Partial repeal of Dodd-Frank will help economic growth

Annual economic growth has not reached 3% since 2005. That is the longest period of economic stagnation in US history. There are a number of policy-related issues to blame for this, but the Dodd-Frank bill played a major role. The repeal of Dodd-Frank, or at least most of the bill will help to stimulate economic growth.

In 2009, Barack Obama was sworn in as President of the US. The economy was in the middle of a very deep recession. Obama, like other Democrats, blamed the recession on the financial crises. The Dems believed the financial crisis was caused by banks granting mortgages to people who were not really qualified.

A majority of those people eventually defaulted on mortgages everyone knew they could not afford..

Eliminate predatory lending.

The Dems wanted to stop the practice of predatory lending and to make sure that the largest banks would not fail. With almost no Republican support, the Dems passed the Dodd-Frank bill. The law put restrictions on not just the largest banks, but small, even community sized banks.

The law made it very difficult for banks to freely lend to even worthy businesses. As a result, small business, which provides more than two-thirds of new jobs, could not expand. This contributed to the slow growth economy since the law was passed.

Economic growth has averaged just above 2% since the law was passed.

At the same time, Obama wanted to make sure that big business did not take advantage of consumers.

So, primarily through executive order, he puts thousands of new regulations on business. This slowed growth even further.

The Federal Reserve sought to stimulate growth.

Beginning in 2009, the Federal Reserve (FED) wanted to stimulate economic growth, by vastly increasing the money supply, through quantitative easing. Even though their action was the most expansive monetary policy in history, economic growth continued to stagnate. Why?

In order for Monetary Policy to be effective, there has to be a multiplying effect. That means the FED increases the money supply essentially by increasing the amount of money in circulation. The money is deposited into banks who then have additional funds to loan to businesses for expansion.

Once the money is lent, the money supply increases further. When business spends the borrowed money, the economy expands. By making loans there is a multiplying effect of increases in the money supply. If loans are not made, there is no multiplying effect.

The Dodd-Frank law eliminated predatory lending and ended up severely restricting all lending, especially by smaller banks to small business. That significantly reduced the multiplying effect. The result was that the massive expansion in money supply failed to stimulate economic growth.

Today, however, economic growth is accelerating.

Since President Trump was sworn into office, growth became the top priority. Trump immediately removed all burdensome and counter-productive regulations. Since then, economic growth has averaged about 3%. Beginning early is 2018, the effects of the growth stimulating tax cut are beginning to show.

The Federal Reserve Bank of Atlanta is forecasting economic growth will exceed 4% for the current 2nd quarter of 2018.

Once the repeals of Dodd-Frank take effect, economic growth could reach 4 ½% to 5%. This level of growth will eliminate or at least minimize many economic problems.

Unemployment is now at record lows for the economy in general and for high unemployment minority groups in particular. The higher growth will mean millions of underemployed workers will find higher paying jobs, more reflective of their skills. Millions of discouraged workers, who have dropped out of the labor market because of a lack of opportunity, will return to seek jobs.

The number of people seeking welfare, food stamps and unemployment compensation will fall as these people find an opportunity to support themselves.

Repeal of Dodd-Frank was long overdue.

The reality is that banks’ lending practices did not cause the financial crisis. The federal government caused the financial crisis when Congress decided to increase the homeownership rate. Traditionally about 62% to 64% of households owned homes, while the remainder rented. Congress set a goal to raise that to 70%.

In order to do that, Fannie Mae, Freddie Mac, Countrywide and GMAC (holders) who hold nearly all of the mortgages banks originate, where instructed to purchase subprime loans from originating banks. The banks simply originated loans that they could sell to these entities.

About 11 million of these mortgages which averaged about $200,000 each were originated and sold to the holders. These mortgages totaling over $2 trillion eventually went into default. These mortgages required little or no down payment from the home buyers. They also had low-interest rates for the first year or so. This enabled the 11 million households to initially qualify.

The $2 trillion default was what caused the financial crisis. Had the federal government not attempted to influence the housing market there would not have been any predatory lending and there would not have been a financial crisis. There may not have been a severe recession either.

Incidentally, the homeownership rate today is about 63%, the same as it was before the government decided to raise the target.

The partial repeal of Dodd-Frank is a good step in the right direction.

Michael Busler, Ph.D. is a public policy analyst and a Professor of Finance at Stockton University where he teaches undergraduate and graduate courses in Finance and Economics. He has written Op-ed columns in major newspapers for more than 40years. www.facebook.com/fundingdemocracy @mbusler