Ten Ways Dodd-Frank Will Hurt the Economy in 2013

January 16, 2013

As the Dodd-Frank Act comes to life, its harmful effects will come into plain view. Solutions crafted without a clear focus on the problems that need fixing can create new, even more severe consequences. A quick overview of the law's shortcomings is a stark reminder of the dangers of legislating in haste, says Hester Peirce, a senior research fellow at the Mercatus Center.

  • Codifies too-big-to-fail: Rather than eliminating the market's expectation that certain big financial firms are too big to fail, Dodd-Frank creates an explicit set of too-big-to-fail entities -- those selected by the Financial Stability Oversight Council for special regulation by the Fed.
  • Threatens small businesses: Dodd-Frank's complex web of regulations favors large financial firms that can afford the lawyers to analyze them. New requirements will be disproportionately costly for small banks and small credit rating agencies.
  • Hurts retail investors: New rules impose costs on nonfinancial companies that will be passed on to investors and consumers.
  • Consumer "protections" harm consumers: The consumer financial products regulator established by Dodd-Frank, rather than helping consumers, threatens to raise the prices consumers pay and limit the products, services and providers available to help them achieve their financial objectives.
  • Sows the seeds for the next financial crisis.
  • Creates new unaccountable bureaucracies.
  • Gives more power to failed regulators.
  • Gives government unchecked power to seize firms.
  • Interferes with basic market functions: The Volcker Rule, which prohibits banks from engaging in proprietary trading and limits their investments in hedge funds and other private funds, is proving to be difficult to implement. It will be more difficult to comply with and will interfere with the functioning of the market.
  • Replaces market monitoring with regulatory monitoring: Dodd-Frank relies on the hope that regulators that failed before and during the last crisis will be able to spot problems in the future.

Source: Hester Peirce, "10 Ways Dodd-Frank Will Hurt the Economy in 2013," U.S. News & World Report, January 7, 2013.

 

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