[ by Melanie Gretchen ] The Dodd-Frank Reform Act celebrated its Second Anniversary one day after FINRA celebrated its 5th.  [See our 7/30 Who's News story, "FINRA Celebrates 5th Anniversary".] Apparently, the 1-day lag took some of the "fizz" out the Capital Hill festivities.  In fact, some U.S. congressional leaders couldn't keep their frustrations with Dodd-Frank in check.  Congressman Jeb Hensarling (R-TX) who wrote the WSJournal Opinion Piece that this story is based on, just couldn't refrain from suggesting, again, that the Law is as clear as mud – and would likely create a similar landscape. The Assumptions of Dodd-Frank. The bill is based on the (incorrect) assumption that regulators lacked the authority to prevent Wall Street from taking outsize risks, according to Congressman Hensarling.  After all, Mr. Hensarling contends that the financial crisis stemmed from federal policy, which drove financial institutions to lend money to people for home purchases they couldn't afford – lowering "historically prudent underwriting standards."

"Of the subprime and Alt-A mortgages that led to the 2008 financial crisis, more than 70% were backed by the federal government through government-sponsored enterprises (GSEs, such as Fannie Mae and Freddie Mac), the Federal Housing Administration and other programs. An accommodative monetary policy, in turn, allowed an inflated housing bubble that finally burst." -- Mr. Hensarling.

After earlier federal legislation caused the financial crisis, new regulations contained in the Dodd-Frank Reform Act is only succeeding in compounding the problem.  Of the 400 new regulations contained in this bill, Mr. Hensarling categorizes them, as follows:  "These generally fall into one of two categories:   those that create uncertainty and those that create economic harm." Regulations. But perhaps saving his best for last, the Congressman took issue with the so-called Volcker Rule, an as yet unrealized 300-page proposal to limit the kinds of investments banks can make.  Its some 1,300 questions covered nearly 400 topics, drew 18,000 comment letters from market participants and the public asking for clarity. In addition, Dodd-Frank's derivatives title, which the U.S. Chamber of Commerce says could make it more expensive for nonfinancial companies to hedge their risks, prompting American firms to take their business overseas.   Then there is the "Qualified Residential Mortgage" rule that would increase mortgage interest rates by 1 to 4 percentage points, according to Moody's Analytics. The Consequences. Private-sector job creators would have to spend 24,180,856 hours each, as estimated by the House Financial Services Committee to meet the 224 rules that have been written to date.  For his part, William Isaac, a former chairman of the Federal Deposit Insurance Corporation, has predicted that hundreds if not thousands of community financial institutions will ultimately buckle under the regulatory load. Besides business, consumers will be affected by Dodd-Frank's "Consumer Financial Protection Bureau".  Contrary to its name, this bureau, according to Mr. Hensarling, "gives unparalleled power to an appointed credit czar who can ban or ration practically any consumer financial product deemed 'unfair' or 'abusive'—based on his or her discretion alone, with virtually no oversight from Congress." As a result, rationed consumer credit will drive up costs for entrepreneurs to obtain capital and will stifle both product innovation and consumer choice.  [CI Note: And we know from the housing bubble how well depending on consumers works.] The Kicker. The biggest issue Mr. Hensarling takes with Dodd-Frank is what he sees as the reliance of companies on – and at the expense of – individuals.  "Dodd-Frank has codified into law a taxpayer-funded safety net for institutions deemed too big to fail—the Orderly Liquidation Authority, which the Congressional Budget Office predicts will cost taxpayers tens of billions of dollars."

"In downgrading the credit ratings of the nation's largest banks last month, Moody's explicitly stated that its ratings still reflect an assumption 'about the very high likelihood of support from the U.S. government for bondholders or other creditors in the event that such support is required to prevent default.' So much for ending taxpayer-funded bailouts. And when we lose our ability to fail, we will soon lose our ability to succeed." -- Mr. Hensarling.

Solution: Dodd-Frank Relief. What the Congressman proposes is for the President to work with Congress to phase out the government-sponsored enterprises and transition them to the private market, supported by the fact that other industrialized nations "enjoy comparable or higher rates of home ownership without government dominance in their mortgage markets."  And finally, he believes that Dodd-Frank's bailout authority must be revoked, in favor of more transparent balance sheets and a meaningful application of capital and liquidity standards to address the risks posed by financial institutions. CI Note: Is what Mr. Hensarling proposing possible?  How much have we committed to Dodd-Frank and what would it take to propose a new plan?  How long would that take? For further details, go to [WSJ, 7/25/12].