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Dodd-Frank Five Years Later—What’s Next?

Five years ago on July 16, 2010, Congress enacted the Dodd-Frank Act. It promised unprecedented regulation of the financial sector so that the devastation of the 2008 financial crisis that was visited mostly on middle- and low-income Americans in the form of the Great Recession would not be repeated. Though the law was far from perfect, Dodd-Frank includes many important reforms, from bulwarks against the systemic risks of casino capitalism to protection against predatory consumer lending.

American households do not need Dodd-Frank to be walked back as opponents claim. Instead, they need additional constraints on the financial sector to reverse the historic degradation of the income and wealth of all but the richest among us. The financial sector in its modern manifestation makes the wealthiest even wealthier. The problem is that it accomplishes this by making everyone else poorer than they otherwise would be.

Over the ensuing half decade, financial sector lobbyists have enlisted the aid of many in Congress—even some relatively progressive members—to impede implementation and roll back the law. Astonishingly, despite a financial sector that cost the world almost one full year of income seven years ago, the fight for sensible regulation is still very real.

In some ways, the left and right are even farther apart on financial regulation than they have ever been. Since the most recent congressional elections, opponents of Dodd-Frank have mounted wide ranging challenges. Some target arcane rules clearly to whittle away at sensible regulation in service of Wall Street profit opportunities. Other attacks are far more strategic. Funding of regulators has been cut, the most egregious being the budget of the Commodity Futures Trading Commission. This commission was tasked to regulate the behemoth, complex and dangerously risky derivatives markets but has never been granted the resources to do a proper job.

Opponents have also allied with foreign jurisdictions, most notably the European Union, to encourage rule shopping and to pressure US regulators to ratchet back to prevent financial businesses from migrating to more lenient locales. And implementation of the all-important Volcker Rule, that prohibits too-big-to-fail banks from effectively gambling with taxpayer money, has been slowed, perhaps in the hope that the next administration will eliminate or dilute its provisions.

On the eve of a new presidency, this anniversary is critically important because the financial regulation discourse for the next cycle will be framed in the election. In one sense, the rhetoric of the Democrats is most important since the Dodd-Frank Act was one of the important accomplishments of the Obama years. The great non-candidate, Elizabeth Warren has spoken out repeatedly. Senator Sanders has taken the message to the electoral trenches, asserting in speeches and legislative proposals that banks that are too-big-to-fail are categorically too big to exist.

But the elephant in the room is Hillary Clinton. So far, Secretary Clinton is a bit short on detail, but the sentiment is encouraging. She hinted at further regulation in her recent speech at the New School:

Many of our major financial institutions are still too complex and too risky. Serious risks are emerging from institutions in the so-called shadow-banking system, including hedge funds, high-frequency traders, and nonbank finance companies… I will offer plans to rein in excessive risks on Wall Street and ensure that stock markets work for everyday investors, not just high-frequency traders and those with the best or fastest connections. I will appoint or empower regulators who understand that too big to fail is still too big a problem. 

If we have learned nothing else in the last five years, it is that bold statements of intent can wilt under the pressure of the Wall Street lobby as details are filled in. Alan Blinder, a Clinton economist advisor, quickly explained that this did not mean she favors a new Glass-Steagall.  We cannot yet be confident that the Democratic candidate will push for a financial system that serves all of the people.

On the other side, there is little evidence that any candidate will take on Wall Street. Yet it is undeniable that this is a populist cause at its core. Several in the field of aspirants have expressed an affinity for economic populism. Even Ted Cruz provided the following observation:

The top one percent today earn a higher share of our income than any year since 1928…. [T]he rich are getting richer. People who are doing well are doing even better, but working men and women -- millions of people are hurting.

Is it too much to ask of Republican populists that they connect the plight of the 99% to the system that decides what the society invests in?

The way forward under Dodd-Frank has been treacherous and frustrating, but its defenders soldier on still. Nonetheless, Dodd-Frank was tentative from its inception. Even its principal sponsor, Barney Frank, has told us that his main priority was to get a bill that could be passed rather than a perfect one. We know a great deal more now.

It is not just that the banks operated a good system in a risky way in 2008; the system had become and remains a drag on the well-being of almost all Americans. Though some have grown weary of the defense of Dodd-Frank, as the financial lobby had hoped would happen, the public’s interest cries out for a financial system that works for the common good. In the long run, businesses and banks and American workers will all prosper as a result.