City Journal Summer 2014

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Summer 2014
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Nicole Gelinas
Too Convoluted to Succeed « Back to Story

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"That Dodd-Frank tried to do too much at once is evident not only in its length but also in its mind-numbing complexity and vast scope. "

Poor little Dodd-Frank. Trying so hard, achieving so little.

Feh.

We both know why it is so long: it was written by bankers to (a) make it sound good, and (b) leave them with a ton of carefully crafted loopholes.

As New Yorkers, your entire economy and culture is built on the crumbs that fall from the bankers' table so I don't expect you to actually tell the truth. This bald-faced lie is going a bit too far, though.
I find it somewhat surprising that this article has been met with total silence from liberal circles. Gelinas has put forth, in a rather well-respected if partisan magazine, that Dodd-Frank codifies "too big to fail" as federal law. As far as I can tell as a non-expert, it's an argument based in fact; it is backed up by a February 18, 2012 Economist article that warned that the law's complexity would have unforeseeable consequences, and by various, localized media reports that Dodd-Frank is endangering small banks. When "too big to fail" was merely a suggestion, the world financial system nearly fell apart. What is going to happen to us when the current bubble pops? Doesn't anyone care about this?
Frank-Dodd is CREATING the next economic disaster. It is in NO way reform. It's economic cronyism at the very highest levels of government corruption.

It's a disaster already for the little guy.

Just look at the home mortgage business for example. Starting January 2014 the only remaining home lenders will be the 5 or 6 large banks (yes, the same ones that caused the majority of the problems last time). The new "rules" created by Frank-Dodd have put all small lenders out of business. Most small mortgage businesses will finish their final loans this month and then close their doors January 1 or find an affiliation with a large bank (many have, many will not be able to). Ironically (or maybe not) these were the firms that didn't cause the economic problems (and were critical of the nonsense going on) and kept their standards throughout the boom (when they could have cashed in).

The federal government regulations have made the price of entry to the mortgage business so financially high that only the large banks will remain. It's great for the federal government as it will only have to "regulate" about five large banks instead of tens of thousands of little banks, store front mortgage brokers etc around the country.

I'm sure the large banks had "nothing" to do with that "regulatory" development huh?.?. It's a classic case of cronyism wiping out the smaller competition. As of January 2014 the big banks have successfully removed almost ALL of their competition in ONE day.

The problems of the financial field is not the lack of regulation, as there are millions of pages of regulation. It is the use of "regulation" in a corrupt manner.

Frank-Dodd should be repealed. Along with alot of other corrupted regulation.
Despite what Alan Greenspan once thought (and has since issued a mea culpa) financial markets are unstable -- they will not correct themselves. There will always be some systemic risk. The point of Dodd-Frank is to greatly reduce that systemic risk. It should be pointed out that it is also necessary to have intelligent people at the Fed and Treasury (Bernanke and Paulson rather than Harrison and Mellon) with appropriate regulatory authority should another crisis appear.
From the standpoint of the authors of Dodd-Frank, the "perpetuation of Too Big To Fail" represents success, not failure. The bill also perpetuates the sleaziest elements of the derivatives trade, and codifies the practice of "bail-ins," where banks may recapitalize themselves by expropriating the funds of their depositors, as was done in Cyprus.

Dodd-Frank should be repealed, and replaced with the original Glass-Steagall language, as in Marcy Kaptur's HR 129.
The lessons about central planning and regulation never seem to be learned.
I agree with many of your conclusions about Dodd Frank but this statement is not right: "Because the banks had supposedly transformed risky bets into safe ventures, they didn’t need to hold much capital, regulators believed—after all, the chance of incurring losses was minimal to nonexistent." The sad truth is that the regulators let the banks hold equity equal to only 3% of their total assets. No matter what activities the banks were engaged in (and every type of banking is risky - lending money is always risky), 3% was way too low. It left no margin for error when, as always happens sooner or later, things went south.

Moreover, such low equity, combined with the expectation that the Government would bail out any bank that got into trouble, created a powerful incentive for the banks to engage in highly risky activities.

Dodd Frank does little to correct this. It raises equity requirements a little, but not close to enough, and leaves the too-big-to-fail guarantee in place. It substitutes micromanagement by "wise" regulators for adequate equity requirements and proper incentives. It has accelerated the concentration of the banking industry into a few behemoths. It's another disaster waiting to happen.