It’s been eight years since final passage of the Dodd-Frank Act. Since then, Republicans in Congress have focused much of their efforts on demonstrating flaws in Dodd-Frank that have preserved some of the core problems of the financial crisis. Specifically, the law has perpetuated bailout facilities and left in place discretionary government backstops that were abused during the crisis.
Much of the energy of the Republican caucus and at conservative and libertarian think tanks in financial services policy has focused on building an alternative approach, one represented in the themes underlying Chairman Jeb Hensarling’s Financial Choice Act (which I helped craft during my time on the House Financial Services Committee from 2013 to 2015). This alternative approach centers on three pillars: strong capital requirements to keep insured depository institutions stable during a crisis, elimination of government backstops that perpetuate moral hazard and relief from government micromanagement of banks caused by unbounded regulatory discretion.
Critics of the Financial Choice Act argue that this effort has been in vain and that a lack of bipartisan buy-in to an alternative approach to Dodd-Frank suggests the energy has been wasted. But such a critique ignores the long view of banking history. The sort of idea leadership reflected in the Choice Act cannot be measured in the time frame of a single Congress — or even a single decade.
Over the last hundred years, a number of flawed laws passed in the wake of major crises have subsequently been reformed decades later through a slow but steady war of ideas. Time and again, restrictive laws passed in the wake of crises give way to reforms intended to grow the economy.
In fact, it’s often the case that laws intended to villainize the banking industry, like the Glass-Steagall Act, end up supporting the industry. Glass-Steagall long helped to protect bankers from competition by insurers and stock brokers, and vice versa. Much like that law, Dodd-Frank has been cited by large banks today as protecting them from competition by smaller banks.
Yet Glass-Steagall’s artificial separation of banking and commerce wasn’t reformed overnight — it took another 70 years for the passage of the Gramm-Leach-Bliley Act to remove those walls. And this came after more than a decade of exemptions by bank regulators. What’s more, Gramm-Leach-Bliley reflected over a decade of bills that passed the House, but not the Senate, developing ideas subsequently included in the law.
Fast forward to today and a similar trend can be seen. The Choice Act has won the support of Republican committee members and a majority in the House, even though it did not gain traction in the Senate.
At the same time, Congress has made great strides with a series of smaller reforms, including the multiple iterations of “JOBS Act” bills and the recent small and regional bank reforms reflected in the regulatory relief package that passed Congress this spring. But that doesn’t mean the Choice Act, or its fundamental principles, are going away.
What many commenters don't appreciate is that the short-term focus of these reforms and the long-term focus of the Choice Act are not in competition. Believing otherwise is simply shortsighted. The two perspectives — pursuing short-term initiatives and the bigger structural reforms of the Choice Act — merely reflect a difference of short-term tactics on one hand, and long-term, endgame strategy on the other.
This work will ultimately bear fruit over the long view of banking history, just as the industry saw with the overhaul of Glass-Steagall’s artificial restrictions in the late 1990s, many decades after the Depression-era law was put into the place.
The war of ideas will continue until it is won.