The latest edition of The Heartland Institute’s Author Series featured Hester Peirce of the Mercatus Center at George Mason University. One of the most-knowledgeable scholars in America on finance policy, Hester came to Chicago to talk about the book she co-wrote and edited titled Dodd-Frank: What it Does, and Why it’s Flawed. We were honored to host her appearance in the Midwest.
Blogger Nancy Thorner, a good friend of Heartland and contributor to Heartland’s public free-market blog Freedom Pub, attended the event and wrote it up. For that we’re grateful. Read it below — and if you don’t want to miss the next great Heartland Author Event, keep an eye on this link.
As part of the Heartland Institute Author luncheon series, Hester Peirce reviewed her book, “Dodd-Frank What It Does and Why It’s Flawed,” to a captive audience this past Thursday.
Hester Peirce is a senior research fellow at the Mercatus Center at George Mason University and was on the staff of the Senate Banking Committee during the drafting of Dodd-Frank (Dodd-Frank Wall Street Reform and Consumer Protection Act), which was signed into federal law by President Barack Obama on July 21, 2010.
Although Dodd Frank is heading toward its three-year anniversary the effects of the Act are still not know. It remains a work in progress, as many of the rules have not yet been finalized. To make matters worse, federal legislators, given broad discretion under the act, have missed deadlines for rules even through progress reports were ordered by law.
The Dodd-Frank Act was formulated as a solution to the devastating financial situation which rocked this nation in 2007 and 2008, a time when there was lots of pressure on Congress to do something as people were suffering. Dodd-Frank was meant to promote the financial stability of this nation by improving accountability and transparency in the financial system, to end “too big to fail”, to protect the American taxpayer by ending bailouts, and to protect consumers from abusive financial services practices.
A Financial Inquiry Commission was appointed to work solo under the faulty assumption that regulators could determine what the problems were and come up with solutions, even before the existing financial problems had been ascertained. It is not surprising that a massive undertaking crafted in haste (only six months) would have given rise to a whole new set of problems. Many items were added at the last minute which would have received lots of scrutiny in other situations and during prior times.
Some of the provisions included in Dodd-Frank didn’t even relate to the crisis, such as the “Durbin amendment” that sets price controls on fees banks can charge merchants in connection with debit cards.
The Dodd-Frank Act that was signed into law in 2010. Many of the provisions (rules) in Dodd-Frank are rooted in “behavioral economics”, which enjoys great popularity within the Obama administration and among Democratic legislators. Government looks at the way people make decisions and doesn’t like what it sees. This results in a government that thinks it can do better as it knows what is best for the American people. Examples of behavioral economics in the Obama administration include its push for green energy to fight Global Warming; passing Obamacare to which rules and regulations are still being added; and its promotion of the Common Core curriculum for schools which most states have adopted. Illinois signed on without hesitation when first introduced in 2010, even before the Core programs were written to be evaluated.
Agencies set up to finalize, administer, and enforce Dodd-Frank include the Financial Stability Oversight Council (FSOC); the Consumer Financial Protection Bureau (CFPB) and the Office of Financial Research (OFR). Instead of acting in the ways originally perceived, the agencies are shielded from accountability to Congress, the president, and the American people. Decision-making is left to the regulators; agencies many times are working at cross purposes, each agency going its own way, with no coordination between them in their rule-making; their is a lack of economic analysis being conducted in regard to writing rules with regulators deciding on their own the most effective way to proceed; and Congress is basically given a cold shoulder by regulators when information is requested.
The Dodd Frank Act assumes that the free market has not done a good job and that regulators must decide what people need and when firms should be shut down. In regard to Fannie Mae And Freddie Mac, which were at the heart of the housing crisis, proponents of Fannie Mae and Freddie Mac exclaimed at the time that both were too big to fail and needed to be bailed out to be kept afloat.
Despite Dodd-Frank, no attempt was made to reform either, instead, both were ignored. Today both Fannie and Freddie are no better off than they were after their bailouts. (Added by Thorner: An article in the Washington Guardian on March 21, 2013 by Phillip Swarts relates how despite billions of dollars through a federal bailout, Freddie Mac continues to ignore its customers when they lodge serious complaints about fraud or rule-breaking. – http://www.washingtonguardian.com/cant-hear-you-now)
In Ms. Pierce’s opinion, AIG was not too big to fail. It was a big insurance business, but other insurance companies would have picked up those insured by AIG, etc. The author did express some reservations as to the government deciding exactly what constituted a business that was considered too big to fail, as this would amount to an invasion of the free market.
Regarding bank bailouts and those bailouts received by large firms, situations were created that allowed a handful of big, favored firms to stay on the good side of regulators because of the “life blood” they received. This, in turn, fosters the possibility that more attention might be given to pleasing regulators than customers.
In response to a questioner who asked Heather Peirce what she thought about scraping Dodd-Frank, which has resulted in higher costs and fewer options for the consumer, and reinstating Glass-Steagall (Banking Act of 1933), Peirce’s answer was a definite “No.”
Instead, Ms. Peirce suggested the following remedies to bring stability to the financial markets and to improve accountability:
1. Remove government from decision making and standing there with a safety net.
2. Get government out of housing.
3. Strive for easier and simpler rules.
4. Embrace failure. Firms come and go. The Free Market will determine those that succeed or fail.
5. Make regulators accountable to Congress and the people.
6. Choice is necessary. Need to decide just what the role of government is.
The next Heartland Author Series presentation will take place on Tuesday, April 9, when Dr. Parth Shan, president of the Centre for Civil Society in New Delhi, India, will discuss the work of CCS and its devotion to improving the quality of life for all citizens of India by reviving and reinvigorating civil society. Check out Heartland.com for further information.
Also check out Heartland’s podcast with podcast with Hester Peirce.