The National Pastime

by Dave Schuler on July 21, 2014

Today seems to be “National Pick on Dodd-Frank Day”. Perhaps it should be added to the list of federal holidays. The editors of Bloomberg get the ball rolling with the complaint that Dodd-Frank isn’t doing anything:

Four years after President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law, polling suggests that most Americans think it hasn’t done enough to protect them from a repeat of the 2008 financial crisis, a disaster from which the global economy has yet to fully recover.

Unfortunately, they’re right.

while Peter Wallison whinges that it’s doing far too much:

When the Dodd-Frank Wall Street Reform and Consumer Protection Act took effect on July 21, 2010, it immediately caused a sharp partisan division. This staggeringly large legislation—2,300 pages—passed the House without a single Republican vote and received only three GOP votes in the Senate. Republicans saw the bill as ObamaCare for the financial system, a vast and unnecessary expansion of the regulatory state.

Four years later, Dodd-Frank’s pernicious effects have shown that the law’s critics were, if anything, too kind. Dodd-Frank has already overwhelmed the regulatory system, stifled the financial industry and impaired economic growth.

According to the law firm Davis, Polk & Wardell’s progress report, Dodd-Frank is severely taxing the regulatory agencies that are supposed to implement it. As of July 18, only 208 of the 398 regulations required by the act have been finalized, and more than 45% of congressional deadlines have been missed.

The effect on the economy has been worse. A 2013 Federal Reserve Bank of Dallas study showed that the GDP recovery from the recession that ended in 2009 has been the slowest on record, 11% below the average for recoveries since 1960.”

I don’t think that either opinion piece sees the big picture here. Dodd-Frank is clearly a jobs program. Full employment for federal bureaucrats. It’s an overwhelming success. Heckuva job.

That under Dodd-Frank we’ve seen a constant progression towards increasing centralization of the banking industry into the hands of an ever-shrinking few “too big to fail” banks does not seem to concern anyone. You can’t make an omelet without breaking eggs, can you?

{ 18 comments… read them below or add one }

TastyBits July 21, 2014 at 11:07 am

Dodd-Frank is an attempt to allow the party to continue, but they want to regulate it. Unless the wall is rebuilt, there will be another financial crisis. More regulations will not work, but some people never listen.

steve July 21, 2014 at 7:39 pm

The centralization of the banking industry occurred during the first year of the crisis AFAICT. Any cites on how it continued past then?

Steve

Dave Schuler July 21, 2014 at 8:12 pm

You can count for yourself. The small banks in this list didn’t just evaporate. They were folded into bigger banks.

A sizeable number of banks have closed every year since 2008. More than 100 in each of 2010 and 2011.

steve July 21, 2014 at 9:33 pm

Are you suggesting that without Dodd-Frank these small banks would not have folded? That their good assets would not have been assumed by other banks? If banks fail, it is just simple math that there will be fewer banks left. What I don’t see in your list are banks like Citi, BOA, etc taking over the good assets of these failed banks.

(SEC has about 3500 employees, FDIC about 5500, OCC about 3800.)

Steve

... July 21, 2014 at 11:15 pm

The point is that Dodd-Frank was supposed to reduce systematic risk, in part by eliminating institutions that were too big to fail. That has most decidedly NOT happened.

Dave Schuler July 22, 2014 at 5:57 am

Are you suggesting that without Dodd-Frank these small banks would not have folded?

No, I’m suggesting that when banks fail their assets are assumed by other and almost exclusively larger banks. If you think the banks that have failed have simply evaporated or that new small banks are being created to take over from the failed small banks, go for it. The burden of proof is on you.

Otherwise, what’s happening is exactly what I said in the post: the big banks are getting bigger.

michael reynolds July 22, 2014 at 6:00 am

Wow, two pieces of tripe. One seems to believe we can poll on Dodd-Frank. Of course. Because what, one percent of Americans have any idea what it is? And that one percent consists almost entirely of bankers?

The other piece darkly suggests cause-and-effect without showing any such relationship.

So much offal we could make some haggis. (Yeah, I’m still in Scotland.)

Zachriel July 22, 2014 at 7:24 am

Peter Wallison: The effect on the economy has been worse. A 2013 Federal Reserve Bank of Dallas study showed that the GDP recovery from the recession that ended in 2009 has been the slowest on record, 11% below the average for recoveries since 1960.

As the financial meltdown was the worst since the Great Depression, that does not support the argument.

: The point is that Dodd-Frank was supposed to reduce systematic risk, in part by eliminating institutions that were too big to fail. That has most decidedly NOT happened.

Dodd-Frank doesn’t eliminate large institutions. Instead it has a mechanism for resolution of a bank in crisis, only when the normal bankruptcy procedure won’t work. Separate legislation has been proposed to break up the big banks.

Dave Schuler July 22, 2014 at 8:10 am

I am neither for nor against Dodd-Frank. I do think that the burden of proof should be on those who favor it rather than those who oppose it. That it’s politically necessary that we do something and it’s something isn’t much of an argument.

... July 22, 2014 at 8:56 am

Zachriel, it is not terribly difficult to find quotes from Pelosi and Reid (and I’m sure many others) stating the Dodd-Frank was going to eliminate TBTF financial institutions. So take it up with your party leadership.

Plus they said it would end bailouts of banks. So QE Infinity was what, then?

... July 22, 2014 at 9:00 am

Are you kidding, Schuler? The “we must do something and this is something” rationale has been the primary form of political argument in this country (coupled with party tribalism, of course) for a few decades now.

When me and my fellow Gen Xers were kids, we would snark “There oughta be a law” when something objectionable came up. Somewhere along the line the snark got lost.

Zachriel July 22, 2014 at 9:06 am

: it is not terribly difficult to find quotes from Pelosi and Reid (and I’m sure many others) stating the Dodd-Frank was going to eliminate TBTF financial institutions. So take it up with your party leadership.

Government having liquidation authority allows large financial institutions to be taken down in an orderly fashion when they fail. That’s different than “eliminating institutions that were too big to fail”.

: So take it up with your party leadership.

We belong to no political party.

: Plus they said it would end bailouts of banks. So QE Infinity was what, then?

The problem with the original bank bailouts is that they were ad hoc, and therefore resulted in unequal treatment. Quantitative easing affects all banks, while Dodd-Frank has specific trigger mechanisms for liquidation authority, and enough negatives that banks will be averse to such a course.

Dave Schuler July 22, 2014 at 9:08 am

The problem with eliminating “too big to fail” financial institutions is not one of regulatory framework but one of time inconsistency. In order to believe that it will happen requires that you believe that presented with the same alternatives and the same incentives a future Congress will respond differently than past ones have.

TastyBits July 22, 2014 at 9:21 am

Dodd-Frank was designed to allow the hustlers access to grandma’s savings, but through regulations, it would prevent the hustlers from stealing all of grandma’s money.

All the bad practices that Dodd-Frank try to regulate were excluded from commercial banking under Glass-Steagall. The reason is that they were determined to not repeat the financial crisis that caused the Great Depression.

If grandma wanted to play with the hedge funds, she would have to go into the investment banking world leaving all security behind.

... July 22, 2014 at 9:42 am

Nancy Pelosi, from floor debate for passage of Dodd-Frank: “This legislation makes common-sense reforms that end the era of taxpayer bailouts and ‘too-big-to-fail’ financial firms.”

Saying the era of TBTF financial firms will end if this legislation is passed is different than saying, “They will still exist but now we will take them down in orderly fashion.” (And one wonders what the difference is between this new era and the era when Bear Sterns was taken down in orderly fashion.)

The truth of the matter is that the meltdown in 2008 did not happen because of a lack of legal means of oversight, but because the regulators were more beholden to the financial institutions than to their jobs. Nothing in Dodd-Frank addressed that in any meaningful fashion, or we wouldn’t have one of the men that rode CITI into the ground as the country’s master of coin.

... July 22, 2014 at 9:48 am

QE has favored banks that are primary dealers and also favors banks that heavily invested in MBSs. That isn’t exactly treating all banks equally. In the first case it is supporting the largest institutions for being the largest institutions, and in the second it is rewarding institutions that did extremely stupid stuff.

enough negatives that banks will be averse to such a course

LOL

Andy July 24, 2014 at 1:16 am

Zachriel,

The problem I have is that I don’t think the big banks will be subject to Frank-Dodd when the shit hits the fan. They will have the muscle to get exceptions from Congress and regulators in the name of preserving the banking system. It’s also a convoluted system quite unlike, for instance, the FDIC.

Dave Schuler July 24, 2014 at 6:55 am

The problem I have is that I don’t think the big banks will be subject to Frank-Dodd when the shit hits the fan. They will have the muscle to get exceptions from Congress and regulators in the name of preserving the banking system.

That’s the time inconsistency problem I mentioned above. For Dodd-Frank or any other legislation to be able to address the problem you’ve got to believe that Congress and White Houses will respond differently than they did in the past.

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