Over the course of the 2007-2009 Great Recession, over 1.2 million Americans were removed from their homes (Schoen). In an attempt to prevent this many families from being displaced, the Senate passed the Dodd-Frank bill (DFA). This bill adapted many laws and regulations in order to ensure a safer economy for all. But just a month ago, the Senate rolled back many of the key points of the bill, putting millions of Americans at risk of losing their homes and gaining debt again. The Senate needs to pass a bill that reinforces the main principles of the Dodd-Frank bill to ensure that there won't be another economic crisis.
The Dodd-Frank bill is a way to ensure the economic safety of American citizens. The Dodd-Frank was incredibly necessary at the time and gained lots of support because the Senate believed ““that it would help the United States avoid future financial crises by creating new bureaucracies to fill regulatory gaps purportedly responsible for the crisis in 2008” (Twight). The Senate was able to come together on the bill because they knew that it would help in preventing future crises, and worked for a long time ensuring that the bill covered every topic that they wanted it to. The purpose of the Dodd-Frank bill was to change financial regulations and systems throughout the US. This change was very necessary as “the financial crisis of 2007-2008 forced U.S. President Barack Obama and his administration to reconcile with the need to “re-regulate” the financial markets“ (Gruskin). Although the Obama Administration’s hand was forced by the financial crisis, these changes to regulations were very necessary for our nation’s economy.
Lately, the Senate seems to think that these Dodd-Frank regulations are not all that necessary. There have been talks about replacing the bill altogether, and the Senate even “passed bipartisan legislation Wednesday designed to ease bank rules that were enacted to prevent a relapse of the 2008 financial crisis that caused millions of Americans to lose their jobs and homes. The Senate voted 67-31 for a bill from Republican Senator Mike Crapo of Idaho that would dial back portions of…Dodd-Frank” (Freking). In this day and age, it is very unusual to see any bipartisan progress. However, they chose to come together on repealing parts of the DFA, the bill that is protecting our economy from a crisis. Previous to the legislation, the Dodd-Frank had a fair share of criticism, with economics Professor Allan Meltzer saying “Over Response to short-run events and neglect of longer-term consequences of its actions is one of the main errors that the Federal Reserve makes repeatedly“ (Meltzer). Although Meltzer claims that the Federal Reserve made an error when pushing for the Dodd-Frank bill, the DFA is very important for the preservation and safety of the economy.
One very important aspect of Dodd-Frank is the economic safeguards it contains. The main reason for the implementation of the Dodd-Frank bill was “the financial crisis of 2007–09 [which] started with a “bubble” in housing prices and was global in nature” (Richardson). The housing crash caused a period of recession, and the US was in desperate need of some major loan and interest regulation and law changes. One specific problem was the ease of borrowing. Banks were offering loans with low interest to customers with not so perfect credit, “the first narrative from analysts and academics focused on the low interest rate policy of the Federal Reserve in the years preceding the crisis and the global imbalance of payments due to the growth of emerging economies” (Richardson). The Federal Reserve dropped interest rates to the lowest they have ever been, resulting in lots of loans being given out. The problem with this is that a consumer may think that he can afford something bigger because of the low interest, but down the line realizes that he cannot, faulting on his loan and leaving the bank without their money. In the years leading up to the crisis, the amount of mortgages given out that were subprime rose by 11% (“The State”). A subprime mortgage is “a type of loan granted to individuals with poor credit scores…who, as a result of their deficient credit histories, would not be able to qualify for conventional mortgages” (Carther). The issue with subprime mortgages is the high interest rates applied to them. Since the loanees typically have poor credit scores, they are not used to handling large recurring payments and usually end up falling behind. Once loanees fell behind on payments, they usually end up having their homes foreclosed. There was a large increase in the amount of foreclosures and “lenders lost all of the money they had extended, and then some” (Carther). These conditions led to the need for regulation, “The economic theory of regulation is very clear. Regulate where there is a market failure. It is apparent that a major market failure in this crisis was the emergence of systemic risk” (Richardson). The aforementioned systemic risk is the idea that some businesses are too big to fail. If a financial institution is deemed “too big to fail” it means that its failure would cause bigger economic issues like causing companies heavily invested in the institution to fail as well, setting off a chain reaction of companies going bankrupt. As a result of this power that they have, the government supports them when they are at risk of failing. This is a big issue, seeing as during the recession, the government paid out nearly one trillion dollars to help bail out companies. While these bailouts preserved the lives of a large number of companies and financial institutions, it increased the amount of debt that the government was in, as well as the amount of debt US citizens were racking up.
Relating also to the government, an additional cause for the creation of the Dodd-Frank bill is political. One problem that surfaced leading up to the crisis was the “government ‘affordable-housing’ policies supporting home ownership despite borrowers’ low incomes and poor credit histories” (Twight). The problem here is that anyone and everyone was able to receive loans and mortgages for houses. Consumers who have struggled maintaining their credit scores in the past were now able to receive mortgages and purchase houses that they could not afford. This resulted in missed payments and foreclosures, with the homeownership rate dropping by nearly 5% (“The State”). This seemingly small change in homeownership resulted in over 7 million home foreclosures (Olick). Foreclosures are bad for everybody involved, leaving families without homes and leaving lenders at a loss of their money. The government was seeing heavy influxes of reports of homelessness and large amounts of debt. Affected citizens were calling for reform, so the government had to respond. The Senate pushed the DFA through to make sure that loanees with poor credit would not be tricked into high interest loans among other things. The DFA created many positive conditions for consumers, including safe mortgages and loans. A couple of examples include, “Highly risky loan products, like negative amortization mortgages, are now banned. Borrowers must document their employment and debt levels. Lenders must disclose all the costs involved in each loan, and, perhaps most important, lenders must verify a borrower's ability to repay the mortgage” (Olick). These regulation changes make taking loans a safer and more clear experience. First of all, the specific loan type that largely contributed to the financial crisis is now banned, among other risky mortgages. This means that there is not the slightest chance that a loanee will receive one of these dangerous loans, preventing all of the debt and bad credit that would result. This prevents sudden shortages in the housing market, which prevents price bubbles from happening. In addition, lenders may not have any hidden costs in the loan, preventing any surprises once loanees have already purchased a home and begin making payments. This means that loanees will know exactly how much money they will be paying, and they know they will be prepared for the bills that come. These regulation changes provide many benefits for consumers. It provides an easy, safe mortgage experience for all. The loaners will no longer be able to trap poor credit borrowers into high interest mortgages. Loanees will no longer be surprised with secret fees and higher interest than expected after buying a home.
Although the Dodd-Frank makes buying a home much safer for all Americans, there has been lots of opposition. Some of it has to do with Republican party funding, “One main factor, as ever, is the power of outside interest groups. ‘The housing-industrial complex continues to be a major player here,’ says Rep. Scott Garrett, R-N.J., who favors a purely private mortgage market. The complex includes Realtors, homebuilders, and mortgage bankers, whose businesses depend on federal support for the market” (Kaper). The idea of the quote is that outside interest groups are influencing the Republican party by donating money to them. This lobbying comes from groups of very rich individuals, and does not accurately reflect the average American’s wants and needs. The Republican party may have been heavily influenced to repeal certain parts of the Dodd-Frank, just based off of an influx of money. This seems to be a very poor reason to oppose the DFA, yet the Senate did vote to repeal some regulations from the bill. An additional point that comes from the opposition is that "The President and Democrats today gave financial regulators the power to create years' worth of financial uncertainty, which will only lead to more struggling businesses and fewer jobs" (“Repeal”). The idea that a bill that ensures safety in consumer activities can lead to years of financial uncertainty is absurd. The main purpose of the DFA is to prevent financial uncertainty among Americans. This is proved by the fact that the DFA banned high risk loans and had lenders disclose all costs of loans before agreement. Those two things alone help to make consumers certain of their decisions, knowing exactly what they are signing up for. As a result of this opposition, the Senate has voted to “Repeal portions of last year's Dodd-Frank Wall Street Reform and Consumer Protection Act, which has created hundreds of pending rules causing uncertainty and a halt in hiring for everyone from banks and credit unions to retailers and manufacturers that extend credit or hedge financial risks with derivatives” (Berlau). To begin, the Dodd-Frank was not cause for a halt in hiring. Many banks and credit unions lost money during the financial crisis, and as a result needed to reassess their spending. Banks most likely stopped hiring new employees as often for financial reasons caused by the Great Recession.
As a result of the Great Recession and the housing market crash in 2008, the country needed some financial reform. This change came in the form of the Dodd-Frank, a bill set on providing a safe environment for American consumers and future homeowners. However, the Senate recently voted to repeal many regulations put in place by the DFA. These regulations need to be reinforced and put back into place.