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Academic

: Conglomerate

Dodd-Frank Forum: A Love Story

By Gordon Smith, Christine, Hurt, Vic Fleischer, Fred Tung, Lisa Fairfax, David Zaring

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I LOOOOVE LOOOOVE LOOOVE this law, every last smelly comma of it. It gets the second A+ I have ever given in my life. Would vote for it with both hands and feet with my eyes closed.

Here are my summary reasons:

I am late to the forum (deadlines crashing), and someone has to.
The law is positively pithy and substance-filled next to your average law review volume.
The law is one heck of a legislative feat in this political climate, if only for how closely it tracks the Administration's White Paper from June 2009 and the G-30 Report from the preceding winter.
It does some good and no major harm for its central animating theory: systemic risk and macroprudential regulation. (I am with Brett here--and just look at the title sequence.)
In the Glass-Steagall--BHC Act--FIRREA--FDCIA--Gramm-Leach-Bliley genealogy (which I prefer to the 1933-1934-SOX genealogy, given the animating theory), Dodd-Frank is second only to Glass-Steagall. And Dodd-Frank gets a lot more lovable if thought of as financial modernization, rather than crisis elimination.
Dodd-Frank took what opportunity there was. Glass-Steagall passed four years after the crash, after every state in the Union had imposed a bank holiday, farmers with pitchforks were storming courthouses, and some cities had 90% unemployment. And this picture of JP Morgan Jr. was scandalizing the front pages. In contrast, Jamie Dimon looks like Clark Gable brooding over coffee in modern-day crisis pulp.
If Dodd-Frank had surgically addressed the causes and management of this crisis, it would have been fighting the last war. In fact, I wince more where it does just that (e.g., requiring Fed 13(3) lending to be "broadly available" in what is an incredibly concentrated financial sector, Sec. 1101(a), and the ensuing ode to the liquidity- solvency distinction). Even so, I think the law does a serviceable job of looking ahead to where the risks might come from going forward, based on the experience of the last two decades. Will it save us from the next one? Of course not. Will it make it marginally easier to deal with the next one? Probably.
I think the Fed and the FDIC are both good eggs on balance, and have done well in the law--including the balance of power between them. I am also glad at the relative autonomy of the consumer protection function, which had no prayer embedded in prudential regulation.
I suspect that the Volcker Rule might put some downward pressure on the size and transaction volume in the effectively insured financial sector. It is fairly blunt and indirect, but then again, it is not like PUHCA and the Tobin Tax were the likely alternative.
Like many others, I see the rampant delegationism as inevitable. The multitudinous audit and Congressional reporting requirements are meant to compensate, I think. Does this mean new opportunity for capture? Sure. Net more capture? Doubt it.
I don't mind studies when they preempt goofy law. Others have addressed some of the bigger examples, but for one little one, Sec. 989F mandates a GAO study of person-to-person lending (think Prosper, Kiva) with a view to potential regulation. This sector is growing super-fast, has tremendous domestic and international development potential, and fits badly in the existing regulatory structure. When Kevin Davis and I tried to think this through last winter, we found no systematic studies to guide the way. Yet the House had twice proposed a provision that would have the consumer bureau regulating P2P platforms, which basically addressed a specific SEC enforcement action and offered no predicate or vision for the sector as a whole. Study away, I say.
In all, I think Dodd-Frank is about making modern diversified and interconnected financial institutions more regulable. This is most explicit in Title I, and I basically buy the way in which it goes about the task.

Now, Erik, I know you will ask whether there is one teensy weensy little thing I do not like about Dodd-Frank. I suppose Sec. 1501 (instructing the U.S. to vote against IMF loans unlikely to be repaid in full) just about defines fecklessness--but what's a little fecklessness among friends? Soft bigotry of low expectations, you say? Did I mention I LOOOOOVE the font?

Full post as published by Conglomerate on July 21, 2010 (boomark / email).