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Dodd and Frank May be History, But History Won't be Kind

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

Chris Dodd is gone to pasture and Barney Frank is about to follow. The legacy of their signature reform legislation called Dodd-Frank however is still alive- and it could kill again.    

Getting past the rhetoric on the left and the right is always hard even three years after the legisaltion was passed. That’s why it’s pretty startling when liberal economists and conservative politicians agree that whatever the other consequences of so-called Dodd-Frank banking reform legislation, it’s failed in its main purpose.

Of all the reasons put forward by proponents of banking reform, the one that made the most sense was that we needed to prevent a failure by a big money-center bank from taking the rest of the banks with it as they did in 2008. Dodd-Frank not only doesn’t address the issue in any substantive way, it in fact ensures that the few too-big-to fail banks get bigger and bigger, while killing the small banks that loan to everyone else.

“In the aftermath of the crisis, the banking sector has become more concentrated, and the risk posed by too-big-to-fail banks has, if anything increased,” Joseph E. Stiglitz, a Nobel Prize-winning economist and former Clinton administration advisor, told the Senate Banking Committee in August according to the New York Times.

The criticism has been much the same from the right.

“Real financial regulatory reform must deal with these lenders who were a leading cause of our economic recession,” said Rep Michele Bachmann when offering up an unsuccessful attempt to repeal Dodd-Frank as the GOP took over the House. “True reform must also end the bailout mind-set that was perpetuated by the last Congress. I am proud to work towards repeal of Dodd-Frank because Congress must protect the taxpayers, instead of handing out favors to Wall Street.”

While both the left and the right offer ideological reasons for their opposition to Dodd-Frank, the American Bankers Association (ABA) offers some more pragmatic reasons.

The law contains over 3900 pages that if stood end to end would reach three times the height of the Empire State building. Even still, it will be years before regulators fully decide how to interpret the new rules and regulations. That process will require even more pages to explain. In fact, the law firm Leonard, Street and Deinard maintains the web site with 20 bloggers dedicated to helping clients understand- or predict- the complexities of the law.

The cost is easier to pin down. The Congressional Budget Office says that new fees imposed by Dodd-Frank on clients will cost $27 billion, while new regulatory offices will cost another $6 billion. Deposits and insurance will cost an additional $15 billion.     

Especially hard hit, says the ABA, are the community banks that don’t have the personnel resources to devote to compliance issue required under Dodd-Frank. “Managing this tsunami of regulation is a significant challenge for a bank of any size, but for the median-sized bank, with only 37 employees, it is overwhelming.”

“The weight of these new rules creates pressure to hire additional compliance staff instead of customer-facing staff,” says the ABA. “It means more money spent on outside lawyers, reducing resources that could be directly applied to serving a bank’s customers and community. In the end, it means fewer loans get made, slower job growth, and a weaker economy.”

Dodd-Frank also requires banks to hold on to more capital, leaving less money for loans and for shareholders. Suddenly banks aren’t such an attractive investment anymore, not because of the risk involved, but because government is the new sheriff in town and has reduced the amount of profit potential for a bank. And let’s be clear: Profits reduce risks for banks; losses increase those risks.  

Part of the issue too is that the government under Dodd-Frank has prevented banks from using certain tools, like derivates, that used help mitigate risks for banks rather than increase them. That’s in part because politicians little understand what derivatives really are. And what they don’t understand, they try to regulate.

Economist and Townhall contributor Dr. Thomas Sowell has said that that is one of the most dangerous trends coming out of the Obama administration.

“[It’s the] presumption that Obama knows how all these industries ought to be operating better than people who have spent lives in those industries, and a general cockiness going back till before he was president,” Sowell told Reason Magazine, “and the fact that he has no experience whatever in managing anything. Only someone who has never had the responsibility for managing anything could believe he could manage just about everything.”

The uncertainty created by Dodd-Frank is probably even worse than that created by Obama’s signature legislation Obamacare. Even the regulators are unsure what effect Dodd-Fank will have on markets. “When all of our Dodd-Frank rules are completed,” said  U.S. Commodity Futures Trading Commission chairman Gary Gensler recently, “I believe that it is appropriate that the Commission take a step back at the appropriate time in the future and carefully evaluate the new regulatory landscape as a whole - and how it is actually working."

With opacity like that, how could it not fail?

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