Two Thumbs Down on the Financial-Reform Bill

For those of you still recovering from Gary Becker‘s take on immigration, you might want to skip his assessment of the financial-reform bill that looks set for passage. But if you can stomach it, here are a few highlights:

A 2,300-page bill is usually an indication of many political compromises. The Dodd-Frank financial-reform bill is no exception, for it is a complex, disorderly, politically motivated, and not-well-thought-out reaction to the financial crisis that erupted beginning with the panic of the fall of 2008. Not everything about the bill is bad — e.g., the requirement that various derivatives trade through exchanges may be a good suggestion — but the disturbing parts of the bill are far more important. I will concentrate on five major defects, including omissions.

Becker’s first objection:

The bill adds regulations and rules about many activities that had little or nothing to do with the crisis.

Here’s an omission he dislikes:

[T]he bill essentially says nothing about Freddie Mac or Fannie Mae.

And here, in its trenchant entirety, is his final objection:

Many proposals in the bill will have highly uncertain impacts on the economy. These include, among many other provisions, the requirement that originators of mortgages and other assets retain at least 5% of the assets they originate, that many derivatives go on organized exchanges (may be an improvement but far from certain), that hedge funds become more closely regulated, and that consumer be “protected” from their financial decisions. Most of these and other changes in the bill are not based on a serious analysis of what contributed to the financial crisis, but rather are the result of political and emotional reactions to the crisis. Usually, such reactions do more harm than good. That is likely to be the fate of the great majority of the provisions of the Dodd-Frank bill.

Someday, if you’re ever wondering why economists don’t get elected to high office in this country, think back to this assessment by Becker.

Becker’s co-blogger Richard Posner doesn’t go into as much detail but is on the same page:

I agree with Becker’s criticisms of the new law (not quite a law yet-it has not been passed by the Senate, but I am guessing it will be, because an ignorant public demands action). It’s a monstrosity, and a gratuitous one, as there is no urgency about legislating financial regulatory reform. … There are little nuggets here and there, such as the abolition of the fainéant Office of Thrift Supervision, but on the whole, so far as I can judge, the new law is a political measure in the worst sense.


"Sometimes the emotional response is the right one." - Nathan

Typical Liberal: thinking with their heart rather than with facts. Look, I don't tell a brain surgeon how to do surgery because I'm not a surgeon. What do a bunch of politicians know about finance other than hiding their own assets or avoid paying taxes? All they are going to do is create a bunch of unknown consequences, leading to a bunch of the people here who pushed for reform complaining about higher fees, limited credit, lower credit scores to whine even more.

Reap what you sow....

Bobby G

A lot of emotional response with little economic analysis in these comments... maybe I'll come back to this topic when I get a bit more time today but really people, some of these posts are getting pretty ridiculously defensive of this awful reform bill.

I'll just say this in regards to Mr. Becker's final quoted objection... in studying public finance, we learned that government involvement in a market can only improve society when there is a market failure, and even in the case of the market failure there is no guarantee that the skewed incentives brought on by public finance will make the situation better; in fact there's a chance to make things worse. Given this, the fact that the bill addresses things in our admittedly large and extremely complex financial system with very uncertain consequences can be disastrous for an economy.

I'm OK with trying to fix things that are broken (that's an overstatement, I really think we need less government), but trying to fix things that we aren't sure are broken? That's bad news. Very bad.


fran quittel

Alas, exactly where was Freakonomics' whistle blowing while all of this was going on four years ago? Jumping on the band wagon now is meaningless. This current "honking" would have been absolutely super had it come a lot earlier, covering the very points they, as astute advisers, are making now. Alas, they did not.


I am confused as to the time and place when Washington produced well reasoned bills that accurately handled their day's problems or staved off future ones. It has always been full of log-rolling, political point scoring, and a shamelessly short time horizon on decision making.

As Washington becomes more "efficient" the politicians become even less and less concerned with what their decisions will mean for people 5 or 10 years from now, those people are not voting for them, so who cares. The lobbying/interest groups have also become steadily more effective and entrenched and now the whole place is positively sclerotic.

No reform is possible and I find it laughable that anyone still believes it is, on this or any issue. These criticisms to me just seem hopelessly naive and out of touch with how Washington operates, as though there was actually potential for some alternate intelligent bill that makes hard choices to pass the congress?

This isn't a technocracy it is a democracy, and a calcified one at that. Good decision making is not part of the program.



I'm pessimistic about this bill, too, knowing that Dodd and Frank are two of the prime culprits who precipitated the current economic mess.


The congress is using this crisis as an excuse to increase the power of the central government. What does congress know about financial reform? They cannot even produce a balanced budget. In fact the real cause of this crisis was the flawed policies of the federal reserve and the congress that grants it it's authority. Wake up people, government regulation is not the solution, it is the problem.


Few points
The Freakonomics blog did not do much analysis precisely because they are a blog, not conducive to long posts. Furthermore, Stephen Dubner is not an economist by training, so it would be expecting a lot from him to do it, even if deep analysis was the sort of thing the Freakonomics blog did.

Becker's length problem is more an indication of a bill trying to do too much (and maybe a bit of log rolling), not an indication of intricate details. In fact, I have heard criticism that the legislation is too vague.

Tom Jones

The white collar criminals of Wall Street have paid off politicians of both parties to make sure any 'reform' can be easily worked around by high-paid lawyers.


I like to see all gov workers including voted for politicians subjected to pay for performance. If they fail to protect the economy, they don't get paid.

Alex M

What good are all these new regulations> We don't have good, honest regulators.


Becker and Posner.. really? Stephen, these guys are the definition of the Chicago School. Of course they don't like financial reform, because their gratuitously ignorant view of the world known as the Efficient Markets Hypothesis does not have a single explanation for the recession.