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The Dodd-Frank Wall Street Reform and Consumer Protection Act: The Triumph of Crony Capitalism, Part 1


The revolving door between Washington and Wall Street allows people attracted to power and skeptical of free markets to dominate economic policy for their benefit.


Editor's Note: This is Part 1 of a multi-part series. Read Part 2 here, Part 3 here, and Part 4 here.

Until I began to examine the Dodd-Frank financial overhaul bill, I had no idea that it would so significantly change the direction of the United States. It's scope is so vast and pervasive that it's difficult to grasp its totality. I wrote this article to try to explain this, and why I believe it's so important for us to understand it. Because of its complexity it wasn't possible to do this briefly, so I wrote this major "white paper" and divided it into four parts to make it easier to digest. Please stick with me for the next parts; your eyes will be opened.

Part 1

The new financial overhaul bill is the greatest government takeover of the financial sector of the economy since the National Recovery Act of 1933 when Franklin Roosevelt attempted to introduce central planning in America.

More than just a new law, the Dodd-Frank "Wall Street Reform and Consumer Protection Act" (the "Act") gives government a relatively free hand to set prices and wages, to make business decisions, to promote or eliminate businesses, and to break up businesses. It establishes a large new bureaucracy to enable the government to dictate its wishes to the industry.

A major law firm described the Act as follows:

The Act marks the greatest legislative change to financial supervision since the 1930s. This legislation will affect every financial institution that operates in this country, many that operate from outside this country and will also have a significant effect on commercial companies. As a result, both financial institutions and commercial companies must now begin to deal with the historic shift in US banking, securities, derivatives, executive compensation, consumer protection, and corporate governance that will grow out of the general framework established by the Act. While the full weight of the Act falls more heavily on large, complex financial institutions, smaller institutions will also face a more complicated and expensive regulatory framework.

The Act isn't directed just at the financial sector; because of its vast scope, it's directed against everyone.

Startling as it may seem, the Act does nothing significant to prevent the real causes of this or any future boom-bust cycle. At best one may analogize this as the doctor breaking the thermometer to cure a fevered patient. At worst it's a massive federal power grab which will inhibit financial innovation, increase the cost of money, and open wide the gates to a favored few where politicians, politics, and lobbyists, rather than markets, determine the direction of the financial sector of America's economy.

While the new law has been signed by the President, it hasn't yet been written. That task will be the job of federal mandarins, the career lawyers and economists inside and outside of government who live off of government regulation. As such the ultimate consequences of this Act are unknown and won't be fully known until years later after the regulations have been written, agencies are established, and power is distributed among the bureaucrats. In other words, the Act's advocates have no idea how the new law will impact the economy.

No positions in stocks mentioned.

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