elimination or reform of the CFPB is a good idea, it missed an opportunity to specifically endorse House Financial Services Committee Chairman Jeb Hensarling’s “Choice Act”. If enacted, the Choice Act would allow banks and other financial firms to opt-out of Dodd-Frank’s onerous regulations in exchange for higher equity capital requirements. This is a simple, transparent and commonsense way to combat the “Too Big to Fail” problem highlighted by the 2008 financial crisis and further entrenched by Dodd-Frank.
Return of Glass-Steagall
As mentioned, the Platform is largely positive in its treatment of the financial services industry, but it missed the opportunity to endorse Chairman Hensarling’s Choice Act. Worse still, the Platform endorses a return of Glass-Steagall, which requires separation of commercial and investment banks. This separation was eliminated by the Financial Services Modernization Act of 1999. Glass-Steagall is an archaic New Deal-era law has long been a favorite of the left, but it is ill-suited for the globalized financial system of the 21st century.
Simply put, eliminating Glass-Steagall did not cause the 2008 financial crisis. The investment banks and other financial firms at the center of the crisis – Lehman Brothers, Bear Sterns, Fannie Mae, Freddie Mac and American Insurance Group – were not depository institutions. In fact, repealing Glass-Steagall helped soften the blow of the financial crisis because banks were better diversified as a result of the law’s repeal and thus able to absorb the shock. Reinstating Glass-Steagall may make for a good sound bite for populist politicians, but it is bad economic policy.
Fannie, Freddie and Housing Finance Reform
As the Platform correctly notes, Fannie Mae (Fannie) and Freddie Mac (Freddie), the two large Government-Sponsored Enterprises (GSEs), played a crucial part in the 2008 financial crisis. As a result, taxpayers bailed out the two GSEs to the tune of $188 billion. Since that time, they have been in government conservatorship and no significant reforms have been enacted. This is pure negligence on the part of policymakers in Washington.
As NTU has highlighted in the past, the Obama administration’s quarterly profit sweeps of Fannie and Freddie have left the GSEs grossly undercapitalized, which poses serious risks to taxpayers and the broader financial system by increasing the likelihood of more taxpayer-funded bailouts.
It is well past time to reform the GSEs. NTU is thankful the Platform calls on Congress to rethink the role of Fannie and Freddie and the complicated web of government housing subsidies.