August 3, 2015
July marked the fifth anniversary of passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Not surprisingly Washington celebrated with numerous events and Congressional hearings. I put in three Congressional testimonies myself, as well as numerous panel appearances, ranging in venues from the American Enterprise Institute to the Center for American Progress. One of the many impressions I walked away with is that badly needed substantial reforms of our financial system will be impossible to pass into law until we get past Dodd-Frank. I’ve also come to the conclusion that the only way to really get past it is full repeal.
One might ask, but wouldn’t repeal leave our system vulnerable and take us back to financial crises? And indeed that would be the crucial question, if its premise of Dodd-Frank having addressed the crisis were correct. Such a premise, however, is not correct. The weight of the evidence suggests to me that the recent crisis was driven largely by a boom and bust in our nation’s property markets, particularly housing, and that our current system of financial regulation linked the performance of the housing and mortgage market to our capital markets in such a manner as to result in a significant disruption when the value of housing and mortgages declined. Key ingredients of this crisis were: exceptionally loose monetary policy, supply rigidities in our property markets, extensive international capital flows into the US (and US mortgage market), extensive policy encouragements for both high corporate and household leverage and extensive moral hazard created by various government guarantees.
The Act did give a nod to crisis related issues like mortgage underwriting and the role of rating agencies, but for the most part, it did not address drivers of the crisis or addressed them in an ineffective manner. Of course the next crisis may look considerably different. The Volcker rule, for instance, was defended by Paul Volcker as not about the last crisis, but about the next one. Despite the almost tautological claim that every crisis is different, in truth a wealth of empirical data suggests crises have a lot in common. They almost always involve some combination of easy money, high leverage on property, moral hazard from government guarantees and international capital flows. These have largely been unaddressed in Dodd-Frank.
Read the full article at Morning Consult: Dodd-Frank is an Obstacle to Reform