Home > The Economy > Dodd-Frank brings transparency to financial industry

Dodd-Frank brings transparency to financial industry

from Dean Baker

The calls for repealing the Dodd-Frank financial reform bill are more than a little bizarre. It was only three years ago that the whole financial system was at the brink of collapse, with President Bush warning us of a second Great Depression if Congress didn’t quickly approve a massive bailout bill.

This crisis was the result of a poorly regulated financial system that was issuing millions of mortgages that they did not expect to be paid off. It was packaging these bad mortgages in mortgage-backed securities and more complex instruments and passing them off to gullible buyers all over the world. And we had companies like AIG issuing hundreds of billions of dollars credit default swaps that they had no ability to support.

This is the pre-Dodd-Frank world. Is this the world that those demanding repeal want us to bring back?

Dodd-Frank is far from a perfect piece of legislation. It could have been much stronger. For example, it could have required that the too-big-to-fail banks break themselves up, so that they could no longer freeload on an implicit government guarantee of support if they get into trouble. It could also have reinstituted a strict Glass-Steagall type separation that prohibited banks that take government-insured deposits from engaging in risky investment banking or hedge fund type activity.

But it does make the risks of the financial system more transparent. And, it give regulators an alternative to bailouts to deal with the sort of Lehman-AIG situation we faced in 2008.

Given the economic disaster that was brought on by the mismanagement of the financial system, Dodd-Frank is actually a very mild piece of legislation. Its opponents have highlighted the paperwork requirements imposed by the law. In fact, smaller banks will not be forced to deal with most of the requirements since they are explicitly exempted. The Goldman Sachs and the J.P. Morgans of the world specialize in creating paperwork and therefore will have little difficulty dealing with the requirements of the law.

However, the more important issue is the logic of this complaint. There is plenty of needless paperwork in the Defense Department, by the logic of the Dodd-Frank repealers we should just shut it down and start from scratch.

That doesn’t make sense and it doesn’t make sense to repeal Dodd-Frank. The proponents of repeal should put their specific complaints on the table and argue the case. That is the way serious people do things.

See article on original website

  1. October 18, 2011 at 7:32 pm

    Dean stated:
    “It could also have reinstituted a strict Glass-Steagall type separation that prohibited banks that take government-insured deposits from engaging in risky investment banking or hedge fund type activity.”

    Please change that to: “It should have reinstituted Glass-Steagall…”

  2. October 18, 2011 at 9:06 pm

    CNN reported earlier today that some poll claims two-thirds of respondents blame the state of the economy on “government” – whatever that means. For all I know, half those mean “government” did too little, rather than meaning “government” should not be involved at all. On the other hand, some pizza boy reject from the cast of Bamboozled is now vying with a disciple of the 4th Abrahamic Religion for the opportunity to prove who’s less alien than the extraordinary disappointment in the White House. What’s logic got to do with any of that?

  3. October 18, 2011 at 10:44 pm

    Dave, Thanks for injecting a modicum of albeit sardonic reality here. Dean, please, I don’t want to villify or alienate or depress, but I am at a loss as to how you can see the bizaarity of the situation and — still — after all — not see the truth about the “bailout” and so massively understate The Problem as “the result of a poorly regulated financial system.”

    Dean, for the benefit of us naive amateurs/autodidacts and uncooth barbarians, please explain for us how the financial system was valid in the first place. Then we may be able to start thinking about it and economics aright (correctly). OK?

    That would be very kind, and it would also give us hope that RWER has not been co-opted already — though that might explain the decreasing responses to rigorous analysis and the dwindling dialogue on the most crucial issues of our lives and times.

    That would, naturally, lead to a revisionist critique of the revisionist critique of NeoLib N-CE and academic economical autism, or did I mistakenly assume that most of the posters here are beyond the pale and authentically outside The Box?

    In lieu of an intellectual/rhetorical rebuttal, would a solid, enthusiastic show of proactive support for an ethical science of economics be too much to ask?

    Is there anybody “out there” with suggestions for improving or supplanting my proposals?

    Dave, since logic clearly has nothing to do with conventional reality, I’m not holding my breath. Hey, is Bamboozled an HBO series, an off Broadway play, a film, or…?

    Oh, BTW, the best way to blow off psychic constipation is a heavy dose of RW experience. I heartily recommend going out into the streets or off into the wilds (preferrably near hotsprings), and getting to know us extraordinary ordinary (nonRWE) people.

    Blessings & Blissings — MM

  4. October 18, 2011 at 11:05 pm

    PPS: Dean, Ed, Paul, Peter, et al, if it seems I’m throwing down a gauntlet, please forgive me. What I mean is that it is clearly time to disabuse ourselves of the belief in the “value” of bogus currency, bogus status, bogus expertise, bogus rhetoric, bogus security, bogus isolation & independence, and the Plutonomy Game.

    Though I understand your reason for staying out of the fray, standing in the wings, watching, learning, hopefully contemplating and weighing the wisdom of what you see, I’m compelled to urge you to the front lines.

    To use a Tolkienesque metaphor, the longer one hides in the shadow of The Ring, the more one’s will and mind are usurped by the Dark Lord (the fundamentally negative tendencies & forces of unliberated, unenlightened animality, which is always worse in the human realm than in any other). The analogies from the Star Wars & Matrix films are equally apt.

    Take heart — this IS OUR time to shine, and your abilities, expertise and encouragement can tilt the odds further in favor of humanity’s collective success. Pandora and Gaia may be film fantasies, but this IS the time for the ascendence of RWE or ARE, actual reality economics.

    I wonder, which will it be…? If you believe in such fictions, which side are you on…?

  5. Bruce E. Woych
    October 31, 2011 at 10:41 pm

    http://baselinescenario.com/2011/10/27/mr-hoenig-goes-to-washington/

    The Baseline Scenario

    What happened to the global economy and what we can do about it
    Mr. Hoenig Goes to Washington

    with 46 comments

    By Simon Johnson

  6. October 31, 2011 at 11:15 pm

    I am sorry, a monumentally long Dodd-Frank Act, that not even once mentions the Basel Committee, and of which the USA is a member and signed off on implementing Basel II in June 2004, and that the SEC makes a direct reference to when it in April 2004 authorizes much higher leverages for the investment banks, cannot really be described as an example of transparency.

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