U.S. home-mortgage rates, although up slightly since midyear, remain extremely low. The current rates advertised by private banks and lenders reflect a subsidy of several percentage points above where a hypothetical private market investor would lend. And Dodd-Frank leaves the federal monopoly on mortgage finance virtually untouched.

Unfortunately, Dodd-Frank does not address the financial crisis at its core. Under the law, lenders are encouraged to originate “qualified mortgages.” These low-risk loans include those backed by the FHA and the VA, conventional loans bought by Fannie Mae and Freddie Mac, and some “portfolio” loans, which are mortgages that lenders originate and then keep. But qualified mortgages exclude many of the mortgage-loan options that have been available in the past. The terrible irony of Dodd-Frank is that it seeks to address the misdeeds of Washington and Wall Street by reducing the availability of credit for American consumers at both ends of the credit spectrum.

Blue-chip “jumbo” borrowers whose loans are too large for the agency market are discriminated against by Dodd-Frank, an illustration of the mindlessness of the reform legislation. And Dodd-Frank doesn’t just affect borrowers at the top of the marketplace. The qualified-mortgage guidelines limit points and fees to 3 percent of the amount being financed and prohibit prepayment penalties that protect lenders from refinancing in the first three years of a loan. But such a stiff standard will lock many borrowers with weaker credit out of the market. That certainly won’t expand local real-estate sales or maintain home values. Qualified mortgages, according to the CFPB, “generally require that the borrower’s monthly debt, including the mortgage, isn’t more than 43 percent of the borrower’s monthly pre-tax income.” Unfortunately, the 43 percent debt-to-income standard and other rules imposed by Dodd-Frank leave many potential home buyers without financing. Instead, American families will be locked into renting homes at a cumulative cost far above that required to buy the very same dwelling. Is this what Chris Dodd and Barney Frank mean when they talk about helping American families?

IN A SIGN of the continuing agitation in Congress over the largest banks, Democratic senator Elizabeth Warren of Massachusetts and Arizona’s Republican senator John McCain have introduced legislation to separate commercial and investment banking in the mold of the Depression-era Glass-Steagall law. The proposal is mostly a political exercise since the legislation has little chance of approval, but it is important because the political attraction of assailing the largest banks has not diminished even five years after the onset of the subprime crisis.

The most interesting thing about McCain-Warren is that it would complete the evolution only partly accomplished in Dodd-Frank by the Volcker Rule, named after former Federal Reserve chairman Paul Volcker, who pursued draconian anti-inflation policies in the late 1970s and early 1980s. Specifically, the McCain-Warren legislation would separate securities underwriting and trading from banking, and allow large dealers such as Merrill Lynch and Morgan Stanley to trade once again for their own account. The Volcker Rule’s limits on trading activities of banks for their own account do not address the causes of the subprime crisis, but they do sequester bank capital from the financial markets, reducing liquidity in many types of debt and equity securities.

It is no small irony that the Volcker Rule could be the cause of the next financial crisis by limiting the ability of banks to provide liquidity to financial markets, as was the case this past June when Fed chairman Ben Bernanke began to signal an end to easy-money policies. Ultimately we need to either repeal the Volcker Rule or move forward with something like a Glass-Steagall-type legal separation of banking from investment activities to release this capital. In the latter case, “narrow banks” would function as depositories, lenders and fiduciaries, and they would become clients of the investment banks. The investment banks would need substantial balance sheets to operate outside the umbrella of “too big to fail.” But this would be a big improvement over the current—and very dangerous—situation created by the half measure of the Volcker Rule within Dodd-Frank.

The fact that members of Congress such as Warren and McCain, among others, still feel the need to push for a separation of the securities and banking arms of the largest universal banks speaks volumes about the unfinished nature of the debate surrounding the Dodd-Frank legislation. Bashing the big banks remains good politics, even if chances of actually passing legislation to split up those banks are very thin. Besides, when members of Congress bash the big banks, the banks and their surrogates write ever more checks to fill campaign war chests.

In the next several years, the full negative impact of Dodd-Frank on the U.S. economy, and particularly its housing sector, will likely become apparent. Then the emphasis on higher capital in banks will be replaced by a desire for stronger growth and more jobs. One of the key targets for such counterreformation will be the CFPB, the Calvinist instrument of righteousness of Senator Warren, which has greatly reduced the availability of credit to American consumers. The intentions of Warren and others may be noble, but their efforts to regulate the U.S. financial markets are almost certainly doomed to failure. But even as Congress seeks to repair some of the deficiencies of the Dodd-Frank bill, it will surely remain oblivious to the real relationships between finance, markets and capital. If history, as Edward Gibbon recorded in The Decline and Fall of the Roman Empire, consists of the “crimes, follies, and misfortunes of mankind,” then the congressional record on financial regulation does little to dispel his gloomy verdict.

Christopher Whalen is a writer and investment banker who lives in New York City. He is the author of Inflated: How Money and Debt Built the American Dream (Wiley, 2010).

Image: Flickr/401(K)2012/2013. CC BY-SA 2.0.

Image: Pullquote: The terrible irony of Dodd-Frank is that it seeks to address the misdeeds of Washington and Wall Street by reducing the availability of credit for American consumers at both ends of the credit spectrum.Essay Types: Essay