The Dodd-Frank Act of 2010 has been a disaster for our financial system. Passed in haste after the financial crisis ostensibly in order to stop it from ever happening again, it is actually just a laundry list of leftist command-and-control policies designed to hobble Wall Street. Bureaucrats were given power to decide what risks are healthy for the economy. As might be expected, the bureaucrats have hobbled Main Street with their decisions, reducing the free flow of money through the economy and stopping businesses and citizens getting access to the credit that they desperately need.
On November 19, however, a panel of three judges from the DC circuit will hear arguments in a case brought by the Competitive Enterprise Institute (CEI) and others challenging the constitutionality of this new bureaucracy. If the judges rule in our favor, Main Street and Wall Street should both breathe a sigh of relief.
The nation as a whole needs injunctive relief from these provisions of Dodd-Frank. According to the Financial Services Roundtable, Dodd-Frank has:
- Reduced pretax earnings up to $34 billion annually for the eight large banks
- Lowered the number of free checking accounts by 40 percent
- Required nearly 26,000 full-time employees to file compliance paperwork annually
- Lowered the return on equity of community banks with less than $500M in assets to between 6-8 percent
These numbers are likely underestimates.
The grounds for our case are simple. CEI and our co-plaintiffs believe that the Consumer Financial Protection Board (CFPB) and the Financial Stability Oversight Council (FSOC) violate the Constitution in a number of ways. Most importantly, the CFPB has no checks or balances to its power, making it unaccountable to Congress, the Administration, the courts, or the people in general:
- Congress exercises no “power of the purse” over the CFPB, because the agency’s budget – administered essentially by one person – comes from the Federal Reserve, amounting to approximately $400 million that Congress cannot touch or regulate.
- The president cannot carry out his constitutional obligation to “take care that the laws be faithfully executed,” because the president cannot remove the CFPB Director except under limited circumstances. It is probable that neither the current president nor his successor will be able to remove Director Cordray until his term ends in 2018.
- Judicial review of the CFPB’s actions is limited, because Dodd-Frank requires the courts to give extra deference to the CFPB’s legal interpretations.
Put simply, the CFPB is a power grab over every U.S. citizen.
These problems are repeated in our claims against FSOC. The Dodd-Frank Act gives this body, headed by the Treasury Secretary, unprecedented power to liquidate private companies. As Attorney-General Pruitt of Oklahoma, one of our co-plaintiffs, noted when announcing his decision to join the case:
By committing such broad power to federal bureaucrats and nullifying critical checks and balances, Dodd-Frank's "orderly liquidation" authority violates the Constitution's separation of powers, the Fifth Amendment's guarantee of due process, and the guarantee of "uniform" bankruptcy laws.
Moreover, we are already seeing that FSOC is quite happy to extend its powers beyond the large banks that were the focus of Dodd-Frank, having decided to designate large insurance companies with no diversified banking arms like Metlife as within its purview. That is the way of things with unaccountable bureaucracies.
What is certain is that Dodd-Frank needs to be halted now. While Republican legislators have already indicated that reform to Dodd-Frank is one of their priorities for the new Congress, the best hope for the immediate relief the nation needs lies in the hands of the DC circuit.
Iain Murray is a Vice President at the Competitive Enterprise Institute in Washington DC.
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