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Dodd-Frank: Accretion of Power, Illusion of Reform

September 20, 2015
By Charlotte Twight

This paper, written by Boise State University economics professor Charlotte Twight, examines how lawmakers used political theory to increase the difficulty of fixing problems with the Dodd–Frank Wall Street Reform and Consumer Protection Act (DFA).

for sale sign

This paper, written by Boise State University economics professor Charlotte Twight, examines the Dodd–Frank Wall Street Reform and Consumer Protection Act, referred to as “Dodd-Frank” or the “Dodd-Frank Act” (DFA), and how lawmakers used political theory to increase the difficulty of reforming DFA to correct or undo government power grabs.

Twight writes that government-sponsored enterprises, (GSEs) a form of government economic manipulation, helped create the problem government later sought to solve with later power accretion actions.

“Beginning in 1992, the GSEs—whose original purpose was to provide liquidity to mortgage markets by purchasing and securitizing mortgages issued by savings and loan associations, banks, and other depository institutions—were required to purchase risky subprime or Alt-A loans in ever-increasing percentages to support federal ‘affordable-housing’ policies,” Twight wrote. “Banking institutions also had to comply with affordable-housing mandates via nonprime lending or be denied such things as the right to merge or open new branches. With pressure to issue ever more subprime loans, subprime mortgage-lending standards plunged in terms of down payment, income requirements and credit history—the mainstays of sound mortgage lending. Further, GSE securitization of nonprime loans of varying and unascertainable quality built unprecedented risk into the mortgage-backed securities market.”

Twight writes that lawmakers used vague and misleading language to make future attempts to undo their power grab difficult.

“The DFA’s authors wrapped each of their new bureaucratic creations in the language of arbitrary power, using statutory words and phrases that sound appealing but establish few objective limits on powers granted to the new regulatory entities,” Twight wrote. “The very names of the new entities embrace language designed to hinder resistance to them. Congress promoted the DFA as a means to achieve ‘Wall Street reform and consumer protection.’ Vast discretionary powers wielded by the FSOC were labeled matters of ‘financial stability oversight.’ Unprecedented powers conferred upon the CFPB were wrapped in the mantle of ‘consumer financial protection.’ With the act’s objectives thus framed in benign-sounding generalities, non-specialists easily overlook the absence of objective statutory limits on bureaucrats’ actions authorized under these banners. Indeed, that is the purpose of such language.”