President Obama has signed the financial industry regulatory overhaul – officially, the Dodd-Frank Wall Street Reform and Consumer Protection Act. Predictably, what he said about it cannot possibly be true.
For example: “[T]hese reforms represent the strongest consumer financial protections in history. And these protections will be enforced by a new consumer watchdog with just one job: looking out for people – not big banks, not lenders, not investment houses – looking out for people as they interact with the financial system.”
And: “[B]ecause of this law, the American people will never again be asked to foot the bill for Wall Street’s mistakes. There will be no more tax-funded bailouts — period. If a large financial institution should ever fail, this reform gives us the ability to wind it down without endangering the broader economy. And there will be new rules to make clear that no firm is somehow protected because it is ‘too big to fail,’ so we don’t have another AIG.”
Note that Obama did not promise to spare the taxpayers from having to foot the bill for the government’s mistakes. He and the members in Congress know better than to make that howler of a promise. Nevertheless, the magnitude of the whoppers being told about this law is astounding.
The government cannot deliver on pledges to protect consumers in the financial markets and to shield taxpayers from bailouts. In the first instance — consumer protection — financial instruments are inherently complex and government attempts to shelter less-sophisticated investors and borrowers from all danger would either require control of products to the point of prohibiting things people want or inundating them with information until they ignore all of it because of the sheer volume. Alas, what the new law will provide consumers is a false sense security – and that’s worse than none at all.
As for the new watchdog agency, we have cause to wonder why the law of regulatory capture should suddenly stop operating or why the door between government and industry should suddenly stop revolving. (It’s still spinning in the energy industries.)
As for taxpayer bailouts, the new law leaves plenty of room for the FDIC to borrow money in order to keep favored creditors of failing big companies afloat. The wind-up fund that’s supposed to be financed by banks and other firms will of course be filled by their customers.
Most generally, the new law exhibits the standard governmental hubris. Who truly believes that an army of necessarily myopic bureaucrats can ever know enough to 1) anticipate a systemic crisis and 2) do something intelligent about it in a timely way? The more centralized the power the more vulnerable we average taxpayers are. Mistakes are system-wide. The virtue of a freed market is not that it’s unregulated (it’s not) but that its radically decentralized.
So anyone who thinks this 2,300-plus page monstrosity has a chance to prevent another large-scale financial failure has been watching too much network news. Two pieces of information are pretty much all you need to see through the hype. First, in all those pages you will not find the words “Fannie Mae” or “Freddie Mac” (or their official names), the two government-sponsored enterprises (that’s a term of art) that had so much to do with encouraging the hollow mortgages that underlay the flimsy securities and credit default swaps that made the financial system so fragile these last several years. (Search our archive for many articles about this.) When Fannie and Freddie couldn’t pay their bills a couple of years ago, the government took them over, proving that the widely assumed implicit government guarantee of their obligations was real after all. They are still in business buying up mortgages though they need regular infusions of the Treasury’s borrowed money. Before it’s over the bailout cost is expected to at least hit the $400 billion cap, though Obama has unilaterally promised unlimited financial aid.
The second important fact is that the chief movers of this law, Sen. Chris Dodd and Rep. Barney Frank, are the two biggest congressional champions of Fannie and Freddie. Whenever anyone expressed concern about the poor condition of the GSEs’ books, Dodd and Frank could always be counted on to fend off the threat of scrutiny. They would insist it was all part of an altruistic cheap-home-ownership program, but too much money was being made from government intervention to take that seriously. Dodd and Frank were aided by Fannie’s and Freddie’s well-connected lobbyists and campaign contributions. All told, they spent $200 million from 1998 to 2008. Fannie and Freddie are the ultimate Washington insiders. “They’ve stacked their payrolls with top Washington power brokers of all political stripes,” the Politico reported. Altruism, indeed.
It’s Dodd, by the way, who said of his bill, “No one will know until this is actually in place how it works.” And Frank is ready to submit new legislation to fix any mistakes in the law. We’re about to have a laboratory experiment of the law of unintended consequences.
Obama said: “For years, our financial sector was governed by antiquated and poorly enforced rules that allowed some to game the system and take risks that endangered the entire economy.” The implication is now we have up-to-date rules that will be vigorously enforced. But he can’t possibly know that. Why not? Because in writing the law, Congress did not write the rules. It merely handed that job off to unelected, unaccountable bureaucrats in a variety of agencies. In a word, Congress delegated its legislative authority, which has no authority to do. (Not that anyone cares.)
The Wall Street Journal reports,
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. [Emphasis added.]
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.
In other words, your misrepresentatives have no idea what they just passed.
The Journal adds that “the 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.”
The more the rules change the more they stay the same.