Most Americans are (understandably) focused on the unmitigated disaster otherwise known as Obamacare. But there’s another moronic mess that’s equally (if not more) at fault for holding back the economic recovery: The Dodd-Frank Wall Street Reform and Consumer Protection Act.
As you know, a viable banking sector is vital if we want to see sustained economic recovery.
To quickly grow the economy, businesses need capital. So, two years after the great liquidity crisis of 2008, Congress passed the bill to fix the problems they had created.
But now, three years after Barack Obama signed the bill, 60% of the Dodd-Frank implementation rules still haven’t been written.
And thanks to their stupidity, none of the problems Dodd-Frank was intended to solve have been fixed.
The Volker Rule is the perfect example.
Banks Should Get Back to Their Roots
The Volker Rule was central to Dodd-Frank. It was supposed to restrict U.S. banks from making certain speculative bets in their own trading accounts. In other words, it would ban proprietary trading by banks with government-insured deposits.
Makes sense, right?
After all, banks should be conservative institutions that are primarily meant to lend money to businesses and individuals. So securities firms that engage in speculative trading shouldn’t be housed inside institutions that hold government-insured deposits.
Of course, the Volker Rule hasn’t been implemented.
U.S. banks have only gotten bigger and – since the speculative trading hasn’t been curtailed – riskier.
Case in point: the so-called “London Whale” trading scandal at JP Morgan (JPM). In a matter of days, large bets by a single trader culminated in over $2 billion in losses.
Indeed, America still has banks that are “too big to fail.” And taxpayers are assuming the risks these banks take on in the securities and derivatives markets.
Steer Clear of Risky Banks
In the end, the only thing that’ll make investment firms smaller are rules that clearly indicate that unsecured creditors are at risk and will not be bailed out.
Deposits in a bank are unsecured; but because of insurance, no depositor takes the time to analyze the likelihood of getting repaid. They all believe the government will step in and bail them out, regardless of how much money their particular bank may lose.
But the dirty secret is that deposit insurance is running thin. As a result, the FDIC likely won’t have enough money to bail everyone out the next time a big crisis hits.
This is essentially what happened in Cyprus. And depositors ended up taking the loss.
Bottom line: Don’t be naïve. The government won’t be able to step in and bail you out during the next banking crisis. Think for yourself, and put your money in banks that don’t take these huge risks.
This article originally appeared at CapitolHillDaily.com and is reprinted here with permission.
Photo credit: SS&SS (Creative Commons)
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