Congress Needs to Fix America's Broken Financial System

Iain Murray December 19, 2016

Whole forests have been cut down to print the books written about the financial crisis of 2007/8 and America’s response to it. Far fewer have been written on what’s wrong with the financial system now. Yet there’s a lot wrong with it. Despite historically low interest rates, banks aren’t lending to businesses or individuals, smaller and community banks have had to close or merge, low-income customers have seen free checking accounts disappear and their fees rise. The financial system is dysfunctional and not fit for purpose.

Most of the blame for this can be laid directly at the feet of the Dodd-Frank Act, passed in 2010 supposedly to stop another financial crisis happening by reining in the big banks with regulatory compliance. Yet the effect of the law has been to strengthen the position of the Wall Street banks most at fault for the crisis, while punishing the Main Street banks who behaved responsibly (there are more details on how this came about in my 2015 paper, “How Dodd-Frank Harms Main Street”).

In addition, the Dodd-Frank law also created a powerful regulator with all the conditions necessary for it to go rogue, which it did quickly – the Consumer Financial Protection Bureau. The CFPB was created with a powerful director who did not serve at the pleasure of the President, independence from Congressional oversight via funding, and with many of its decisions protected from judicial review. The Bureau’s exercise of the enormous power granted to it over the financial system finally led to a court case, PHH Corp. v CFPB, which found the Bureau not only to have acted outrageously towards the plaintiffs, but to have been structured unconstitutionally.

Congress needs to fix this system before another financial crisis hits. CEI’s scholars outline their suggestions for doing this in chapter 2 of our new Agenda for Congress. Our recommendations are:.......To Read More.......