Last Thursday was the one-year anniversary of the signing of the Dodd-Frank bill. The Dodd-Frank bill was a regulatory overhaul of finance reform and regulations that, according to the bill, is supposed to "promote the financial stability of the United States by improving accountability and transparency in the financial system, to end 'too big to fail,' to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes." After a year of signing this bill into law, the question at the moment is whether the bill has brought more stability and security to our financial institutions.
I wanted to see what the Left had to say on the issue since they love regulating the economy so much. In typical NYT fashion, The New York Times said that the reason why Dodd-Frank hasn't been able to get off the ground is because the Republicans are blocking nominations of certain key posts at financial institutions. That might have to do with something that the bill was not bi-partisan and Mr. "I'm Going Reach Across the Aisle" Obama didn't help with transcending party lines, as if that were a shock. CNN also stuck up for Dodd-Frank. They pointed out the provisions that have already gone into effect, even though they pointed out that the Republicans are blocking funding efforts to get most of the initiatives going. I couldn't find anything from Left-leaning think tanks on the one-year anniversary, although I found an article from last March from the Center of American Progress. As those on the Left do, they blamed the recession on a lack of regulation, which is why they think Dodd-Frank is a good bill.
Even the Centrist think-tank Brookings Institute favored the bill. Since the bill is so complex, Brookings Institute fellow Douglas Elliot opines that we will have to wait another year for the benefits of the bill to fully take in effect.
Since I'm libertarian, it should be no surprise that I am not happy with the largest amount of financial regulation that this country has experienced since the Great Depression. The bill has done nothing to end "too big to fail," which was one of the primary goals of the bill. Larger banks normally have to pay more to borrow. But since the passage of Dodd-Frank, the large banks pay less because according to Section 204(d) of the bill, the FDIC can buy out the debt of the bank, which is another way of saying "bailout." If the bill gives the ability to bail out banks, I guess that banks are still "too big to fail."
Diane Katz from the Heritage Foundation points out a few reasons why this bill hasn't worked. The first is that the bill does not address the causes of the "Great Recession," mainly being that of Big Government having its hands in the housing market by creating regulatory incentives that distorted the market. The American Enterprise Institute (AEI) also concurs that it was government housing policies caused an unusually high number of risky loan practices that caused the housing bubble to burst. Secondly, much like with Obamacare, when you bite off more than you can chew, you will fail with trying to regulate so much. Plus, since when has excessive governmental regulation fixed anything? Third, the bill has done nothing to improve the state of the economy. As Katz emphasizes, "the unemployment rate stands at 9.2 percent. The budget deficit tops $1.3 trillion, and federal debt has hit the ceiling at $14 trillion. Consumer spending is tepid, wages are stagnant, and prices for energy and food are rising."
Even the Cato Institute found that Dodd-Frank did not mitigate much. According to Cato Institute Director Mark Calabria, the bill might have actually exacerbated the financial situation. Calabria outlines that Dodd-Frank has aggregated risk in the derivatives market, doubled the ceiling for insured bank deposits, and thereby doing what it essentially can to make sure that Big Banking doesn't fail. This bill has created uncertainty, which is part of why this recovery is lagging. It hasn't done anything to increase confidence in our financial institutions, which is why the University of Chicago's Financial Trust Index shows no discernible change in financial confidence.
I'll end this entry with Calabria's overall take on Dodd-Frank:
Credit is the lifeblood of an economy, facilitating both investment and consumption. While the economy faces several headwinds, the unavailability of credit is a major problem. Rather than fix our financial plumbing, Dodd-Frank has largely clogged up the channels of credit further. The new Consumer Financial Protection Bureau could likely represent a massive litigation risk for lending. The result is both a higher cost of credit for consumers and reduced availability. Hardly a recipe for economic recovery.
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