Deregulating banks—or doing just about anything that suggests coziness with banks—has not exactly been a winning message in the wake of the 2008 financial crisis. But ten years later, a bipartisan bank deregulation bill that partly unravels Dodd-Frank is moving through the Senate with the support of every Republican and 17 Democrats.
What started off as an effort to relieve pressure on community banks and credit unions has morphed into a gift to the biggest banks in the country. Quite simply, if the bill passes, banks will get richer. The legislation raises the threshold that triggers increased oversight from the Federal Reserve from $50 billion in assets to $250 billion, freeing more than a dozen banks from stricter rules. It also exempts more banks from the Volcker Rule, which curbs their ability to make speculative bets with their own money, and reduces the amount of capital they need to keep on hand.
In exchange, a financial crisis will become more likely. The Congressional Budget Office reported that the probability of “systemically important” banks failing “is small under current law and would be slightly greater under the legislation.” The 17 Democrats who are supporting the bill have basically shrugged at this possibility, arguing that the bill is a boost for small banks, small businesses, and consumers.
Indeed, Dodd-Frank has caused headaches for some middle-class people who have struggled to secure a loan or a mortgage because of its strictures. But the deregulation bill goes well beyond technical fixes. Barney Frank, the since-retired Democrat who co-wrote Dodd-Frank, has said the threshold should be closer to $125 billion. (As many have noted, the systematically destructive Countrywide Financial had less than $250 billion in assets when it collapsed during the crisis.) As David Dayen has reported, mega-banks like Citigroup are eager to lift capital requirements so they can engage in more risk. There just aren’t many reasonable policy justifications for these generous provisions.
There aren’t a lot of political justifications either. In going along with a bill that fulfills a number of longstanding Republican priorities and very few Democratic ones, Democrats are displaying a profound incoherence heading into the midterm elections.
The 17 Democrats who voted for the bill to proceed on Tuesday are either centrists or facing reelection in states that Donald Trump won in 2016. They have defended the bill on the merits, arguing that it will free up credit in rural areas and that it’s an overdue fix for Dodd-Frank’s flaws. There is also a sense among Democrats that this may very well be the best deal they can get on Dodd-Frank reform. But it’s also clear that they’re supporting the bill for performative reasons, hoping to show voters back home that Congress can do more than just bicker and that Democrats are willing to work with Republicans to get things done. “This is old-school legislating,” North Dakota Democrat Heidi Heitkamp told Politico.
But it’s not old-school legislating, not really. If it were, Democrats would participate in a give-and-take with Republicans. There would be parts of the bill that they could point to as significant Democratic wins. But as it stands, the bill is a giveaway to the banking industry in which consumers get very little. Even though it may be easier for some consumers to get loans, that comes with the tradeoff of a weakened financial regulatory system and fewer consumer protections.
While the bill’s backers have highlighted a number of fig leaf protections—most notably the ability to temporarily freeze one’s credit for up to a year—these are overshadowed by the bill’s regulatory rollbacks, which disproportionately benefit banks and put consumers at risk. The bill, moreover, violates one of the key tenets of Dodd-Frank, according to the Center for American Progress: “regulating financial products not based merely on who offers them but on what the products do. For a homebuyer, the size of the originating bank should not determine whether he or she obtains a fair deal and a safe mortgage.”
The bill does not seriously address the recent Equifax data breach or the alarming deregulation efforts being pushed by the Consumer Financial Production Bureau—two areas where Democrats should be actively negotiating. In their eagerness to show voters that they’re not just obstructionists, Democrats have simply rolled over.
It’s not clear what, if any, political returns Democrats will gain from this. There are few signs, as Talmon Joseph Smith argued in The New Republic, that what voters really want is bipartisanship. Sure, they might complain about dysfunction in Washington, D.C., but the great lesson of Mitch McConnell’s tenure as Senate minority leader during the Obama era was that voters tend to punish the ruling party for that dysfunction. And even if there were appetite for bipartisanship, deregulating banks—banks!—is still broadly unpopular. So Democrats are risking another trap—the only time Congress works together to get anything done, it’s to help a bunch of banks that are raking in profits and don’t really need it. It doesn’t help matters that the Democrats supporting the bill receive lots of donations from those very banks.
Democrats faced a similar situation with immigration, all but abandoning the issue due to fears of how it would affect purple- and red-state Democrats. But a backlash on a pro-immigration strategy of legislative obstruction was a real possibility—a backlash on a pro-banking regulation strategy, less so. Furthermore, there is no constituency within the party (excluding the donor base, of course) that’s really pushing for banking reform. In fact, it’s the opposite: The party’s left is mobilizing against the bill, depicting the dismemberment of Dodd-Frank as the perfect symbol of the Democratic Party’s ties to finance and disregard for working-class people.
Granted, financial regulation just isn’t the hot-button issue that immigration is. Democrats can show a willingness to compromise without risking the kind of blowback they would receive if they worked with Republicans on health care or immigration. Another explanation for their behavior, of course, is that these Democrats actually believe that increasing the risk of another financial crisis is worth the reward to financial institutions.
Chuck Schumer, the Senate minority leader, has come out against the bill, but has done nothing to mount a filibuster. This positioning suggests that Schumer knows that the bill is politically unpopular and is giving himself plausible deniability when he’s asked about it the next time he goes on Meet The Press. But if Schumer really wanted to stop the bill, he could certainly do more—he could, for instance, mobilize his fellow Democrats against it or, at the very least, hold out for some concessions.
What’s so bewildering about all this is that blocking this bill would be politically valuable for Democrats. Deregulating banks at a time when the Republican president is constantly touting the economy’s performance is nonsensical. In the right hands, it could show just how beholden Republicans are to moneyed interests. After passing a $1.5 trillion tax cut package for corporations and the wealthy, Republicans are making it easier for banks to take on the kinds of risks that nearly destroyed the financial system. This bill could be a neat encapsulation of a corrupt administration and an out-of-touch Republican Party. Instead, it has become a totem of a feckless and incompetent Democratic Party.