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Dodd-Frank: Frankly, a Dud

The opinions expressed by columnists are their own and do not necessarily represent the views of

It is certainly rarefied air indeed when I find myself agreeing with an über statist like Sen. Elizabeth Warren (D-MA). But I did so when she recently lamented: “Let's get real, Dodd-Frank did not end ‘too-big-to-fail’.” However, she has the ‘cause-and-effect’ completely arse backwards, as most of her ‘ilk’ usually do. In this regard she said: “Instead of focusing on whether the economy needs more or less government, the battle should be over what makes markets work best.” Sorry senator, but economic logic and evidence overwhelming tell us that the ‘Boom-Bust-Malaise Cycle’ (or ‘BuM Cycle’ for short) of the 2000-2010s (including the too-big-to-fail ‘bail outs’ resulting from the bust phase) was caused by and made worse by government regulation, especially that of the Dodd-Frank Act. Thus, ‘we’ very much do need to focus on “whether the economy needs more or less government”, and that the battle “should be over what makes” governments get out of the way so that “markets work best.” The senator and other Dodd-Frank proponents and surface reformers should heed the sage words of a former president who once reminded us that:


“Governments tend not to solve problems, only to rearrange them.” – Ronald Reagan

There is a lot of great work out there by a number of free market think tanks and similar outfits in Washington, D.C. and around the nation regarding Dodd-Frank, financial regulation more broadly, and regulation in general. Two of which I would like to highlight (but not because others are not worth highlighting too), are a comprehensive study on Dodd-Frank by the Mercatus Center entitled “Dodd-Frank: What It Does and Why It's Flawed”, and a forward policy agenda on all significant federal regulation (including, of course, financial regulation like Dodd-Frank) by the Competitive Enterprise Institute (CEI) entitled “Free to Prosper: A Pro-Growth Agenda for the 114th Congress”.

The Mercatus study tackles Dodd-Frank as a whole and each of its 16 titles in some depth (which is well worth reading cover-to-cover, as I have done). One of the major themes is that it: “… not only failed effectively and holistically to respond to the crisis, but it also gives rise to a whole new set of problems … and lay[s] the groundwork for a future financial crisis”. This is referring to the problem of systemic risk, which has gotten worse under Dodd-Frank. Related to this is the moral hazard problem of encouraging future massive ‘bail outs’, which have also worsened. On this they say: “… it not only failed to solve the too-big-to fail problem [and massive bailouts during financial crises], but it also institutionalized the problem.” They also wisely point out, among a number of other issues, that: “The most striking omission of the act was its failure even to attempt to reform the broken housing-finance system in the United States. The legislation ignored Fannie Mae and Freddie Mac, the flawed government-sponsored mortgage giants at the heart of the housing crisis.”


The CEI agenda also tackles Dodd-Frank as a whole but focuses on a ‘hand full’ of its more egregious aspects (which is well worth reading cover-to-cover also, as I am still in the midst of doing). One of these is: “Big banks are effectively sheltered from competition from both smaller rivals and larger firms that cannot form banking units. That factor exacerbates the problem of too-big-to-fail by limiting alternatives when a giant bank falters.” In other words and in ‘economist-speak’, Dodd-Frank has raised the already high and artificial government barriers to entry into banking and finance. This hurts businesses and consumers alike, of all shapes and sizes. In addition, Dodd-Frank has hurt international development through its attack on remittances: “Some of the world’s poorest people depend on money they receive from relatives working in developed countries. In fact, that money dwarfs the world’s official foreign aid budget, and the gap is increasing. … [Made worse by] technically ban[ning] remittances using Bitcoin [which] is increasingly the vehicle of choice for remittances.” They importantly also point out the related and morally reprehensible problem of Operation Choke Point resulting in: “An as-yet-unquantifiable number of businesses hav[ing] had their bank accounts canceled as a result of [this] … aggressive Justice Department–led campaign to choke off financing for politically disfavoured businesses” This is Crony Capitalism at its worst.


Before I conclude, let’s step back for a moment and reflect on the ‘bigger picture’ that Dodd-Frank is interconnected to. At any one point in time, individual ends are virtually infinite and social means are finite and scarce. Thus the economic challenge arises, and hence the need for understanding economic laws and for how these are hampered by regulation, financial and otherwise. Regulation which is in better accordance with such natural and eternal economic laws, over the flow of time, then allow for: greater liberty and property rights => greater entrepreneurship, specialization and innovation => greater savings, investment and capital (and the financing that helps bring these together) => greater production, exchange and consumption … at lesser costs and prices => and thus greater ends met with lesser means, or in other words, greater pursuit of happiness in life.

The “Obama-nemia” or “Great Malaise II” (Great Malaise I being under President’s Nixon, Ford and Carter) that I recently pointed out in my previous Townhall Finance article on the Personal Burden Formula (PBF), is largely the result of the ‘all too predictable’ negative unintended consequences from such regulations as Dodd-Frank, Obamacare and climate change and the regime uncertainty it has caused for private investment. Although I do not expect ‘King Obama’ nor ‘Queen Hillary’ to heed the following words of warning for elitist ‘social engineers’ like themselves, I do hope they will prompt some thinking by American voters, businesses and consumers for 2016 and beyond:


“… even when the State has manifestly caused the mischief complained of, faith in its beneficent agency is not at all diminished; … The State’s misdoings become … reasons for praying it to do more! … [despite the fact] that the thousands of Acts of [Congress] which repeal preceding Acts, are so many tacit admissions of failure.” – Herbert Spencer

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