By Quentin Wagenfield
One of the most debated bills passed during the Obama Administration is the Dodd-Frank Wall Street Reform and Consumer Protection Act, briefly called Dodd-Frank. The act adds new regulations requiring financial transparency and accountability in banks and lending institutions, and rules for consumer protection, all government enforced. It was enacted in July 2010 to prevent another financial crisis like that in 2008.
The act is little understood, and its 2,300 pages are probably why. Compare this with the 1933 bank-regulating Glass-Steagall Act that provided modest but effective bank regulation until repealed in 1999 — it required only 34 pages.
Dodd-Frank’s main feature is bank regulation with the addition that a bank “too big to fail” may be broken up. The act includes the Financial Stability Oversight Council (FSOC) to check on risks affecting the financial industry that might cause another recession.
Another agency, the Consumer Financial Protection Bureau (CFPB), provides regulators in large banks and hedge funds with power to stop hurtful business practices such as risky lending. It also gives added transparency to consumers about mortgages and credit scores.
An addition to Dodd-Frank is the Volcker Rule that prevents banks from owning, investing in, or sponsoring hedge funds, private equity funds, or any proprietary trading operations for their own profit.
The act also has a whistle blower provision that provides a financial incentive for information about security violations.
One problem is the economic cost of the act, analyzed by two independent agencies, the Congressional Budget Office and the Government Accountability Office. They reported these findings: Dodd-Frank will take $27 billion out of the economy; 2,000 new full-time federal employees must be hired to implement the act’s 400-plus regulatory mandates at a taxpayer cost of $3 billion for its first five years.
The Dodd-Frank Burden Tracker, the committee’s online resource tracking these regulations, reports 224 of more than 400 regulations Dodd-Frank requires have been issued. Businesses will spend more than 24 million hours yearly to comply with the red tape from these first 224 rules. House Financial Services Committee Chairman Spencer Bachus notes that in comparison, “It took less time — 20 million hours — for workers to build the Panama Canal.”
So is Dodd-Frank good or bad? Douglas J Elliott, Brookings Institute, says “Dodd-Frank is adding safety margins to the banking system.” Mitt Romney wanted the law repealed and replaced with a simpler act because “it created such uncertainty that the bankers, instead of making loans, pulled back.”
Todd J. Zwicki, George Mason University, says, “Dodd-Frank is the thing that is most harming the economy right now.” But Sen. Chris Dodd says, “Their claims are literally based on nothing but misconception.”
Self-regulation of banks and lending institutions doesn’t work — the temptation to take excessive risks and make shady deals with derivatives and insurance manipulations for huge profits is too great. Dodd-Frank corrects these ills, but is it overkill? The CFPB, for example, can impose “cease and desist” orders denying a company time to appeal, and can impose penalties of up to $1 million daily for knowingly violating a rule. It can also demand tens of thousands of document pages with no statute of limitation. A single director serving a five-year term avoids the usual congressional oversight by being located inside and funded by the Federal Reserve.
The best conclusion is yes, we need federal control of the financial industry, but no, we don’t need and can’t afford the massive amount of Dodd-Frank’s governmental control. Romney’s plan is probably the best — get Congress to pass a simpler bill with an agency that answers to them.
Quentin Wagenfield, retired from Rockwell Collins as a technical writer and programmer, is a freelance writer from Cedar Rapids. Comments: firstname.lastname@example.org