Dodd-Frank: The Economic Case for Repeal
July 11, 2012
It is rare that a single law can have a significant adverse effect on the enormous U.S. economy. But there has never been anything like the Dodd-Frank Act. Signed into law by President Obama on July 21, 2010, its extraordinary effect in slowing the economy is coming into focus as its second anniversary approaches, says Peter J. Wallison, the Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute.
Its passage coincided with a massive slowdown in America's economic recovery, and sudden spills in housing prices and manufacturing production also seem to coincide with the implementation of the act. The reason for this adverse consequence is that much of the law is still uncertain and ill-defined, making employers wary and resistant to risk cash savings on additional payroll expenditures.
This can be seen, for example, in the implementation of the Volcker Rule in Title VI.
- This provision prohibits banks from engaging in "proprietary trading," understood to mean prohibiting banks from selling securities for their own account.
- However, this provision clearly was not thought through, as an enormous number of financial transactions involve components that may fall under this statute, such as when corporations sell commercial paper through banks.
- Mired in uncertainty as to whether this practice will be regulated away, firms must now consider new and more costly ways of financing their short-term needs.
Similarly, Title IX provisions contain equally vague language.
- Addressing housing finance reform, Title IX introduced two completely new and important concepts without clear meaning -- the "Qualified Residential Mortgage" (QRM) and the "Qualified Mortgage" (QM).
- The former was supposed to be a high quality mortgage, but what did that mean? The regulators' first try was a mortgage with a 20 percent down payment.
- This provoked a huge outcry in the housing finance industry, and even from members of Congress who had voted for the bill.
- The regulators went back to the drawing board, and now -- almost two years after the act was signed into law -- there is still no regulation that defines this key term.
Many components of this law are so important to the financial sector and far-reaching in their scope that they should have taken years to gain congressional approval. However, Dodd-Frank passed through the legislative process in a mere 18 months.
Source: Peter J. Wallison, "Dodd-Frank: The Economic Case for Repeal," The American, June 27, 2012.
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