The United States financial reform legislation that just passed through conference committee is just about the worst possible bill that could emerge. In its analysis, The Wall Street Journal concluded “perhaps the best summary is to hail Dodd-Frank as the crowning achievement of the Obama ‘reform’ method. In the name of responding to a crisis, the bill greatly increases the power of politicians and regulators without addressing the real causes of that crisis. It makes credit more expensive and punishes business without reducing the chances of a future panic or bailouts.”
Others are critical of the bill, too. The Cato Institute’s Mark A. Calabria wrote “That thin semblance of reform will let Congress and the Obama administration claim they brought Wall Street to heel. But by dodging all the hard issues, this ‘reform’ makes it likely that the next crisis will put the last one to shame.”
Later Calabria wrote “Perhaps it should come as no surprise that Sen. Christopher Dodd and Rep. Barney Frank, the bill’s primary authors, would fail to end the numerous government distortions of our financial and mortgage markets that led to the crisis. Both have been either architects or supporters of those distortions. One might as well ask the fox to build the henhouse.”
Investor’s Business Daily agrees: “The two sponsors, Rep. Barney Frank and Sen. Chris Dodd, are as much responsible for the financial crisis as any two people in America. Yet, we’re now supposed to believe that they, and their flailing party, which can’t even meet its legal obligation to produce a budget, have now fixed our financial system.”
We ought to be wary of government — who many believed caused the crisis — claiming that it can fix the present crisis and prevent another. Liberals believe that the right regulations, when enforced by smart and dedicated federal regulators, can prevent the usual failure of government regulations. But writing earlier this year in The Wall Street Journal Allan H. Meltzer explained why this won’t happen: “This is because regulation is static, while markets are dynamic. If markets don’t circumvent costly regulation at first they will find a way later. … Regulation often fails either because regulators are better at announcing rules than at enforcing them, or because the regulated circumvent the regulations.”
While some might proclaim that free markets produce perfection, Meltzer wrote: “Capitalists make errors, but left alone, markets punish such errors.”
We’re not leaving markets alone. Instead, we’re stepping up the intervention.
Triumph of the Regulators
The Dodd-Frank financial reform bill doubles down on the same system that failed.
President Obama hailed the financial bill that House-Senate negotiators finally vouchsafed at 5:40 a.m. Friday, and no wonder. The bill represents the triumph of the very regulators and Congressmen who did so much to foment the financial panic, giving them vast new discretion over every corner of American financial markets.
Chris Dodd and Barney Frank, those Fannie Mae cheerleaders, played the largest role in writing the bill. Congressman Paul Kanjorski even offered a motion to memorialize it as the Dodd-Frank Act. It’s as if Tony Hayward of BP were allowed to write new rules on deep water drilling.
The Federal Reserve, which promoted the housing mania and failed utterly in its core mission of monitoring Citigroup, will now have more power to regulate more financial institutions and more ability to dictate the allocation of credit.