For all of the recent publicity about the Dodd-Frank legislation, one of its regulatory initiatives is seriously underreported; namely, the Commodity Futures Trading Commission's (CFTC) hugely expensive plan to regulate not merely the kind of derivatives that brought down AIG but also the common, garden variety hedges used by energy users, farmers, home builders and others that pose no "systemic risk" to anyone.
Dodd-Frank was intended not to reach "end users," such as individual utilities companies. Nevertheless, CFTC's proposed rules would reach those end utilities, and require them to set aside $200 million to $ 400 million as collateral — an industry-wide sum of $80 billion — for no good purpose.
Looking past just the utilities industry, the Office of the Comptroller of the Currency estimates that the margin requirements that would apply to derivatives traders would lock $2.05 trillion in capital that should be put to more productive uses. By now many are aware of the risks posed by derivatives, the financial instruments whose use ballooned in the 1990s and 2000s as a means to bet even more on the vast securitization of home mortgages, a Wall Street obsession fed in large part by government's housing policy and officials at Fannie Mae, which lay at the heart of the economic crisis. And many are also aware of the successful efforts of Robert Rubin, President Bill Clinton's Treasury secretary, to terminate efforts to require listing of the new derivatives on a transparent exchange in the late 1990s.
In one of the few useful components of Dodd-Frank, Congress finally addressed the derivative issue, with the CFTC chairman indicating at his confirmation hearing that the new transparency rules would only encompass 15-20 players in the new derivatives market, which are many of the largest financial institutions in the country.
Now, however, the usual Washington regulatory empire building has set in, and the CFTC intends to regulate all routine hedging activities that have been taking place for decades without doing anything but reducing risk for consumers and that bear no resemblance to the kind of problem posed by AIG and addressed by Congress in Dodd-Frank.
This will impose immense costs on the national economy. The Progressive Policy Institute, a left-leaning think tank, says the end-use coverage will "cost American jobs" and "create more potential risk for the economy, not less." And the CFTC inspector general has said that the CFTC allowed its cost-benefit analyses to be dominated by lawyers, not economists.
Yet the White House will not let the Office of Management and Budget's regulatory watchdog unit review the CFTC program's costs and benefits, because the White House sees the CFTC as an "independent agency," even though the president has power to fire the CFTC commissioners (a power denied to him by statute for other officials, such as the new director of the Dodd-Frank Consumer Financial Protection Bureau).
As Fed Chairman Ben S. Bernanke has noted, a principle cause of the nation's slow, jobless recovery is "uncertainty about regulation." And under this administration, such uncertainty arises primarily because of the White House's disconcerting habit of refusing to attempt to direct the so-called "independent" agencies, which the White House says it cannot control (but which it can). Furthermore, too much of this "independent" agency overreach pertains to Dodd-Frank's expansive new programs — programs whose impact on financial markets are supposedly impossible to quantify, according to Mr. Bernanke, at least until all 400-odd Dodd-Frank rules are completed.
The president has taken a similar hands-off approach to the National Labor Relations Board in connection with its efforts to shut down Boeing's new $1 billion Dreamliner plant in South Carolina. But the Constitution assigns the president the power to execute the nation's laws, and federal statutes and court precedents leave him more than enough discretion to direct even the independent agencies. If he cannot discharge this irreducible constitutional obligation to enforce the law or seek its repeal, then he must be replaced by someone who will.
• C. Boyden Gray served as White House counsel in the administration of President George H.W. Bush.
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