It is a shame that Christopher Dodd did not become a lobbyist earlier, before he teamed up with Barney Frank to sponsor the Dodd-Frank Act. Mr. Dodd first helped set into motion a fast-expanding web of obscure bureaucratic dicta for almost all financial activity, then took a lucrative job as Hollywood lobbyist.
As Richard Epstein writes in National Affairs, the new financial law is notably vague and broad, granting vast discretion to government bureaucracies, giving them the wherewithal to waive or soften requirements for some parties while riding hard on others.
Thus the rulemaking to implement Dodd-Frank created immense opportunities for influence peddlers—they might celebrate the great contribution Mr. Dodd made to their bottom line before he joined their ranks.
The WSJ reports that Dodd-Frank rulemaking by various agencies has already resulted in more than three million words in the Federal Register, though most of the 387 mandated sets of rules have not even been put forth. Behind the mass of almost incomprehensible decrees are impenetrable deals that favor the politically connected and savvy.
Meanwhile, the Obama administration is putting on a show of getting rid of “dumb” rules in certain limited areas. Thus the Environmental Protection Agency is to stop subjecting milk containers to the same standard as oil containers. The Securities and Exchange Commission and the Federal Communications Commission, as independent bureaucracies, were not required to identify their “dumb” rules. They did not do so. No doubt they’re too busy making new ones, as are other agencies.
The impact of Dodd-Frank will likely be systemic, as the main rationale for the law was to foster financial stability by adding to the regulation of systemically important financial entities. It is not clear how too-big-to-fail firms are identified beyond their being, well, big. Whatever set of criteria is cooked up, it is bound to become obsolete if financial services evolve and systemic roles change, as they have in the past.
But finance may become stagnant, caught in the intricate net of rules. Oligopolies, identified as systemically important, will be discouraged from taking risk but will benefit from government backing. Small firms and newcomers, with no such backing, will have a hard time competing. The lethargy will infect the economy, dampening job and income creation.
A simple and transparent law to expeditiously shut down failing large organizations would have been useful. An international agreement to this effect with other financial hubs would have limited the damage in failures of global companies like Lehman Brothers, as would have reforming bankruptcy law. Instead, Congress and the Obama administration chose to fashion an elaborate bureaucratic straitjacket with unknown effects.
Professor Epstein points out that “intrigue always arises when the government is in a position to dole out or deny benefits” and this corrodes the rule of law and the legitimacy of the regulatory state. James Madison made a similar point—inevitable corruption accompanies the political giving out of goodies and indulgences.
Dodd-Frank is a dud because its benefits are mysterious and uncertain while the costs, in particular the damage to the rule of law from expanding bureaucratic arbitrariness, are predictable. It’s blarney because there is no evidence that regulators will or can protect us against financial interests or crises. Smooth talk about clamping controls on rampaging Wall Street camouflages the out-of-control growth of government and associated cronyism. Who will protect us from the rampaging regulatory state?
Mr. Dodd’s new clients in Hollywood could make a horror movie of his legislative legacy.