The Economist: Dodd-Frank’s “Failures,” “Flaws” And “Muddle” Hurt Economy
Posted by on February 22, 2012

The 2,300-page Dodd-Frank Act is a disastrous piece of legislation that is burdening the economy, increasing the size and scope of the Federal bureaucracy, and making the American financial system less transparent and less functional.

That is the conclusion of an in-depth article in The Economist titled “Too Big Not to Fail” that appears in the magazine’s Feb. 18 edition and is part of its cover story “Over-regulated America”.

Echoing the concerns Financial Services Committee Republicans have raised since Congress hastily debated and passed Dodd-Frank in 2010, The Economist article highlights the tragic consequences of the overly complex and burdensome piece of legislation.

At a time when Americans are still suffering under a sluggish economy, the last thing their government should be doing is increasing the costs of doing business in America and killing innovation. Unfortunately, The Economist says this is exactly what Dodd-Frank does.

Noting that “the scope and structure” of Dodd-Frank is “fundamentally different” from previous Federal law, the article goes on to explain how the Act expands Federal power in unpredictable ways:

“‘Laws classically provide people with rules. Dodd-Frank is not directed
at people. It is an outline directed at bureaucrats and it instructs them to
make still more regulations and to create more bureaucracies.’ Like the
Hydra of Greek myth, Dodd-Frank can grow new heads as needed.”

The Economist also highlights the impact these new regulatory burdens can have on the country as a whole:

“But the really big issue that Dodd-Frank raises isn’t about the institutions it
creates, how they operate, how much they cost or how they are funded. It is
the risk that they and other parts of the Dodd-Frank apparatus will
smother financial institutions in so much red tape that innovation is stifled
and America’s economy suffers

Though The Economist has no objections to addressing the causes of the 2008 financial crisis through legislation, it can find little to praise in the new law:

“All of which leads to the question of what Dodd-Frank has actually achieved. More information on America’s derivatives markets will be available to regulators than was previously the case, though how much will be useful is debatable. A new (untested) insolvency procedure is now in place for firms like AIG, which lacked an alternative to bankruptcy or bail-out before the crisis. But the heavy lifting on higher capital requirements for banks is being done internationally via the Basel 3 process. And Dodd-Frank has hardly touched Fannie Mae and Freddie Mac, the two big government-sponsored lending entities that received the largest bail-outs in 2008, and which are more important in the housing markets than ever.”

The article also reminds us that the full extent of the damage is still impossible to determine as “only 93 of the 400 rule-making requirements mandated by Dodd-Frank have been finalized.” The Economist does not need to wait for the additional 307 pieces of red tape to lay judgment on the “Dodd-Frankenstein monster.”

“Ambition is often welcome; but in this case it is leaving the roots of the
financial crisis under-addressed—and more or less everything else in
finance overwhelmed.”

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