Friday, June 8, 2012

Two Years Later, no one knows what Dodd-Frank Act actually does.

In July 2010, the massive Dodd-Frank Act was passed by Congress. The goal was to prevent risk-taking of the sort that led to the recent financial crisis. How? Nobody really knows. Will it work? Almost certainly not.

The construction of Dodd-Frank is a recipe for failure. Instead of setting out mandates for businesses to follow, Dodd-Frank sets out guidelines for bureaucracies to create mandates that businesses will follow... If those mandates can ever be decided on (the administrative rule-making process is still ongoing).

The Act was long to begin with, and has the potential to grow much, much longer. A February article from The Economist describes:

The law that set up America’s banking system in 1864 ran to 29 pages; the Federal Reserve Act of 1913 went to 32 pages; the Banking Act that transformed American finance after the Wall Street Crash, commonly known as the Glass-Steagall act, spread out to 37 pages. Dodd-Frank is 848 pages long. Voracious Chinese officials, who pay close attention to regulatory developments elsewhere, have remarked that the mammoth law, let alone its appended rules, seems to have been fully read by no one outside Beijing...
When Dodd-Frank was passed, its supporters suggested that tying up its loose ends would take 12-18 months. Eighteen months on, those predictions look hopelessly naive. Politicians and officials responsible for Dodd-Frank are upbeat about their progress and the system’s prospects, at least when speaking publicly. But one banker immersed in the issue speaks for many when he predicts a decade of grind, with constant disputes in courts and legislatures, finally producing a regime riddled with exceptions and nuances that may, because of its complexity, exacerbate systemic risks rather than mitigate them.
848 pages, and each of those pages can conceivably spawn hundreds of pages of bureaucratic gibberish when it comes time to interpret them.

Is it really surprising we've had such a tepid recovery, or that firms are sitting on cash instead of hiring or investing? When the rules of the game are changing, and no one knows in which direction, there isn't much incentive to make bold moves. Keynesians want to use macroeconomic tools when, arguably, we're facing micro-level problems.

The issue is bigger than Dodd-Frank, of course, and is represented by an entire paradigm of regulation done by unelected bureaucrats instead of publicly-accountable officials. James Gattuso and Diane Katz with the Heritage Foundation note:
During the three years of the Obama Administration, a total of 106 new major regulations have been imposed at a cost of more than $46 billion annually, and nearly $11 billion in one-time implementation costs. This amount is about five times the cost imposed by the prior Administration of George W. Bush.
In addition to Dodd-Frank, there is ObamaCare and the spate of new laws being enforced by the EPA.

How can democracy survive, when the people making the most important decisions for our economy aren't democratically elected? The regulatory state is moving us toward a rule by bureaucratic fiat. Representative government has its flaws, but at least mistakes can be traced back to whoever initiated the policy. Law-making by bureaucrats flouts that avenue for accountability.

This same argument was made by Theodore J. Lowi in his prescient book, The End of Liberalism (1979). As he argues:
...the overwhelming inclination was to embrace the principle of embodying maximum legislative power in the presidency... Whether the field is wage and price control, environmental pollution, unemployment, or inflation, congressional actions now amount to little more than an invocation, even though it is still called lawmaking and legislative drafting. (p. 275-276)
In this view, Dodd-Frank is just one more example in the trend toward executive rule-making, which began with the New Deal and has expanded rapidly since.

What can be done? Courts could revive the "Void for Vagueness" Doctrine, and start demanding that laws coming out of Congress actually specify how they'll be implemented. It's unlikely to happen, but maybe if it did then our representatives would at least start reading the laws before they sign them.

If "Void for Vagueness" ever does come back into vogue, its first victim should be the bloated and useless Dodd-Frank Act.

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