Fed: News flash! Janet Yellen just submitted her resignation from the Fed. Well, not exactly. But based on her remarks about post-financial crisis regulation of the banking system, she might as well have.
XAutoplay: On | OffYellen, speaking at the Fed’s annual conference in Jackson Hole, Wyo., strongly defended the post-2008 financial crisis regulatory response and suggested that it had actually been a boon to the economy, rather than a bane.
“The balance of research suggests that the core reforms we have put in place have substantially boosted resilience without unduly limiting credit availability or economic growth,” Yellen told conference attendees.
More than one news outlet noted that Yellen’s views are starkly at odds with those of President Trump, who has repeatedly criticized the Dodd-Frank financial reforms for hurting small businesses and crimping credit. Given that Yellen’s time as Fed chair expires in February, her remarks may be tantamount to a resignation. Because she has sharply reduced the chances of being renamed to the post.
And, in truth, while there are many reasons to admire Yellen, both as a person and as an economist, she is wrong on this one, big time. Dodd-Frank has been an utter disaster for consumers, businesses and the overall economy.
Ordinarily, the U.S. economy comes screaming out of a sharp downturn such as the one that occurred in 2007-2008. This time, it didn’t happen. Since 2009, U.S. growth has averaged just 2%, a full third slower than its long-term average of 3%. Because of this slowdown, we’re missing about $2 trillion in GDP and about $1.4 trillion in personal income.
Why? It’s no coincidence that the worst expansion in modern history came after a Democratic Congress in 2010 threw a wet blanket over the economy by the name of Dodd-Frank.
Small and midsize banks have been the main source of loans for small businesses, the main employers in America. In 2008, there were 8,345 small banks in the U.S. They made $388.8 billion in small business loans that year. By last year, there were only 5,954 small banks, lending just $308.4 billion. That’s 2,400 banks gone, largely due to Big Bank-friendly regulations such as too-big-to-fail put in place under Obama’s reforms.
The disappearance of community banks, “along with the regulatory burden of Dodd-Frank on surviving small institutions, coincides with a 21% decline in community bank small business lending,” wrote American Enterprise Institute resident scholar Paul H. Kupiec earlier this year.
Meanwhile, the lending rules in place that encouraged big banks to make more and more bad loans to uncreditworthy borrowers, and then to offload the risk of those bad loans onto taxpayers — the true cause of the financial crisis and subsequent meltdown — are still in place.
When interest rates eventually rise, as they someday inevitably will, look for another crisis as millions of people find they suddenly can’t afford their mortgage payments.
The Fed should never have put itself behind this awful inept regulatory regime. By supporting it, sorry to say, Yellen probably sealed her fate as a Fed one-termer.
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