Why Republicans hate the Federal Reserve Board and Dodd-Frank

Janet Yellen

In my Examiner column, last week, I reported on Federal Reserve Board Chair Janet Yellen’s appearance before the Senate and the House in their respective finance committees, the Senate Banking Committee  and the House Financial Services Committee, and that while she received a warm reception in the Senate she was roasted in the House. First up was her rough treatment by the House chair, Rep. Jeb Hensarling who asked several sharp questions regarding accountability and leadership structure, at the Board, which could be readily summed up as condescending.

The real fireworks came from Rep. Sean Duffy (R-Wisc.) who yelled at her that she had blocked an investigation into what seemed to be a questionable meeting with a firm that sells analysis and reporting to investors. The result was an anxious public, perhaps wondering at the reason for the ferocity of these attacks.

Before I discuss their twin ire at the Dodd-Frank act, here is some background from New York Magazine in 2011, on why Republicans seem to see the Federal Reserve Board as hell on earth. Earlier that year, a request was sent by leading Republicans requesting that the Board not intervene in giving Americans sorely needed jobs, and as the article noted: “now that the GOP has made it all but impossible for fiscal policy to be used to improve the economy, they want to make sure that the only other tool the government has at its disposal — monetary policy — isn't used either.”

Much of what has been a Republican juggernaut against the use of monetary policy has been directed at the actions, and structure of the board, but now even most pointedly at the Dodd Frank Act, which they revile as much as the ill-named Obamacare, formally known as “The Affordable Care Act”, which has given subsidies, and exchanges for health care, affecting millions of Americans.

But, let’s continue with more from New York Magazine, as they state, “The Republican letter claims that any reduction in interest rates would ‘harm the U.S. economy.”’ The trade-off in monetary policy is that faster growth could lead to higher inflation. Given rock-bottom inflation and sky-high unemployment, opting for growth right now seems like a no-brainer, but I concede that there is at least some theoretical, long-term inflation risk. The GOP's claim that reducing interest rates could harm short-term economic growth is silly.”

As hard is this is to believe, here’s a brief glance in the rear view mirror to inform you: It used to be liberal Democrats who attacked the Fed for caring more about low inflation than low unemployment, and while that is still true, by some so-called progressive economists, in the 1980s the Board was considered a conservative organization.

The tables have now turned and many of those Democrats and their heirs now view Fed bashing as an unfortunate byproduct of what many see as reactionary populism. By the the end of the century, ”the leaders of the Party were sophisticated folk who prided themselves on their willingness to refrain from ever criticizing the Fed. A 1999 Washington Post encomium to Robert Rubin described the outgoing Treasury Secretary, saying his key triumphs included refusing to “bash Greenspan and the Fed when they raised interest rates.”  This also spread to both parties who felt that even mild rebukes, such as that made by Steve Forbes, complaining about high interest rates and commodity prices, were too much.

Such was the change that great reverence was bestowed on the avuncular Alan Greenspan. Over time, Chairman Greenspan attained a political and cultural prestige that’s hard to fathom today. Not only did nobody in Congress question his decisions on monetary policy, they allowed — some say begged — him to lecture them on policy matters that lay entirely outside his purview.” And, after the great man had uttered his words, some called them obtuse utterings, “Democrats and Republicans were like children, arguing over which one Daddy Alan loved more.”

In the ensuing years, when the Greenspan halo became tarnished by the Great Recession, “Republicans opportunistically grasped onto previously marginal hard-money doctrines of cranks like Ron Paul — which, not coincidentally, gave them cover to choke off the last avenue of economic recovery, in turn offering them their best chance to return to power, continues the New York piece.

Chris Dodd and Barney Frank

Onto the Dodd-Frank act from 2010 that passed Congress with unanimous opposition from the Republicans,and who hate the act (designed to prevent the excesses and dangerous practices that led to the recession), as much as they despise Obamacare and for many of the same reasons: an unprecedented and unneeded power, or abuse of power, by the federal government, but most importantly an overreaction to the financial problems of 2008, and a burden to the business community.   

Sponsored by Senators Chris Dodd and Barney Frank the act was a creation of the Obama administration to help prevent the practices, missteps and dangerous precedents, such as derivatives, which were  part of parcel of the economic debacle.  Specifically, it was designed to monitor risky financial systems, limit trading by banks that hold considerable reserves, provide new regulations for derivative trading, and protect consumers - but most of all prevent another financial crisis.

The most salient of criticism by the Republican is that the act over constrains the financial system with its myriad of regulations. The result, from the opposition, has been a partial implementation with many delays, and by 2013 only 40 of the 400 provisions were actually finalize

"The truth is Dodd-Frank was not chiseled in stone. Nobody brought it down to us from Mt. Sinai," said House Financial Services Committee Chairman Jeb Hensarling (R-Texas), who is leading the effort to change the law.

Some critics say that the act does not go far enough to protect the public, especially where some banks are seen as “too big to fail,”  but their voices are drowned out by the aforementioned critics.

One step forward has been the Volcker Rule which is designed to prohibit banks from trading from their own portfolio and limit the ownership of risky investments; it is a centerpiece of the act, but in January House Republicans forced a 2 year delay, which also had the support of 29 Democrats. The move was defended by lawmaker Rep. Michael Fitzpatrick (R-Pa)  who felt that this was “a smart technical reform,” for an “overly burdensome law.”

All of this came together, in anger and partisanship, when Yellen made her twice required appearances on the Hill, to address lawmakers. While she seemed to have the quiet resolve of a matriarch, the future of protection for American consumers and for the world beyond our shores, because we, as a nation, cannot afford, or sustain another financial debacle.