Dodd-Frank Flaws, Continued Failures Explained
Although the Dodd-Frank Wall Street Reform and Consumer Protection Act is nearing its three-year anniversary, its effects are still not known. It remains a work in progress, as many of its rules have not been written. To make matters worse, federal regulators, given broad discretion under the Act, have missed deadlines for rules even though the law orders progress reports.
This assessment comes from author and editor Hester Peirce, who recently discussed her book Dodd-Frank: What It Does and Why It's Flawed, as part of The Heartland Institute’s author luncheon series at Heartland's headquarters in Chicago. The Heartland Institute publishes Finance, Insurance & Real Estate News.
Peirce is a senior research fellow at the Mercatus Center at George Mason University and was on the staff of the U.S. Senate Banking Committee during the drafting of the Dodd-Frank Act, which was signed into law by President Barack Obama on July 21, 2010.
The Dodd-Frank Act was formulated as a solution to the financial crisis of 2008. Dodd-Frank was meant to promote financial stability by improving accountability and transparency in the financial system, end bailouts of "too big to fail" financial institutions, and protect consumers from abusive financial services practices.
Crafted in Haste
A Financial Inquiry Commission was appointed to work solo under what Peirce said was the faulty assumption that regulators could determine problems and solutions even before the existing financial problems had been accurately ascertained. She said it is not surprising that a massive regulatory bill crafted in haste (only six months) would have given rise to a whole new set of problems. Many items that were added at the last minute would have received much greater scrutiny in other situations.
Some of the provisions included in Dodd-Frank had nothing to do with the crisis, such as the "Durbin amendment" that sets price controls on debit card fees banks may charge merchants.
The Act was influenced by persons who espouse progressive socialism, Peirce said, a political ideology embraced by President Obama. An attendee at the Heartland event suggested Dodd-Frank amounts to a jobs act for the progressive socialist movement.
Embrace of ‘Behavioral Economics’
Pierce said many of the rules in Dodd-Frank are rooted in "behavioral economics," which enjoys great popularity within the Obama administration and among Democratic legislators. Devotees of this approach look at the ways people make decisions and often dislike what they see, she said. Examples of behavioral economics in the Obama administration include its push for “green” energy; the passage of Obamacare, to which rules are still being added; and promotion of the Common Core curriculum for schools. Illinois signed on without hesitation when Common Core was introduced in 2010, even before the Core programs were written.
Agencies set up to finalize, administer, and enforce Dodd-Frank include the Financial Stability Oversight Council (FSOC); the Consumer Financial Protection Bureau (CFPB); and the Office of Financial Research (OFR). The agencies are shielded from accountability to Congress, the president, and the American people, Pierce said. Decision-making is left to regulators; agencies many times are working at cross purposes, each going its own way in rule-making; there is little or no economic analysis being done to help with rule-making; and regulators give Congress a cold shoulder when information is requested.
The Dodd-Frank Act assumes the free market has not worked well and regulators must decide what people need and when firms should be shut down. Peirce noted Fannie Mae and Freddie Mac, government-sponsored mortgage entities that were at the heart of the housing crisis, were declared too big to fail and needed to be bailed out.
No Reform Effort
Despite Dodd-Frank, no attempt was made to reform either of them. Today both Fannie and Freddie are no better off than they were after their bailouts, Peirce said.
She said AIG, an international insurer that was also bailed out, was not too big to fail. Other insurance companies would have picked up AIG’s business. She also questioned how people in government decided what constituted a business that was too big to fail, as this amounted to intervention in the market.
The bailouts of banks and other large firms allowed a handful of big, government-favored companies to stay on the good side of regulators because of the "lifeblood" they received, Pierce said. This, in turn, fosters the possibility more attention will be given to pleasing regulators than customers.
In response to a questioner who asked Peirce what she thought about scrapping Dodd-Frank and reinstating the Glass-Steagall Banking Act of 1933—which, among other things, separated commercial from investment banking—Peirce answered "No."
Principles for Remedies
Instead, she suggested the following remedies to stabilize financial markets and improve accountability:
1. Remove government from decision-making in markets and providing business safety nets.
2. Get government out of housing.
3. Strive for easier and simpler business rules.
4. Embrace failure. Firms come and go. Markets will determine those that succeed or fail.
5. Make regulators accountable to Congress and the people.
6. Choice is necessary. People need to decide what the appropriate role of government is.
Nancy J. Thorner (firstname.lastname@example.org) is a blogger, writer, and Heartland Institute member from Lake Bluff, Ill.