Financial Regulation and Regime Uncertainty
JULY 14, 2010 by SHELDON RICHMAN
From today’s Wall Street Journal (subscription site):
Dodd-Frank, with its 2,300 pages, will unleash the biggest wave of new federal financial rule-making in three generations…. In a recent note to clients, the law firm of Davis Polk & Wardwell needed more than 150 pages merely to summarize the bureaucratic ecosystem created by Dodd-Frank. …[T]he lawyers estimate that the law will require no fewer than 243 new formal rule-makings by 11 different federal agencies.
The SEC alone, whose regulatory failures did so much to contribute to the panic, will write 95 new rules. The new Bureau of Consumer Financial Protection will write 24, and the new Financial Stability Oversight Council will issue 56. These won’t be one-page orders. The new rules will run into the hundreds if not thousands of pages in the Federal Register, laying out in detail what your neighborhood banker, hedge fund manager or derivatives trader can and cannot do.
…[T]he biggest financial players aren’t being punished or reined in. The only certain result is that they are being summoned to a closer relationship with Washington in which the best lobbyists win, and smaller, younger firms almost always lose. New layers of regulation will deter lending at least in the near term, and they are sure to raise the cost of credit.
You don’t have to be an economist to see the truth in the Journal‘s remark: “The timing of Dodd-Frank could hardly be worse for the fragile recovery.” This is a classic example of what Robert Higgs calls “regime uncertainty.” Who would make a major financial move with all those rules still yet to be written?
PS: Rep. Barney Frank has promised to fix this bill’s mistakes in a follow-up bill. Relieved?
PPS: Sen. Chris Dodd has admitted that no one knows how the new law will work until it is in operation. Be afraid. Be very afraid.