The Dodd-Frank Wall Street Reform and Consumer Protection Act is taking effect more than two years after the economic crisis that prompted it. It is over 2,300 pages long, and almost all aspects of it are misdirected and offensive, starting with its portentous title, and including the improbability of its co-authors as sources of such righteous commercial meddling.
The two most offensive aspects of Dodd-Frank are that it is part of the concerted bipartisan effort of the entire political class to pretend that the economic crisis was entirely the result of private-sector greed, and that it doesn’t address at all the main discernible causes of the economic crisis of 2008, which have not gone away. The housing bubble and imprudent lending into it were the principal problem, and the principal culprit is the United States government, for legislating a substantial percentage of private-sector commercial mortgages to be on a non-commercial basis; for issuing executive orders to the giant, pseudo-private-sector Fannie Mae and Freddie Mac to make the majority of their mortgage loans on that basis; and for keeping interest rates and mortgage equity requirements so low for so long. This was certain to lead to mountains of excess residential housing and worthless mortgages.
It was also the federal government that extended the permissible borrowing ratio of debt to equity for merchant banks to 30 to one, and required constant mark-to-market current valuation of the assets against which they were borrowing up to 30 times. A moron could see that if a bank became impetuous and put too many eggs in one basket, and the market value of the eggs declined, it would have to issue securities to hold its ratio, at steadily declining prices, encouraging and rewarding short sales and assuring a power-dive into insolvency, as was allowed to happen to Lehman Brothers.
No one in this public-policy debate seems to start with first principles, which are that capitalism is the only economic system that works because it conforms to the universal desire for more; that that will inevitably lead to excess in pursuit of more; that only governments can deal with the crisis that then occurs, not because the people in authority in government have any aptitude to do it, but because the governments make and enforce laws and control the money supply; and that the politicians always seek a political free lunch, as surely as capitalists seek gains.
The argument of socialists, that people really want to share, beyond a reasonable level of charity, is rubbish, though it is espoused by a lot of rich, pious hypocrites who want to share only enough to avoid widespread starvation, mob violence, and government seizure of more of their incomes. This includes most of the espousers of the oxymoronic bunk about being “social liberals and fiscal conservatives.” And the political class, including the Federal Reserve, went all the way with catastrophic housing policies, so they could claim increasing family home ownership and grease the rails for the building trades’ unions, the real-estate developers, and the more speculative elements of the financial industry, supposedly at no cost to the taxpayers.
Of course, the private sector was greedy; it was contemptible to take refuge in the fraud that “everyone had to dance when the music was playing,” and scandalous that the rating agencies approved, as investment grade, trillions of dollars of securities that they must have known were questionable, and should have known were worthless, and that the insurance industry backed a large quantity of them against default. But it was no more contemptible than the efforts of the Congress, administration, and central bank to try to buy the goodwill of everyone with funny money.
And as disconcerting as the ethical failure of the leaders of government and industry was the stupidity of almost all of them in not imagining what was inevitable. They all hoped, public and private sector, that they would be comfortably seated when the music stopped, having passed the queen of spades to someone else. And the shame falls also upon almost all the professional and academic economists and most of the financial press, with a special exception for Paul Gigot of the Wall Street Journal, who warned for years what a minefield the federal government was entering with Fannie and Freddie.