Share

Topics: Obamacare

Manhattan Moment: Dodd-Frank is too convoluted to succeed

|
Op-Eds,Barack Obama,Obamacare,Economy,CFPB,Dodd Frank,Manhattan Moment,Consumer Protection Agency,Wall Street

In July 2010, four months after President Obama signed his universal health care act into law, he enacted his other signature achievement, the Dodd-Frank financial reform law.

Although it hasn't gotten as much attention, Dodd-Frank is as flawed in its own way as Obamacare, with a similar potential to harm ordinary Americans.

It's harder for the public to grasp Dodd-Frank's failure. But it's equally simple: a promise made and not kept. In signing Dodd-Frank, Obama pledged that "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."

Just this past May, though, Treasury Secretary Jack Lew told Congress that "getting Dodd-Frank implemented is still a fair amount of work."

On the procedures that are supposed to allow financial firms to fail in an orderly fashion, he said: "I think the challenge is now to make sure that we know that those can work. ... The operational issues are not insignificant."

Five months later, in October, the Davis Polk law firm found that regulators had missed 61 percent of 280 deadlines to make rules for Dodd-Frank — rules governing crucial aspects of the law, including how much money banks can borrow to trade opaque financial instruments such as derivatives and how much cash people must put down before they can get a mortgage.

What's the holdup? Just as with Obamacare, it's easy to blame the complexity itself.

But the solution to "too big to fail" was always pretty easy: Prevent financial firms from borrowing too much by forcing them to put down more "capital" — non-borrowed money — behind their businesses.

Dodd-Frank's complexity was a symptom, then, of a simple problem: the unwillingness of either party to level with voters.

Ending "too big to fail" for real would require ending decades of implicit government subsidies for financing firms.

Banks have been able to borrow cheaply since the early 1980s because their investors know the banks will get government help in a crisis.

If banks can't expect such help, they'll have to pay more to borrow in accordance with the higher risk. Then the banks will have to charge people higher interest rates for mortgages and other loans.

That's a good thing in the long term. Part of the reason the country is still in so much trouble economically is because people were able to borrow way too much, way too cheaply, for too many years.

In the short term, though, ending the era of "too big to fail" would be bad for banks and bad for consumers. That's why the government wrote hundreds of pages pretending to solve the problem without doing so.

Neither Obama nor Congress dared to "reform" Fannie Mae and Freddie Mac, two deeply flawed entities that have given many Americans a government benefit in the form of a cheap mortgage.

Big chunks of the existing health care industry also have a stake in keeping things largely as they are. Health care in America is more expensive than it is in other Western countries partly because insurers and providers have benefited from an opaque marketplace with costs borne by third parties.

Dodd-Frank and Obamacare have similar problems, but there's a difference. If American health care keeps failing, people will know about it, even if they’re not willing to do much about it.

If financial regulation keeps failing, few people will know until the next financial crisis -- one that likely would cost millions of jobs, just as the last one did.

Nicole Gelinas is a contributing editor to the Manhattan Institute's City Journal. A longer essay she wrote on Dodd-Frank's failures appears in the fall issue of City Journal. Twitter: @nicolegelinas
View article comments Leave a comment