Beware politicians whose legislation bears a grandiose title. You can be certain their schemes will accomplish the opposite of their purported intent. Such is the case with the Wall Street Reform and Consumer Protection Act signed into law one year ago today. The massive 2,300-page tome - commonly known as Dodd-Frank - promised to fix the financial system, streamline regulation and end bailouts. Like so much of President Obama’s legislative achievements, this bill promised much, delivered little and cost a great deal.
By the Government Accountability Office’s reckoning, implementation will require $1.25 billion in new spending. It’s not cheap marshaling an army of 2,800 newly minted federal bureaucrats wielding fresh power over the private sector. Over the next decade, businesses will shell out $27 billion in fees, assessments and tithes to their new regulatory masters, according to Congressional Budget Office estimates.
The enterprise was a knee-jerk reaction to the financial crisis of 2008, where the feds had just bailed out the investment bankers at Bear Stearns and elsewhere. Rep. Barney Frank, Massachusetts Democrat, and then-Sen. Christopher J. Dodd, Connecticut Democrat, insisted creation of agencies like the Financial Stability Oversight Council and the Bureau of Consumer Financial Protection would crack down on Wall Street and end the ingrained idea that some firms are “too big to fail.”
The actual result has been a mountain of red tape. At least 400 new federal rules will be layered on top of existing regulations. New bureaucracies will have overlapping jurisdiction with existing regulatory bodies. Affected banks and businesses are scrambling to comply, but frequently they don’t know what they are supposed to be complying with. Only 21 of these rules have been finalized, and the remainder are being rammed through with nearly no time made available for cost-benefit analysis, public comment or reflection.
Far from getting rid of bailouts, Dodd-Frank institutionalized them. Title II empowered the Federal Deposit Insurance Corporation with “orderly liquidation” authority, giving the agency discretion to intervene between a financial institution and its creditors in any way it sees fit. Markets have not been slow to recognize this. Historically, large banks have paid higher interest rates on their loans than small banks; since the passage of Dodd-Frank that relationship has been reversed. Markets believe Treasury Secretary Timothy F. Geithner when he says the federal government is prepared to do “exceptional things” if warranted. That means the “too big too fail” ethic still applies.
Dodd-Frank has largely severed the relationship between risk and return, which is the necessary discipline imposed by a free market. Now, the big banks get to keep the rewards, but American taxpayers bear the risk. If that sounds familiar, it should. That is precisely what happened in Greece, when the International Monetary Fund underwrote hundreds of billions of dollars in loans, leaving American and German taxpayers stuck with the bills. To add insult to injury, these financial institutions are sophisticated market players, with a wealth of resources at their disposal to assess risk. They don’t need any further protection, and certainly not at the expense of the ordinary taxpayer.
Dodd-Frank has been an expensive exercise in command and control by the federal government. It encourages crony capitalism while undermining free markets and limiting competition. A year later, the folly of this legislation has only grown more apparent.
Nita Ghei is a contributing Opinion writer for The Washington Times.