Taking Stock Of Dodd-Frank: Hits, Misses And Unfinished Business

Taking Stock Of Dodd-Frank: Hits, Misses And Unfinished Business
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Taking Stock Of Dodd-Frank: Hits, Misses And Unfinished Business by [email protected]

David Zaring and Todd Zywicki on the Fifth Anniversary of Dodd-Frank

The fifth anniversary of the Dodd-Frank legislation is an opportune time to resume the debate on whether it has achieved or failed to meet its goal of overhauling U.S. financial regulations.

Enacted in July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was a response to the 2007-2008 financial crisis and the economic slump that followed. Critics say the legislation has ushered in excessive regulations that have shrunk the market for community banks while benefiting larger ones; driven low-income borrowers in particular to unregulated lenders, and failed to bring clarity on how it can prevent bailouts of institutions viewed as too big to fail.

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But supporters contend that Dodd-Frank has made the U.S. financial system safer, enhanced consumer protection, regulated previously unregulated derivatives markets and encouraged multiple regulatory agencies to collaborate.

Wharton legal studies and business ethics professor David Zaring and Todd Zywicki, a law professor at George Mason University and executive director of its Law and Economics Center, debated the record of Dodd-Frank and discussed the tasks ahead for lawmakers and regulators on the [email protected] show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

A Work in Progress

Zaring described Dodd-Frank as “a work in progress” though he is “tentatively happy” with the way the statute has been implemented. “It has made the financial system safer, limited the size and scope of the largest banks, and created a new system of oversight that is affecting the way they do business today,” he said.

Zywicki, however, strongly disagreed. “If the purpose of Dodd-Frank was to permanently entrench too-big-to-fail [financial institutions], raise the cost of credit for consumers, reduce access to credit for consumers and spur a greater reliance on products like pawn shops and payday lending, then certainly Dodd-Frank achieved its purpose,” he said. “But to the extent that what Dodd-Frank intended to do was to eliminate too-big-to-fail [financial institutions], to make the system work better for consumers, to increase choice and competition, then Dodd-Frank by any measure is a miserable failure. Everything that has resulted from it is the exact opposite of what it was supposed to do.”

Unseemly Rush?

According to Zywicki, the U.S. Congress was in a hurry to craft and enact Dodd-Frank. He pointed out that a commission created to study the causes of the financial crisis released its report six months after the law was enacted. “They rushed into Dodd-Frank without having any idea of what they were doing; they never properly diagnosed the underlying causes of the crisis,” he said.

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