We are governed by a faux-populist president from a gilded penthouse with little regard for the middle class and a Republican-dominated Congress that lives to feed the deregulation bonfire, which is an unsettling combination if you value stability in our banking institutions.
So Janet Yellen came out and admitted it: The Federal Reserve chair smells another financial catastrophe like a distant blaze if there is a wholesale rollback of Dodd-Frank regulations, and she deserves our national gratitude for speaking truth to reckless power.
Yellen sent this message to the President Trump and Capitol Hill during a banking symposium recently, when she defended the sweeping and bipartisan law that overhauled the financial system after 2008 meltdown.
Some say it was her farewell address, in that it ends her chance of being reappointed after her term as Chair expires in February. But Yellen did not equivocate: The general regulatory structure must stand, she said, even though a broad repeal bill – called the Financial Choice Act – has already passed the House by party-line vote.
“The events of the crisis demanded action, needed reforms were implemented, and these reforms have made the system safer,” Yellen said. “(Yet) already, for some, memories of this experience may be fading – memories of just how costly the financial crisis was and why certain steps were taken in response.”
That’s a gobsmacking assessment of human nature and the greed that drives it, as it implies an institutional amnesia could doom us all if Republicans take a machete to Dodd-Frank.
Because the Financial Choice Act rips away most provisions, root and branch.
Some of the repeals are smarmy. One target is the Consumer Financial Protection Bureau, a seminal watchdog agency that recovered $12 billion for 27 million consumers since 2011, including 43,000 from New Jersey. It protects us from toxic mortgages, credit card disputes, payday lenders, etc. – yet Republicans want to strip it of much of its authority.
Also in the crosshairs is the so-called fiduciary rule, which requires financial advisers to sell products with a client’s interests in mind, rather than their own fees and commissions.
The House bill also eliminates the Volcker Rule, which bans commercial banks from making risky and speculative trades with their own capital. The repeal bill also makes it easier for banks to pass a “stress test,” which gauges whether they can survive an economic shock.
All of it has the full endorsement of president who spent most of 2016 claiming that Ted Cruz was in bed with Wall Street, that Hillary Clinton was too cozy with Goldman Sachs, and that hedge funds were “getting away with murder.”
Yellen told the whole truth: Dodd-Frank made the system substantially safer, and it did nothing to restrict growth or squeeze credit. Consider this: The share of “good” mortgages – loans to borrowers with high credit scores – has jumped from 30 percent in 2008 to nearly 60 percent today.
No doubt, Dodd-Frank needs tweaks. A reasonable Congress could lighten the load for community banks that present lower risks, and find ways to scale back the paperwork.
But as Princeton economist Alan Krueger warns, it must be done intelligently: There is a need to maintain strict requirements on systemically important institutions – and surveillance from regulators at the Financial Stability Oversight Council – while easing up on the burdensome restrictions placed on smaller banks.
Yellen will be chided as a political animal who is better off running for office if she wants to dictate regulations.
But the Wild West days of hands-off central banking – which peaked during – should remain dead and buried. And anyone who survived it does not mourn its passing.