Bench Memos

Dodd-Frank at Two: Bad for Business and the Constitution

Dodd–Frank, President Obama’s financial-regulation reform, had its two-year anniversary over the weekend. The act, spanning 2,319-pages, is an embodiment of former White House chief of staff Rahm Emanuel’s maxim to never let a serious crisis “go to waste.” Capitalizing on the fervor after the 2008 financial crisis, Dodd-Frank purported to promote financial stability, accountability, and transparency. Unfortunately, we would have all been better off if the crisis had been “wasted” than used to pass this legislation. Not surprisingly, much of why Dodd-Frank is damaging for our economy — including its massive regulatory structure and its contribution to economic uncertainty — could be remedied by addressing Dodd-Frank’s constitutional problems. 

Dodd-Frank hurts our economy because one of its central premises is that bureaucratic experts with near-unlimited discretion make the best stewards of our economy. These experts believe that if they promulgate enough rules, they can somehow fix our complicated financial system. In Dodd-Frank, this has already led to more than 8,000 pages of regulations, and regulators are only about 30 percent finished

This contributes to an increasingly regulated but tepid economic climate. As the Economist explained, Dodd-Frank “will smother financial institutions in so much red tape that innovation is stifled and America’s economy suffers.” The House Committee on Financial Services estimated that complying with the law will take about 24 million labor hours a year, or, as the Financial Services Roundtable explained, require that businesses hire about 26,477 personnel just to comply with those already-finalized regulations. 

This outsized trust in bureaucratic experts inevitably breeds destructive economic uncertainty; businesses cannot decipher their regulatory obligations or must wait years to do so. Last year, former Federal Reserve chairman Alan Greenspan examined how our government’s uncertain regulatory regime has influenced economic growth. He found that 50 to 75 percent of the significant reduction in long-term investment in our economy “can be explained by the shock of vastly greater uncertainties embedded in the competitive, regulatory and financial environments faced by businesses . . . deriving from the surge in government activism.”

Dodd-Frank’s flawed regulatory approach has a partial constitutional solution: forcing Congress to provide concrete guidance to administrative agencies, an aim of the broader separation of powers challenge to Dodd-Frank. Administrative agencies, which follow legislative guidance to write regulations, may use discretion in enforcing laws. But the Constitution requires that Congress still decide the basic policy questions by providing an “intelligible principle” for all enactments. This provides at least some economic certainty for businesses, who could turn to the “intelligible principle” for guidance, knowing that it constrains regulators. Furthermore, forcing Congress to answer instead of punt the hard policy questions might make passing legislation more difficult or render certain detailed regulatory interventions impractical. This does not require closing administrative agencies or disavowing all complicated government interventions, but it is a reasonable check on government’s regulatory power.

Dodd Frank’s Orderly Liquidation Authority (OLA), a legalized corporate death panel, is a useful case study for how Dodd-Frank’s constitutional and economic issues intersect. The OLA lets the Treasury Secretary, the FDIC, and the Federal Reserve authorize an FDIC-led liquidation of a financial company if, among other things, it is (1) “in default, or in danger of default,” and its (2) failure “would have serious adverse effects on financial stability in the United States.” Once authorized, the FDIC essentially steps into the shoes of the company’s board of directors and can commence winding down the company as it sees fit. This includes the possibility of ignoring the bankruptcy code’s stable rules for resolving a failing institution. 

These guidelines do not bother to provide regulators with an intelligible principle to constrain their interventions, instead trusting in the FDIC to take over and run a complicated business during the height of a financial crisis. This unleashes economic uncertainty about any number of major financial companies’ fates during the worst time — a financial crisis. Will we ever know how close to default must a company be for the OLA to be applicable? How serious must the effects on financial stability be? When and how will the FDIC forgo the stable rules provided by the bankruptcy code in favor of its own regulatory judgment?

Columbia Law professor Jeffrey Gordon has explained that during a financial crisis Dodd-Frank, and the OLA in particular, would result in “the nationalization of the financial sector, an untested and potentially destabilizing intervention, the mere threat of which could hasten a slide from financial instability into financial emergency.” These are not just theoretical concerns, but rather, very practical problems that prevent Dodd-Frank from aligning with both our Constitution and sound economic policy.


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