Will Dodd-Frank Help or Hinder?

In a closed door meeting with regulators, President Obama said that Dodd-Frank should be “implemented promptly and, most importantly, implemented in a way that protects the long-term stability of our financial system and the financial interests of middle-class families all across the country.”

The call for prompt but careful implementation ought to be accompanied by some soul-searching questions about whether Dodd-Frank, once it is implemented, will actually be helpful or harmful to the financial system and to consumers. Middle-class consumers could end up paying more to get credit cards, mortgages, and other loans as a result of the new rules and enforcement threats emanating from the new consumer agency created by Dodd-Frank.

And rather than giving us a more resilient financial system, Dodd-Frank, once it is fully implemented, will give us a financial system more dependent than ever on Washington regulators, and thus vulnerable to their whims and weaknesses.

Under Dodd-Frank, the Financial Stability Oversight Council will identify any potentially systemically important company or financial activity. The Fed will make sure no financial company is taking on too much risk. The Bureau of Consumer Financial Protection will ensure that no consumer is getting ripped off. The Securities and Exchange Commission will force credit rating agencies to do a good job. And the Commodity Futures Trading Commission will keep worldwide derivatives markets in check. With a crack regulatory team like that at work, …

A regulator-centric statute such as Dodd-Frank gives private companies an incentive to try to beat out competitors through the regulatory process, rather than by providing better and cheaper products and services to customers.

Nevertheless, financial regulators cannot simply refuse to consider concerns raised by the financial industry.

When I was in kindergarten, my teacher asked the class whether anyone played a musical instrument, and I responded that I played the recorder. “The tape recorder is not an instrument, it is a machine,” she chided. As I attempted to correct her misconception, she told me to be quiet and proceeded on the assumption that a child as impudent as I could not be part of any kindergarten orchestra.

Sometimes even well-intentioned people in positions of great power are not operating on accurate information.

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