I am devastated.
Writing in the Financial Times today, Alan Greenspan, argues that the Dodd-Frank Wall Street Reform and Consumer Protection Act will have–indeed is already having–unintended consequences.
He cites five specific cases.
1) Making credit ratings agencies legally liable for their opinions about risk made them unwilling to give Ford Motor Credit a rating (leading the SEC to suspend the need for a credit rating). True. However, holding credit ratings agencies blameless for their mistakes makes them more likely to make mistakes.
(2) Restrictions on bank debt card fees will make banks less likely to issue them. The absence of such restrictions is a license for large banks (the ones doing most of the complaining, according to the FT) to jack up these fees.
3) Without an immediate exemption from Dodd-Frank, a significant proportion of the foreign exchange derivatives market will leave the US. See my earlier post about the scare tactics used to force a relaxation of regulations.
4) Many of the acts rules on proprietary trading will merely push the business overseas. Ditto.
(5) Because bank executive pay packages are so large, and the competition for executives is so fierce, it will be difficult for regulators to micromanage that high-flying arena. This despite the fact that many of the most highly paid bankers led to some of the largest taxpayer losses.
It would be easy to dismiss Greenspan’s commentary with one snappy come-back line: “If the Fed had run a more responsible monetary policy during Greenspan’s tenure, none of this would be necessary.”
That said, Dodd-Frank is far from perfect.
Given the complex nature of modern finance and globalization of financial markets and institutions, it is probably impossible to write the perfect set of rules.
Which returns us to what I am convinced are the most important questions facing legislators and regulators: Can we afford to return to the financial lockdown that existed for a quarter of a century prior to 1973? Can we afford to return to the financial wild west that existed before the sub-prime meltdown?
The answer to both questions is “no.” We will have to find some middle path. It is not clear exactly what that path will look like, but I am convinced that it will involve greater transparency and higher levels of capitalization/accountability.