Last week, Massachusetts senator Elizabeth Warren threatened to derail the omnibus continuing resolution (“cromnibus”) that funds most of the government through the end of the fiscal year. She objected to the elimination of an obscure rule in the Dodd-Frank financial reform law known as “push-out.” Under Dodd-Frank, federally backed financial institutions must spin their “swap trades” off to uninsured subsidiaries; after cromnibus, they will no longer have to do this.
Conservatives were caught off guard by this last-minute opposition from Warren. Unfortunately, though, she and the left wing of the Democratic party had a point. While the push-out provision hardly spelled doom and gloom for the country, as they warned, congressional Republicans went about repealing it the wrong way.
To be clear, the 2010 Dodd-Frank financial reform law is a bad piece of legislation, built on two flawed premises. First, by enshrining in law the principle of too big to fail, it doubles down on the mistaken policies of the 1990s and 2000s that paved the way for the financial crisis. Businesses, whatever their size, should bear the consequences of the risks they take. They should not be able to count on Uncle Sam to bail them out. That generates moral hazard. It also creates unfair competitive advantages, as the largest and most politically connected firms enjoy lower borrowing costs.
Second, Dodd-Frank wrongly assumes that an additional regulatory regime is what is needed to keep Wall Street in line. The old regime actually provided all the tools necessary to regulate the big financial firms; the regulators simply chose not to use them. One reason was “regulatory capture,” a phenomenon as old as the Interstate Commerce Commission (ICC), the first U.S. government regulatory body, created in 1887. In fact, the experience of the ICC, especially its manipulation by the railroad barons, proves that more regulation can be worse than useless. If the regulated industry captures its regulator, then it actually enjoys the best of both worlds: the appearance of oversight and the reality of unfettered discretion.
The financial mess of the last decade had a lot to do with regulatory capture. For instance, the Office of Thrift Supervision, which oversaw outlets like Washington Mutual, and the Office of Federal Housing Enterprise Oversight, which regulated Fannie Mae and Freddie Mac, were clearly captured by their industries. In both instances, the mechanisms for capture were actually written into the originating laws, which predated the crisis by decades. So the problem was not so much laissez-faire economics run amok as bad regulations that facilitated interest group power run amok.
As for the push-out provision itself, it was not widely adored when the law was passed. As Tim Carney of the Washington Examiner notes, former Arkansas senator Blanche Lincoln insisted on its inclusion in Dodd-Frank as a way to beef up her anti-Wall Street bona fides in advance of her reelection bid, which eventually failed. Financial institutions have been agitating for repeal of the provision ever since, and not just the biggest banks. As Carney reports, a coalition that included even the Bank of Oklahoma wanted the provision undone. They had a point, too. Leading up to the financial collapse in 2008, the vast array of elaborate credit default swaps ultimately made matters worse because they did not mitigate risk as the firms thought they would. But that does not mean that swaps have no value. Employed properly, they can indeed provide a useful hedge.
Elizabeth Warren, moreover, has been an inconstant opponent of corporate giveaways. When conservative House Republicans tried to eliminate the Export-Import Bank this summer, she refused to join the cause. That says a lot about her intentions. Ex-Im actually does what she claims push-out does: use taxpayer money to underwrite private bets, mostly by Boeing.
So Warren is only a sometime opponent of corporate cronyism. She is defending a fundamentally flawed regime, and in championing push-outs has taken up a cause of questionable importance. Regardless, House Republicans were wrong on this issue.