Corporate-sponsored groups have launched a campaign of litigation in the lower federal courts challenging the legality of the second major piece of President Obama’s legislative program: the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. When these cases reach the Supreme Court, we could very well see a reprise of the drama surrounding its decision on the Affordable Care Act at the end of this past term.
As was true of the ACA, a Democratic-controlled Congress passed Dodd-Frank over almost universal Republican opposition, including a Senate filibuster. Unlike the ACA, however, Dodd-Frank—while monumental in its regulatory scope—was enacted with relatively little fanfare or controversy among the general public. The statute’s essential purpose is to prevent the kind of reckless and wholly unregulated financial shenanigans that led to the 2008 financial meltdown.
While Dodd-Frank may not be as well-known or as controversial as the ACA, the public is certainly aware that highly speculative and undercapitalized betting on the success of subprime mortgages by the “too big to fail” banks caused the crisis, and that when those banks couldn’t pay off their bets, the American taxpayer was called on as the lender of last resort, to the tune of trillions of dollars. Those banks survived and prospered, but the US economy as a whole did not.
Even though the Second Great Depression was prevented by taxpayer bailouts, the pain to those taxpayers was dire. In the financial meltdown’s immediate wake, $19 trillion of household wealth was lost, 8.7 million jobs disappeared, and 6.3 million more Americans sank below the poverty line.
The Dodd-Frank Act has been hailed by most financial market reformers as a way to provide the regulatory weapons to stop these opaque, reckless and undercapitalized casino operations by the big banks. Unfortunately, unlike key provisions of the ACA, Dodd-Frank is not self-executing; almost all of its provisions must be implemented by agency rule-making done in compliance with the rigorous standards dictated by the Administrative Procedure Act.
For example, Dodd-Frank requires the Commodity Futures Trading Commission for the first time to police the previously unregulated and highly toxic derivatives market, which has a notional value of $300 trillion. That includes the now infamous multitrillion-dollar “naked” credit default swaps market, in which the big banks bet on whether the subprime mortgages held by low-income borrowers whose houses were financially underwater would be paid off. The CFTC must implement by year’s end well more than fifty rules consistent with both Dodd-Frank and the Administrative Procedure Act to put itself in a position to stabilize these “too big to fail” gambling ventures.
Having failed to block the passage of Dodd-Frank, the Republicans, who now control the House of Representatives, have aggressively sought to repeal the act or, failing that, to starve the regulators financially so that they cannot enforce the law. Also prominent in this strategy is the flood of lawsuits in federal courts challenging the Dodd-Frank rules by claiming that regulators have used improper cost-benefit analyses.
As interpreted by every administration since President Reagan’s, cost-benefit analysis has entailed a pseudo-scientific algorithmic “test” that foregrounds the costs of business compliance with a given regulation and minimizes its social and economic benefits. Moreover, Wall Street’s champions argue that such cost-benefit analyses may be applied only prospectively, meaning that the trillions of dollars in costs that taxpayers have already borne because of a lack of regulation will never be considered.