Tags: Dodd-Frank | Republicans | derivative | Obama

Republicans Risk White House in 2016 By Eviscerating Dodd-Frank

By    |   Friday, 19 Dec 2014 08:14 AM

In an effort led by the Republicans, the Dodd-Frank financial reform legislation has been effectively eviscerated, recreating the very financial environment that crippled the global markets and economy six years ago.

In recent days, as Congress was at an impasse to approve a massive $1.1 trillion spending bill to keep the government operating, Republicans led the charge to insert a proposal to permit taxpayer subsidies for high-risk derivative products promoted by financial institutions.

In 2000, the global derivative market totaled less than $100 trillion. Against the objection from Commodity Futures and Trading Commission, President Clinton deregulated derivatives that year with the strong support from Treasury Secretary Robert Rubin, Deputy Treasury Secretary Lawrence Summers, Federal Reserve Chairman Alan Greenspan and many major banks and Republicans.

By 2008, this global derivative market skyrocketed seven-fold to roughly $700 trillion. These products were ineffectively supervised and regulated, resulting in mismatched orders that lacked adequate capital cushions. This was a significant cause of the financial and economic collapse.

Recently, Dodd-Frank was undercut by the reduction in risk retention and down payments required by mortgage loan originators, another key weakness that enabled the financial unraveling.

This new development will not sit well with the electorate.

Since the inception of the financial crisis, the U.S. banking system has received nearly $29 trillion in liquidity, including loans, guarantees and asset purchases. Christine Lagarde, managing director of the International Monetary Fund, says the "too-important-to fail" banks have received implicit taxpayer subsidies of 0.8 percentage point in the form of lower borrowing costs. According to analysts, this translates to some $64 billion for the top five U.S. banks in 2012, the equivalent of their entire aggregate profit.

This political landscape portends poorly for Republicans going into the 2016 elections, especially if Sen. Elizabeth Warren, D-Mass., decides to run for president. She was adamantly opposed to this Wall Street legislation, and her position will set her far apart from many others in the current environment.

In a recent Wall Street Journal editorial, former Sen. Phil Gramm, R-Texas, suggested economic growth during the Obama administration was much lower than that for the Reagan and Clinton administrations. However, the economic and financial landscape inherited by Presidents Reagan and Clinton was far better than that for the current president. It might take decades to heal from that trauma, even if Obama focused more on jobs instead of healthcare.

While neither political party has a monopoly on poor public policy, a pattern seems to be emerging that identifies Republicans more strongly with the greatest financial crisis in our lifetimes.

Perhaps a third-party candidate is becoming more and more viable.

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In an effort led by the Republicans, the Dodd-Frank financial reform legislation has been effectively eviscerated, recreating the very financial environment that crippled the global markets and economy six years ago.
Dodd-Frank, Republicans, derivative, Obama
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2014-14-19
Friday, 19 Dec 2014 08:14 AM
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