Dodd-Frank: Two Years Later, Countless Questions Remain

[Valin]

Real Clear Policy:

 

Hester Peirce and James Broughel

7/21/12

 

Today marks two years since the passage of the largest piece of financial legislation since the New Deal: the Dodd-Frank Wall Street Reform and Consumer Protection Act. Because many of the rules to implement Dodd-Frank have yet to be written, and others have yet to take effect, the full impact of Dodd-Frank is highly uncertain. Given what we do know, however, it may do more to create future crises than to prevent them.

 

First, Dodd-Frank didn’t even attempt to reform the broken housing-finance system. The legislation simply ignored Fannie Mae and Freddie Mac, the flawed government-sponsored mortgage giants at the heart of the housing crisis. Why? The enormous influence that special interest groups such as realtors, homebuilders, housing advocates, and Wall Street firms wield in Washington made seriously tackling this issue politically dangerous. Despite their bravado, that was not a price the drafters of Dodd-Frank were willing to pay.

 

Second, Dodd-Frank not only failed to solve the problem of “too-big-to fail,” it institutionalized it. On the most basic level, Dodd-Frank, with its myriad regulatory complexities, gives big banks a competitive edge over their smaller rivals, who can’t afford the lawyers and compliance personnel the law necessitates.

 

Not only does Dodd-Frank make it tough for small banks to survive, but the law makes it hard for big financial institutions to fail. Dodd-Frank allows the regulators to decide which firms they can’t imagine living without. While there is a high price to pay for getting on the too-big-to-fail list -- more stringent regulation -- once you’re there, the regulators will be your best friends forever. After all, if you fail, it looks as if they’ve failed, right? So, with the additional regulatory burden comes an unspoken commitment that the Federal government (i.e. taxpayers) will step in to save these critically important firms and their creditors if there is trouble. Firms on the list will have an easier time borrowing money and finding business partners than their unimportant competitors.

 

(Snip)