Another problem with regulation: Dodd-Frank

Reacting to the financial meltdown of 2008, the Obama administration enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act to provide regulation that would supposedly prevent this sort of financial crisis. The bill is 2,300 pages, with many details (the actual regulations) TBD (to be determined).

I have long been skeptical that it would improve anything, and Conrad Black has, in his usual fashion, provided a pithy, literate explanation. His words have helped me get my hands around what is wrong with Dodd-Frank:

The two most offensive aspects of Dodd-Frank are that it is part of the concerted bipartisan effort of the entire political class to pretend that the economic crisis was entirely the result of private-sector greed, and that it doesn’t address at all the main discernible causes of the economic crisis of 2008, which have not gone away. The housing bubble and imprudent lending into it were the principal problem, and the principal culprit is the United States government, for legislating a substantial percentage of private-sector commercial mortgages to be on a non-commercial basis; for issuing executive orders to the giant, pseudo-private-sector Fannie Mae and Freddie Mac to make the majority of their mortgage loans on that basis; and for keeping interest rates and mortgage equity requirements so low for so long. This was certain to lead to mountains of excess residential housing and worthless mortgages.

It was also the federal government that extended the permissible borrowing ratio of debt to equity for merchant banks to 30 to one, and required constant mark-to-market current valuation of the assets against which they were borrowing up to 30 times. A moron could see that if a bank became impetuous and put too many eggs in one basket, and the market value of the eggs declined, it would have to issue securities to hold its ratio, at steadily declining prices, encouraging and rewarding short sales and assuring a power-dive into insolvency, as was allowed to happen to Lehman Brothers.

So a monstrosity of government regulation is supposed to fix a problem caused by, government policy and regulation ? Acts of Congress cannot arbitrarily cancel the laws of economics or eliminate the human tendency to take unreasonable risks, as this one tries to do. But at the very least, a law to prevent financial meltdowns should have done something about Fannie and Freddie. This is what Dodd-Frank does about those two Government Sponsored Enterprises (GSE): “nothing”.


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