Dodd-Frank’s Problems — and Potential Solutions

[Geee]

National Review:

 

Over the next year, we will probably see much controversy over the implementation of Obamacare. Health insurance is something that almost every adult has some acquaintance with, and there seem to be glitches aplenty in the legislation, much delay in issuing regulations, and some possible changes resulting from litigation.

We’re likely to see or hear less about the operations of the Dodd-Frank financial-regulation legislation, passed four months after Obamacare. Most of us don’t work at banks or financial institutions, which will have to grapple with its myriad provisions and the regulations to be issued thereunder, and we tend to toss out those disclosure forms our bank sends.

But Dodd-Frank may produce more problems than it solves. That is the thesis of David Skeel, professor at the University of Pennsylvania Law School, in his new book, The New Financial Deal: Understanding the Dodd-Frank Act and Its (Unintended) Consequences.

Skeel does not find fault in Dodd-Frank’s effort to regulate derivatives — contracts in which one party agrees to pay another in case of changes in interest rates, currency-exchange rates, oil prices, or just about anything else — with provisions encouraging them to be conducted through clearinghouses.

Derivatives were an obvious target for regulation, since it was derivatives based on the value of mortgage-backed securities that did much to trigger the collapse of Lehman Brothers and AIG in 2008. Skeel calls these Dodd-Frank derivative provisions “an unequivocal advance.”

But he sees serious problems in what he describes as the two themes that emerge from the law’s 2,319 pages: “(1) government partnership with the largest financial institutions and (2) ad hoc interventions by regulators rather than a more predictable, rule-based response to crises.”

The prime mover behind these policies, he argues, was Treasury secretary Timothy Geithner, who as a junior Treasury official played a role in the bailout packages for the Mexican peso in 1994–95 and the hedge fund Long Term Capital Management in 1998. They’re his models for future regulation.

As president of the New York Federal Reserve, he played a key role in fashioning responses to the financial crises of 2008. Dodd-Frank, Skeel argues, was written to give regulators powers they felt they lacked when they allowed Lehman Brothers to go into bankruptcy in September 2008.

Lehman’s collapse, followed by the Bush administration’s demand for the $700 billion TARP legislation — and especially the House’s initial rejection of TARP (reversed four days later) — led to staggering losses first in the stock market and then in the economy at large.