There are two ways to judge the Dodd-Frank financial reform bill that will be signed into law. One way is through a solely political prism. From that standpoint any bill passed is a stunning success. The Obama Administration can now put another accomplishment notch on the handle of its six-gun.
Another way is from a purely pragmatic point of view. Had the measures in Dodd-Frank been in place in 2007 would it have prevented the financial crisis? Since the crisis seems to have been caused by borrowers taking on excessive debt, lenders taking on excessive risk, and the failure of any of a handful of financial institutions posing unacceptable risk to the entire financial system, the answer would appear to be no. Dodd-Frank does little if anything about any of these matters.
I’ve been trying very hard to find a positive review of Dodds-Frank from a pragmatic basis and I’ve finally found one. Mish Shedlock writes:
Medical reform not only accomplished nothing, it actually made matters substantially worse.
In sharp contrast to medical reform, I cannot come up with any financial reform provisions that make matters substantially worse.
Given the absolute best we could ever expect out of a major piece of legislation supported and promoted by Obama is nothing, and given that nothing was accomplished with no major detriments making matters much worse, the financial reform bill must be considered a stunning success.
Indeed, we should all be thrilled by it.
I’m an agnostic on the bill. To my untutored eye the bill appears to put even more emphasis on regulators doing something (unspecified) to prevent a future crisis. I’ve seen the bill characterized as the “Full Employment for Financial Regulators Bill”. As such it would appear to kick the can on financial reform down the road.
Since that’s essentially what healthcare reform did, at least on cost control, I think we can see a pattern emerging.
The problem is, even sans legislation we will probably go happily on our way without another financial crisis for another 30 years since it takes about that long to forget lessons learned from the last one. The only difference now is over the next 30 years, financial lobbyists will quietly whittle away at whatever protections might exist in the current bill and we’ll still have one anyway. Even perfect legislation now will seem overly cautious and silly 1-5 years before the next financial crisis.
Dave,
Agreed that this legislation wont prevent further financial crises.
steve,
Disagree that we will go 30 years. We might, but I think we’ll have something sooner than later. After all, we had a near crisis in the 1990s with LTCM. Now we are going to enshrine as formal policy the “bail out/ bail in” approaches that have been used recently and with LTCM. It has a serious moral hazard issue which if anything might actually make a crisis more likely not less.
After all, if a group of creditors go to the government and say, “We’ve got $150 billion at risk and if we lose it it could cuase a system wide crisis like 2008….” You really think they are going to take much if any hair cut? If so, let me tell you about this piece of land I have in Malibu I want to sell to you for a very reasonable price, just give me your bank account details…..
You see there really are few protections in the legislation. There are no assurances that reckless creditors will have to face at least some form of consequences to their actions. Yes, they talk about liquidation of financial firms, but that isn’t the issue. The issue is the creditors behind those institutions. Leaving them holding the bag is what scare the Bajesus out of policy makers.
This bill does exactly what it is supposed to do. In fact, I’m stunned at how effective TARP and ARRA and the heath “care” bill and so forth have been. That is, if you assume that the purpose of these bills is to transfer money and power from private actors, empower the handmaidens of ever-more-expansionist government, and create dependency on government handouts among the vast majority of Americans.
“After all, we had a near crisis in the 1990s with LTCM. Now we are going to enshrine as formal policy the “bail out/ bail in†approaches that have been used recently and with LTCM.”
Which part of finreg are you thinking about? Yes, it is open to debate whether they will actually use their new resolution authority. Before this bill, there was no doubt whatsoever.
“You see there really are few protections in the legislation. There are no assurances that reckless creditors will have to face at least some form of consequences to their actions.”
Did they change the final bill? The proposed legislation required a new board of directors, new management and the failing bank was to be broken up and sold off.
Steve