An economic choke hold

Speaker: Dodd-Frank prevents small business from creating jobs

Author and scholar Peter Wallison connects the agonizingly slow eightyear recovery of the American economy to ill-conceived financial regulations imposed by the 2010 Dodd-Frank Act, which effectively chokes off credit to small business borrowers, particularly job-creating startups.

Wallison spoke before a sold-out audience of more than 200 people in the summer installment of the American Experiment’s quarterly series How liberal policies hurt the middle class, the poor, and minorities at the Minneapolis Marriott City Center.

Wallison holds the Arthur F. Burns chair in financial studies at the American Enterprise Institute, the Washington, D.C.-based think tank. He was White House Counsel to President Ronald Reagan and general counsel of the United States Department of Treasury.

His recent book, Hidden in Plain Sight: What Really Caused the World’s Worst Financial Crisis and Why It Could Happen Again, challenges the liberal notion that Dodd-Frank was necessitated after lax government oversight, excessive risk-taking and greed in the mortgage markets led to the Great Recession. He argues instead that the mortgage bubble was inflated when congressional meddling to expand affordable housing forced government underwriters to dramatically reduce their underwriting standards.

The Dodd-Frank Act has put the government in substantial control of most of our financial system: large banks, small business, non-bank financial institutions, housing, mortgage policies, insurance, insurance derivatives and consumer finance, he said. “That is why we have such slow growth.” Dodd-Frank is “the most restrictive financial regulatory legislation adopted by the government since the New Deal.”

Most vulnerable to the Dodd-Frank regulations are small banks, which are less equipped to bear the substantial compliance costs, Wallison said. “Small banks are not lending at the rate they used to. New community banks are not being formed,” he said, noting that U.S. regulators once registered about 100 new banks annually; last year there were three. “Some years there is one,” he added.

“If small banks aren’t lending, then small business is not getting the credit it needs, particularly startups, which are typically responsible for about 20 percent of new jobs in the U.S. economy.”

Startups, he said, don’t have the financial track records that the new era of Dodd-Frank’s one-size-fits-all examiners are looking for. The new compliance obligations have compelled banks to hire compliance officers in lieu of lending officers, “who used to facilitate growth.”

AEI’s Peter Wallison told a sold-out luncheon that the Dodd-Frank Act has put the government in substantial control of most of our financial system.