Sheldon Richman on Dodd-Frank Financial Legislation

President Obama has signed the financial industry regulatory overhaul – officially, the Dodd-Frank Wall Street Reform and Consumer Protection Act. Predictably, what he said about it cannot possibly be true.

For example: “[T]hese reforms represent the strongest consumer financial protections in history. And these protections will be enforced by a new consumer watchdog with just one job: looking out for people – not big banks, not lenders, not investment houses – looking out for people as they interact with the financial system.”

And: “[B]ecause of this law, the American people will never again be asked to foot the bill for Wall Street’s mistakes. There will be no more tax-funded bailouts — period. If a large financial institution should ever fail, this reform gives us the ability to wind it down without endangering the broader economy. And there will be new rules to make clear that no firm is somehow protected because it is ‘too big to fail,’ so we don’t have another AIG.”

Note that Obama did not promise to spare the taxpayers from having to foot the bill for the government’s mistakes. He and the members in Congress know better than to make that howler of a promise. Nevertheless, the magnitude of the whoppers being told about this law is astounding.

The government cannot deliver on pledges to protect consumers in the financial markets and to shield taxpayers from bailouts. In the first instance — consumer protection — financial instruments are inherently complex and government attempts to shelter less-sophisticated investors and borrowers from all danger would either require control of products to the point of prohibiting things people want or inundating them with information until they ignore all of it because of the sheer volume. Alas, what the new law will provide consumers is a false sense security – and that’s worse than none at all...

Most generally, the new law exhibits the standard governmental hubris. Who truly believes that an army of necessarily myopic bureaucrats can ever know enough to 1) anticipate a systemic crisis and 2) do something intelligent about it in a timely way? The more centralized the power the more vulnerable we average taxpayers are. Mistakes are system-wide. The virtue of a freed market is not that it’s unregulated (it’s not) but that its radically decentralized...

It’s Dodd, by the way, who said of his bill, “No one will know until this is actually in place how it works.” And Frank is ready to submit new legislation to fix any mistakes in the law. We’re about to have a laboratory experiment of the law of unintended consequences.

Obama said: “For years, our financial sector was governed by antiquated and poorly enforced rules that allowed some to game the system and take risks that endangered the entire economy.” The implication is now we have up-to-date rules that will be vigorously enforced. But he can’t possibly know that. Why not? Because in writing the law, Congress did not write the rules. It merely handed that job off to unelected, unaccountable bureaucrats in a variety of agencies.

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