The crony-cap­i­tal­ist tri­umph

The Washington Times Weekly - - Editorials -

Beware politi­cians whose leg­is­la­tion bears a grandiose ti­tle. You can be cer­tain their schemes will ac­com­plish the op­po­site of their pur­ported in­tent. Such is the case with the Wall Street Re­form and Con­sumer Pro­tec­tion Act signed into law one year ago. The mas­sive 2,300-page tome — com­monly known as Dodd-Frank — promised to fix the fi­nan­cial sys­tem, stream­line reg­u­la­tion and end bailouts. Like so much of Pres­i­dent Obama’s leg­isla­tive achieve­ments, this bill promised much, de­liv­ered lit­tle and cost a great deal.

By the Gov­ern­ment Accountability Of­fice’s reck­on­ing, im­ple­men­ta­tion will re­quire $1.25 bil­lion in new spend­ing. It’s not cheap mar­shal­ing an army of 2,800 newly minted fed­eral bu­reau­crats wield­ing fresh power over the pri­vate sec­tor. Over the next decade, busi­nesses will shell out $27 bil­lion in fees, as­sess­ments and tithes to their new reg­u­la­tory mas­ters, ac­cord­ing to Con­gres­sional Bud­get Of­fice es­ti­mates.

The en­ter­prise was a knee-jerk re­ac­tion to the fi­nan­cial cri­sis of 2008, where the feds had just bailed out the in­vest­ment bankers at Bear Stearns and else­where. Rep. Bar­ney Frank, Mas­sachusetts Demo­crat, and then-Sen. Christo­pher J. Dodd, Connecticut Demo­crat, in­sisted cre­ation of agen­cies like the Fi­nan­cial Sta­bil­ity Over­sight Coun­cil and the Bu­reau of Con­sumer Fi­nan­cial Pro­tec­tion would crack down on Wall Street and end the in­grained idea that some firms are “too big to fail.”

The ac­tual re­sult has been a moun­tain of red tape.

At least 400 new fed­eral rules will be lay­ered on top of ex­ist­ing reg­u­la­tions.

New bu­reau­cra­cies will have over­lap­ping ju­ris­dic­tion with ex­ist­ing reg­u­la­tory bod­ies.

Af­fected banks and busi­nesses are scram­bling to com­ply, but fre­quently they don’t know what they are sup­posed to be com­ply­ing with. Only 21 of these rules have been fi­nal­ized, and the re­main­der are be­ing rammed through with nearly no time made avail­able for cost-ben­e­fit anal­y­sis, pub­lic com­ment or re­flec­tion.

Far from get­ting rid of bailouts, Dod­dFrank in­sti­tu­tion­al­ized them. Ti­tle II em­pow­ered the Fed­eral De­posit In­surance Cor­po­ra­tion with “or­derly liq­ui­da­tion” au­thor­ity, giv­ing the agency dis­cre­tion to in­ter­vene be­tween a fi­nan­cial in­sti­tu­tion and its cred­i­tors in any way it sees fit.

Mar­kets have not been slow to rec­og­nize this.

His­tor­i­cally, large banks have paid higher in­ter­est rates on their loans than small banks; since the pas­sage of Dod­dFrank that re­la­tion­ship has been re­versed. Mar­kets be­lieve Trea­sury Sec­re­tary Ti­mothy F. Gei­th­ner when he says the fed­eral gov­ern­ment is pre­pared to do “ex­cep­tional things” if war­ranted. That means the “too big too fail” ethic still ap­plies.

Dodd-Frank has largely sev­ered the re­la­tion­ship be­tween risk and re­turn, which is the nec­es­sary dis­ci­pline im­posed by a free mar­ket. Now, the big banks get to keep the re­wards, but Amer­i­can tax­pay­ers bear the risk. If that sounds fa­mil­iar, it should. That is pre­cisely what hap­pened in Greece, when the In­ter­na­tional Mon­e­tary Fund un­der­wrote hun­dreds of bil­lions of dol­lars in loans, leav­ing Amer­i­can and Ger­man tax­pay­ers stuck with the bills. To add in­sult to in­jury, these fi­nan­cial in­sti­tu­tions are so­phis­ti­cated mar­ket play­ers, with a wealth of re­sources at their dis­posal to as­sess risk. They don’t need any fur­ther pro­tec­tion, and cer­tainly not at the ex­pense of the or­di­nary tax­payer.

Dodd-Frank has been an ex­pen­sive ex­er­cise in com­mand and con­trol by the fed­eral gov­ern­ment. It en­cour­ages crony cap­i­tal­ism while un­der­min­ing free mar­kets and lim­it­ing competition. A year later, the folly of this leg­is­la­tion has only grown more ap­par­ent.

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