One thing I have noticed over the years is when there is a crisis, it’s a really bad time to pass sweeping legislation. The momentum and justification for legislation comes from fear. “We don’t want that to happen again”, supporters say. For example, 9/11 happens and we get the Department of Homeland Security which is mostly a waste of money and allows the government to pry into all kinds of places it shouldn’t.
Dodd-Frank is a result of the financial crisis. There are so many bad actors in this crisis that it’s hard to list them all, but the root cause was the implicit backing government gave Fannie Mae and Freddie Mac-along with legislation and regulation that encouraged bad behavior. Sure, the ratings agencies were paid by the big banks and slanted the playing field. The big banks knew exactly what they were doing with the mortgages. But, without the implicit backing of government, the game never gets played.
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Here are some data points:
Before Dodd-Frank 75% of banks offered free checking
After Dodd-Frank 25% of banks offered free checking
Small business costs are up 15% to comply with new regulation
15% less credit card accounts, and a 200 basis points more in cost
Remember, many small businesses get started by using credit cards. You might think they are stupid. But why should you import your financial/moral compass on them. Maybe they see the annual percentage rate credit card companies charge as cheap compared to the opportunity that lies ahead of them.
In the state of Missouri, there were 44 banks with less than $50M in assets. Prior to Dodd-Frank they were profitable. Post Dodd-Frank, 26/44 are losing money and will either go out of business or be consolidated. Your local community bank which is often the lifeblood of local capital is dead. How many other states are like Missouri? It’s no wonder small town rural America is having a tough go in the Obama epoch.
Dodd-Frank tried to make central party clearing mandatory for all transactions in the OTC market. Professor Craig Pirrong has blogged brilliantly about this and other aspects of Dodd-Frank. It works for a few, but not for all. This makes it more expensive to hedge risks. Businesses pass along the cost to consumers. In many cases, clearinghouses have to become the actual counterparty to the hedge. This stops commerce and more importantly has created more too big to fail institutions. Those too big to fail clearinghouses are now backed by the full faith and credit of the American taxpayer, you.
These are great points and Jeff’s post is worth reading in full.
I think to understand 2008, it is essential to read Nicole Gelinas’ book, After the Fall,
The big banks relied on “Quants” otherwise known as mathematics wizards who drew up formulas that Killed WallStreet.
For a while you could buy Citibank stock for 35 cents a share.
Dodd-Frank was written by the staffs of the two most guilty members of Congress in the fiasco.
It began with the Community Redevelopment Act, begun under Carter, expanded under Clinton and gone wild under Pelosi/Reid in 2007.
I had two videos of Barney Frank and Maxine Waters defying a Bush administration official trying to rein in Fannie and Freeddie but the videos have vanished, of course.
I was posting stuff on my blog at the time this was going on, and I look back and am content to have it be my opinion even now.
Another of my blog posts from 2008 as it was happening.
Why couldn’t these politicians figure this out ? Not enough graft, I guess, as Glenn Reynolds says.
Outside of Silicon Valley and a few other enclaves and walled gardens, startups have plummeted. Employment with new businesses less than five years old is the lowest it’s been in recorded history. New small firms create jobs and increase productivity. Established firms reduce jobs over time because their priority is defending their market share, decreasing overall productivity. It’s no mystery why the economy and job growth are so stagnant. Burdensome government regulation and oppressive taxation have killed it.
I was talking with an entrepreneur who is also an investor. He said he and his brother used to own (or at least have a majority interest in) a small bank…but after Dodd-Frank, they decided the compliance issues were too much and got out.
The thorn in my side is Conflict Minerals. It is such a crock, but, of course, it did create a lot of useless fake make work jobs and the inevitable consultant firms sprouted to “manage it” for you. I think I could vote for the devil, if he promised to dump Dodd-Frank.