A decade ago, the first inklings of the coming recession emerged as a housing bubble fueled by scant regulation, low interest rates and easy credit gradually began to crater and soon would take the rest of the economy along for the painful ride.
By the time the Great Recession ended in June 2009, almost no one was spared.
Home prices fell 30 percent on average, the unemployment rate nearly doubled and the S&P 500 lost about half its value. The net worth of U.S. households and nonprofit organizations fell by nearly $14 trillion, about 20 percent.
In the midst of a presidential election, Washington struggled in its response. The bankruptcy of Lehman Brothers and the takeover of Merrill Lynch turned the spotlight on Democratic Senator Barack Obama of Illinois and Republican Senator John McCain even brighter, with McCain’s assertion that the “the fundamentals of our economy are strong” used to depict him as out of touch.
After the economy stabilized, Congress shifted from economic stimulus and bailouts to establishing the kind of regulatory framework that might keep another Great Recession from happening. The result was the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
This week, House Republicans will vote on legislation to gut Dodd-Frank and replace it with their own version. A look at the background of the legislation and the GOP plan.
Passed with little GOP support
In June 2010, the House passed the financial regulatory overhaul 237-192. Only three Republicans sided with the vast majority of Democratic members in support of the bill.
Two weeks later, the Senate passed the bill 60-39. This time, only two Republicans voted for the bill, Olympia Snowe of Maine and Scott Brown of Massachusetts. But that was just enough to overcome procedural hurdles that can stop major legislation in the Senate.
Obama signed Dodd-Frank into law on July 21, 2010: “In the end, our financial system only works — our market is only free — when there are clear rules and basic safeguards that prevent abuse, that check excess, that ensure that it is more profitable to play by the rules than to game the system,” Obama said. “And that’s what these reforms are designed to achieve — no more, no less.”
What does it do?
Under the act, large banks undergo “stress tests” to ensure they have enough capital necessary to absorb losses during an economic crisis. The law also put into place strict limits on how commercial banks could invest capital in speculative investments.
Dodd-Frank also established a process by which the federal government could break up and wind down a failing financial company whose failure threatened financial stability in the United States. And it established a new agency with a mission of ensuring that banks and other financial companies don’t abuse consumers.
That’s just a small snapshot of the changes put into place through the nearly 2,300-page bill.
Who were Dodd and Frank?
Representative Barney Frank was the top Democrat on the House Financial Services Committee. When the financial crisis hit, the Massachusetts lawmaker worked closely with the Bush administration to enact a historic bailout of the nation’s financial system so that the government could purchase as much as $700 billion in troubled assets to stabilize banks and get them lending again. Once the crisis began to subside, he turned his attention to an overhaul of the entire financial services industry. Frank was renowned for his knowledge of public policy and parliamentary rules, but also for his gruff, piercing criticism of those who disagreed with him. He declined to seek re-election in 2012 after serving 16 terms.
Senator Christopher Dodd was the chairman of the Senate’s Banking Committee. He announced in January 2010 that he would not seek re-election once his term ended, and he led the debate on the Senate side without fear of how it would harm his political standing. His home state of Connecticut counts several of the insurance companies that were shaken in the crisis.
Republicans, most notably President Donald Trump, view the regulations associated with Dodd-Frank as increasing compliance costs for financial companies and making it harder to lend money and spur economic growth. Trump calls the law a “disaster.”
The replacement in the House has been authored by Texas Representative Jeb Hensarling, the chairman of the Financial Services Committee. At its core, the Financial Choice Act would give banks regulatory relief so long as they meet a strict basic requirement for the capital they build to cover unexpected big losses.
Federal regulators would also lose the power to dismantle a failing financial firm and sell off the pieces if they decide its collapse could endanger the system. The legislation also paints a bull’s eye on the Consumer Financial Protection Bureau, which gained powers to scrutinize the practices of virtually any business selling financial products and services, such as credit card companies, payday lenders, mortgage servicers and debt collectors. Hensarling’s bill would eliminate those powers.
It would allow the president to remove the CFPB director at will, without needing a specific cause. Hensarling is backing off one provision, though, in the face of Republican division: He has promised to pull a provision that eliminates the cap on fees that banks can charge retailers when customers use a debit card.
What people are saying about the bill
House Republicans frequently speak about the need for economic growth.
“This is the Republican plan to reform Wall Street and revitalize Main Street — all while protecting the financial futures of Americans,” House Speaker Paul Ryan, a Wisconsin Republican, said in a statement Monday.
No Democratic lawmaker voted for the bill when it was approved by the Financial Services Committee, saying it would allow a return to the kind of risky practices that crashed the economy nearly 10 years ago.
“It’s an invitation for another Great Recession, or worse,” said Representative Maxine Waters of California, the ranking Democratic member of the committee.
While the bill is expected to pass the House, its prospects are uncertain in the Senate, where Democrats have the votes to block it.