It’s easy to forget, but the Tea Party emerged not in response to ObamaCare, nor illegal immigration, but to the aftermath of the 2008 financial crisis. So why is it that the Tea Party’s Republican allies have been mostly silent on the issue of Wall Street reform?
(DISCLOSURE: I am an adviser to former Texas Gov. Rick Perry, but the opinions in this post are mine, and do not necessarily correspond to those of Gov. Perry.)
In 2009 the Obama Administration had considered forcing banks to offer borrowers more lenient terms than the ones to which they had originally agreed, as a way of helping overleveraged homeowners. CNBC’s Rick Santelli famously asked, “This is America! How many of you people want to pay for your neighbor’s mortgage that has an extra bathroom and can’t pay their bills? Raise their hand…We’re thinking of having a Chicago Tea Party in July…I’m gonna start organizing.”
Average Americans of both parties hated the Wall Street bailouts. They resented the fact they were being forced to suffer through a difficult economy, with no recourse, while banks with hundreds of billions of dollars in capital received taxpayer-funded relief.
A narrative set in—fueled by a liberal media, Democratic victories and Republican quietude—that greedy bankers took advantage of an unregulated financial system to cause the financial crisis. As a result, the primary catalysts of the crisis—Washington policymakers—were let off the hook.
Former congressman Barney Frank (D., Mass.) famously declared that he wanted to “roll the dice” in favor of looser mortgage standards. Representative Frank and former senator Chris Dodd (D., Conn.) not only helped create the housing bubble but also lent their names to a bill officially known as the “Dodd-Frank Wall Street Reform and Consumer Protection Act.”
Dodd-Frank has hardly solved the problem of banks that are too big to fail. Since the financial crisis, one in four community banks—nearly 2,000 of them—have closed their doors. Meanwhile, the banks that were supposedly too big to fail in 2008 have only gotten bigger. So how big will the bailouts need to be during the next crisis?
Furthermore, Dodd-Frank didn’t address the proximate cause of the financial crisis: the housing bubble. Indeed, the Federal Reserve has created a new bubble by keeping interest rates too low for too long. Fannie Mae and Freddie Mac have reduced their down payment requirements to a mere 3%.
One of the most under appreciated—and important—causes of the housing bubble was a boom in cash-out mortgage refinancings. As prices went up, individuals could convert the equity in their homes into borrowed cash—along with low, tax-free interest payments. Cash-out refis inflated mortgage demand and made it more likely that borrowers took out loans at the top of the market.
According to a 2013 study by the Dallas Fed, Texas avoided the worst of the housing bubble, because it regulates cash-out refinancings. Fewer Texans borrowed at the top, and fewer were underwater when the bubble burst. The national share of underwater first mortgages peaked at 27% in the U.S. in 2011, compared to just 7% in Texas.
New leadership can address these issues. Former Texas governor Rick Perry has proposed incentivizing the largest banks to break up into smaller entities, by applying stricter capital requirements to them. He would exempt community banks, banks run as partnerships and asset management firms from Dodd-Frank’s onerous regulations. And he has proposed winding down Fannie and Freddie, but applying his state’s cash-out refi regulations to them in the meantime.
So far, no one else in the Republican field has advanced specific Wall Street reforms. A number of candidates have expressed their desire to repeal Dodd-Frank, but few have described how they would replace the misguided policies that led to the financial crisis in the first place.
It would be great to see the 2016 GOP field engage in a robust debate about how best to end the era of bailouts and crony capitalism. If that debate doesn’t happen, Republicans will have only themselves to blame for the result.
This piece originally appeared in Forbes