Search the Site

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.