In case you needed any more evidence that top policymakers are divorced both from reality and from understanding the consequences of their actions, witness Federal Reserve Board Vice Chairman Stanley Fischer’s interview today, in which he stated that “we had a financial crisis which was caused by behavior in the banking and other parts of the financial system and it did enormous damage to this economy.” Sorry, but it wasn’t bad actors in the banking system that caused the financial crisis. The Federal Reserve System was pumping money into the economy as fast as it could, pushing interest rates too low for too long and encouraging excessive risk-taking. Government housing policies were pushing for higher and higher homeownership rates, spurring lenders to reduce their lending standards to meet the government’s targets. And then once the crisis hit the Fed and the federal government tried to wipe their hands of the whole mess and blame everything on a few bad actors. That’s why Dodd-Frank and the whole mess of post-crisis regulations that have come down the pike completely missed the mark. Not only WILL they do nothing to stop a future crisis, they CAN do nothing to stop a future crisis because they misdiagnosed the cause. Dodd-Frank was just an attempt to use the crisis to force through a bevy of legislation that otherwise would have floundered in Congress for years. The worst part of it is that even after everyone will have realized that the bill was a complete flop, it will remain on the books for decades.
This week marked the fifth anniversary of the passage of the Dodd-Frank Act. As Chicago Mayor Rahm Emmanuel famously said, never let a good crisis go to waste. Congress certainly didn’t let the financial crisis go to waste, using it as an opportunity to push all sorts of projects that had stagnated for years and lumping them into Dodd-Frank. Dodd-Frank may even go down in history as the largest bill ever, a record that will probably stand until the next financial crisis, when Congress will likely try to pass an even larger bill. And it’s precisely because of the mindset that created Dodd-Frank that there will be another, even larger, financial crisis. Financial crises are not caused by banks failing to adhere to regulation – they are caused by the symbiotic relationship between government and the banking sector that gives rise to those very regulations. Rather than making the banking sector safer and more resilient to crises, Dodd-Frank ossified an already shaky system, enabling the “too big to fail” banks to grow even larger and more prone to failure.
Marketwatch reports today on a study that finds that many of the world’s largest banks are as complex and unwieldy as ever. No s***, Sherlock. We have a regulatory system that raises barriers to entry so that smaller banks can’t compete with the big boys. Every time there’s a financial crisis the response is to heighten those barriers and add more regulations (e.g. Dodd-Frank), which further entrenches the largest players. And the big banks’ response of course is to evade those regulations through the creation of increasingly opaque and arcane financial instruments. It doesn’t hurt, either, that they hire former regulators to help them evade these new regulations.
You would think that after a while, people would realize that government regulation isn’t a panacea, but apparently not. All the regulations in the world won’t do anything towards reducing the size of banks, their complexity, or “Too Big to Fail.” The only real solution is the one that hasn’t been tried and won’t be tried because banks and government are Siamese twins, and that is eliminating all government support and backstops for the banking system. No more bailouts, no more subsidies, no more revolving door between DC and Wall Street. Let banks compete for business on their own merits and allow the banks with the best business models to dominate the market, not those with the best political connections.
Analysis and text of the bill is after the jump. Because of the numerous subsections, it’s difficult to format text like this properly in WordPress, so it might be a little difficult to follow all the legislative text below. The provision eliminating the push-out rule can be found in Division E, Title VI, Section 630 of the omnibus bill, on page 615 of this PDF. The section of US Code that is being modified can be found here.
Zerohedge earlier today ran an article about how regulators are fearing runs on PIMCO’s funds in the wake of Bill Gross’ departure and the fact that one of PIMCO’s exchange-traded funds has had 12.5% of its assets already pulled out. Might this be the event that sets off the next round of the financial crisis?