Senator Dodd offered some useful counsel yesterday about his fin-reg bill:
It will take the next economic crisis, as certainly it will come, to determine whether or not the provisions of this bill will actually provide this generation or the next generation of regulators with the tools necessary to minimize the effects of that crisis.
That’s news to President Obama, who just promised that the Dodd-Frank bill will make the financial system “far less prone to panic and collapse.” The president promised, too, that the reforms ensure that Washington will “never again put taxpayers on the hook for Wall Street mistakes.”
Dodd is right about the certainty of the next crisis. This disaster came because of too much borrowing and lending to large or complex financial institutions. The companies then lent that money right back to American borrowers through ever more bizarre contortions, because complexity equals fees.
The lending was not reckless or mad, but perfectly rational. Lenders lent money to big financial firms without bothering themselves particularly about what the firms did with the money, because the lenders expected bailouts, and they got them. (It matters not what the corporate executives at big banks thought, if anything, about the possibility of bailouts or anything else, only that the lenders freely gave the corporate honchos the money to make the decisions that, in the end, the economy couldn’t withstand.)
Dodd-Frank invites similar future behavior. In a future crisis, the Dodd-Frank bill gives new regulators called “orderly liquidators” (sounds like a discount-furniture storefront) the power to guarantee financial-institution lenders against loss if the orderly liquidators think that such a step is necessary to preserve financial stability.
These protected creditors are most likely to be the short-term lenders, since they can yank their money from a bank almost instantly. What about the long-term lenders? They’re protected, too. The bill offers a fast-track way for the president to authorize guarantees to long-term bondholders in a crisis. (This provision, oddly, is what led Republicans to crow in May that they had made the Democrats end “too big to fail” — because the president has to sign something to approve these guarantees, and, presumably, maybe he won’t.)
Dodd knows, then, that his bill continues our 25-year-old policy of inviting ever-bigger financial crises under the misguided idea that regulators and politicians can learn enough about saving the economy from the fallout of the most recent crisis to apply those lessons the next time around.
This “too-arrogant-to-change” policy leaves regulators and politicians permanently one step behind, because the next crisis is always bigger than the last.
But that’s okay with the pols and their appointees. It gives them a future opportunity to look like heroes, at least to themselves, as they ride around in black cars, eat greasy pizza, and stay up all night for days on end making stuff up as they go along to save the ungrateful, self-driving, well-nourished, and soundly sleeping public from a cataclysm, provided the lenders to the U.S. government are willing to go along again.
In that light, Obama’s remarks echo the words of Rep. Michael Oxley after the 2002 passage of the Sarbanes-Oxley law:
How can you measure the value of knowing that company books are sounder than they were before? Of no more overnight bankruptcies with the employees and retirees left holding the bag? No more disruption to entire sectors of the economy?
– Nicole Gelinas, contributing editor to the Manhattan Institute’s City Journal, is author of After the Fall: Saving Capitalism from Wall Street — and Washington.