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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.


The Act's Timing

This chart gives a good picture of the timing for implementing the Act:

Click to enlarge

This process is described as follows:

Now, the legislation hands off to 10 regulatory agencies the discretion to write hundreds of new rules governing finance. Rather than the bill itself, it will be this process -- accompanied by a lobbying blitz from banks -- that will determine the precise contours of this new landscape, how strict the new regulations will be and whether they succeed in their purpose. The decisions will be made by officials from new agencies, obscure agencies and, in some cases, agencies like the Federal Reserve that faced criticism in the run-up to the crisis.

The Commodity Futures Trading Commission has designated 30 "team leaders" to begin implementing its expansive new authority over derivatives, and has asked for $45 million for new staff. The Federal Reserve, Federal Deposit Insurance Corp. and Securities and Exchange Commission are also in the thick of the implementation.

Law firm Davis Polk Wardwell calculated the number of agencies involved in the rule making process. In the below chart, the "Bureau" is the Bureau of Consumer Financial Protection, the "Council" is the Financial Stability Oversight Council, and the "OFR" is the Office of Financial Research:

Here is the reality: It will take many more years to write and implement the regulations that really define the Act. It may be that some of these regulations will never be written, something that's not unheard of in Washington.

The Act will be a siren call to lobbyists, lawyers, accountants, and economists.

Regime Uncertainty and Perfect Wisdom

The initial impact of any new and unwritten law is uncertainty, and uncertainty is what business abhors. "Regime uncertainty," a concept developed by economist Robert Higgs, says that such legislation causes businesses to pause expansion until they know how the law will affect them. This is apparently already happening:

The timing of Dodd-Frank could hardly be worse for the fragile recovery. A new survey by the Vistage consulting group of small and midsize company CEOs finds that "uncertainty" about the economy is by far the most significant business issue they face. Of the more than 1,600 CEOs surveyed, 87% said the federal government doesn't understand the challenges confronting American companies.

No positions in stocks mentioned.

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