The GOP v Dodd-Frank
Ever since Ronald Reagan beat
George HW Bush to the nomination in 1980 primaries, Republican campaigns have
run on the trusted platform of reduced government spending and lower taxes. So
it comes as no surprise that most of the debate concerning financial reform during
the current primary season has included wholesale calls to repeal the
Democrat-sponsored Dodd–Frank Wall Street Reform and Consumer Protection Act.
But once the rhetoric is
peeled away, it becomes much harder to pinpoint how exactly each candidate
would affect the regulation of financial markets in the US if they were to beat
Democratic incumbent Barack Obama in November. While a popular platform for
stump speeches, repealing Dodd-Frank would be no easy task.
“The truth is that the
Republicans are very unlikely to be able to repeal Dodd-Frank, since the
Democrats will just filibuster it in the Senate,” said Douglas J. Elliott, a
fellow at the Brookings Institution, a non-profit public policy organisation
based in Washington, DC.
To Elliott, the GOP’s universal
mantra of repealing Dodd-Frank is tantamount to trash talk.
“The real key will be what
lesser steps a Republican president might push to trim back Dodd-Frank,” said
Elliott. But at this point in the cycle, he said it was politically expedient
for all Republican candidates to assert they will fully repeal the act. “This
has the side-effect of giving us no clue about their ultimate actions.”
How would Mitt fit?
While former Massachusetts
Governor Mitt Romney has pledged to repeal Dodd-Frank, commentators admit pinning
down the candidate’s true intentions for financial reform is difficult because
of his background as both a moderate politician and a former private equity
In the lead-up to January’s
South Carolina primary, Romney – the co-founder of private equity house Bain
Capital – was asked during a televised debate what he would do if another bank
asked for a bailout. The then frontrunner said he would not give anyone a “blank
check”. Instead, he would push failing firms into bankruptcy.
But for a candidate billing
himself as the best man to take on Obama, Romney’s view of what to do if a bank
fails sounded curiously similar to the basic idea behind the Obama-endorsed Dodd-Frank
reforms, which aims to avoid ‘too big to fail’.
Mark A. Calabria, director of
financial regulation studies at DC-based independent think tank the Cato
Institute, said Romney’s support for the Emergency Economic Stabilisation Act 2008
that created the TARP bailout programme, could provide a firmer sense of how
the former private equity manager feels about bailouts.
“This economic crisis has
proven that government has an urgent obligation to address some awful abuses
we’ve seen in the financial sector, particularly in housing finance,” Romney
told a meeting of the Conservative Political Action Committee in February 2009.
“I know we didn’t all agree on TARP. I believe that it was necessary to prevent
a cascade of bank collapses.”
But Calabria warns against
counting on Romney to be soft on banks because of his 15 years in private
“Hedge fund and private
equity-types have a lot of contempt for investment banks,” said Calabria. “It’s
not clear to me what Romney thinks of the big banks but it probably isn’t
Calabria points out that apart
from former Utah Governor Jon Huntsman – who is now endorsing Romney after
dropping out of the race just before the South Carolina primary – the major GOP
candidates have been fairly silent on the particulars of bank reform.
Last October, Huntsman wrote
an editorial for the Wall Street Journal, likening Romney to Obama and faulting
the fellow Mormon as not proactive enough on America’s banking sector.
A new Newt?
Former Speaker of the House
Newt Gingrich is arguably the most conservative runner in the 2012 race, so it should
be a little easier to track the views of the man who recently said Senator
Chris Dodd and Representative Barney Frank should go to jail for drafting the
act which bears their names.
“Once we repeal Dodd-Frank,
we can begin to consider limited, responsible, pro-growth financial regulations
passed in a series of steps, with each one understood and passed on its own
merits,” says a policy statement on Gingrich’s campaign website. “We also must
absolutely ensure that failing financial institutions are not bailed out by the
Lately, Gingrich has espoused
a number of reasons for repealing the law – from insisting it so far has done
nothing to stop small banks going under, to a belief that junking Dodd-Frank
would boost the housing market. But like his fierce rival Romney, Gingrich has
avoided being pinned down on any details.
Gingrich is reportedly
receiving economic policy advice from a group of ‘supply-side economics’
proponents who believe the best way for the US to grow is dramatic tax cuts, less
regulation and a firm hold on monetary policy. The former Speaker of the House
would reduce corporate tax to 12.5% – a third of its current rate. In contrast,
Romney has surrounded himself with mainstream Republican economic advisers and
would only reduce corporate tax to 25%.
“All the candidates are all
over the map when it comes to banking that they go back and forth and flip-flop
on every issue,” said professor Helmut Norpoth of the State University of New
York (SUNY), Stony Brook. “With such erratic behaviour, I wouldn’t believe
anything they say right now.”
While at the front of the
nation’s mind, economic issues and a desire for regulating the banking industry
are extremely complex issues to grasp for average voters who may be out of work
and struggling with mortgage payments.
“All that the candidates can
say right now is that they will cut taxes, kick-start the housing market,
create jobs and stop bailouts,” said Norpoth. “This is very simple-minded and
designed to attract voters without putting any substance to policy. The winning
candidate will work out the finer points after they get the nomination.”
The GOP outsider
The dark horse of this current
cycle has once again been Texas Representative Ron Paul, who ran in 2008 and has
billed himself as a Republican outsider, threatening to run as an independent if
he does not receive the GOP ticket.
Ex-gynaecologist Paul claims
to be a visionary who predicted the financial crisis and the man with the plan
to solve it. The Paul Plan features conservative favourites such as cutting taxes
and the deficit and eliminating federal bureaucracy. Where Dr No differentiates
himself is his promise to reign in the Federal Reserve, which he claims was the
“culprit behind the economic crisis”.
“Its unchecked power to
create endless amounts of money out of thin air brought us the boom and bust
cycle and causes one financial bubble after another,” Paul said in a statement,
vowing to audit America’s central bank.
Paul not only wants to repeal
Dodd-Frank but also Sarbanes-Oxley, which since 2002 has set standards for
public company boards, management and accounting firms.
Earmarked for reform
Of Rick Santorum, the Cato
Institute’s Calabria said the former Pennsylvanian Senator is not necessarily a
small government fan. “Santorum is a Bush-style social conservative. While he
sees a role for intervention in the financial markets, he is far less likely to
take a strong position,” he said of the Senator who has been heavily criticised
for his support of legislative earmarks which direct funds to specific projects.
Like Paul, Santorum would repeal
the “burdensome” Sarbanes-Oxley as well as Dodd-Frank.
“Not only did [Sarbanes-Oxley]
not prevent the financial crisis, but it chased capital overseas,” Santorum
said last year. “At the same time, we must repeal Dodd-Frank before it can be
fully-implemented and start from scratch to enact real reform that ensures the
2008 financial crisis does not happen again but at the same time does not place
impediments in the way of capital formation and credit availability for average
Santorum believes together, the
two laws “enshrine ‘too big to fail’”.
It’s the majority, stupid
For Calabria, the fact that
Dodd-Frank is even on GOP candidates’ radars is a “pleasant surprise”. That all
candidates are incensed by the so-called Volcker rule – which bans prop trading
by deposit-taking institutions and is named after ex Fed chairman Paul Volcker –
is just as encouraging.
“That they’re all on board
with repealing Dodd-Frank is impressive,” said Calabria, nevertheless agreeing
that any repeal by Congress would be difficult, even for a Republican White
House and majority-controlled House of Representatives.
In November, when 33 of the
100 seats in the Democratic-held Senate will be contested, Calabria sees a 75%
chance the Senate will flip to a 52 or 53 Republican majority from its present
53 to 47 Democrat majority. He is also “90% certain” Republicans will keep the
House, currently held with a 51-seat majority. “But the numbers are close,”
Calabria said, asserting neither result would provide the Republicans with
enough seats to repeal Dodd-Frank, given some GOP senators would likely cross
the floor and vote against any repeal.
“You would expect a repeal to
pass the House but not the Senate,” Calabria said.
The question then becomes,
how would each candidate’s administration work with the Hill to reform banking
Calabria sees some hints of
how each administration would operate. “Romney would be working with a House
arguably more conservative than himself,” said Calabria, characterising the
former Massachusetts governor as a potentially reasonable caretaker but
questioning his ability to manage during times of crisis. “Romney, like Obama, would
likely let Congress write the details.”
While Gingrich also is not
one to dwell on the fine print, his time as Speaker of the House from 1995 to
1999, six years as minority whip and two decades as the Representative for Georgia’s
6th district, may give him the greatest advantage in dealing with Congress.
Whoever wins the Republican
ticket will be facing an incumbent with a low but climbing approval rating who
staunchly believes in his present economic reforms. According to Gallup, the president’s
approval rating is up to 44% after an all-time low of 38% in October. At last
week’s State of the Union address, Obama confirmed his commitment to banking
reform as a core strategy for improving the American economy and showed more
signs of campaigning in earnest for the presidential elections in November.
“I will not go back to the
days when Wall Street was allowed to play by its own set of rules,” said Obama.
“So if you’re a big bank or financial institution, you are no longer allowed to
make risky bets with your customers’ deposits.”