Dodd-Frank Seems to be Unraveling
The Dodd-Frank Act is continuing to unravel. Today’s Wall Street Journal notes that the CFTC has delayed, for at least six months, the rules that were to cover derivatives trading. This is good news. Derivatives trading has been unfairly blamed for the financial meltdown. In fact, credit default swaps—the fast-growing of the derivatives—are one of the most effective risk-management tools ever developed. Limiting their usefulness, or making their use substantially more expensive, will increase rather than decrease risks in the economy and the financial system.
Other parts of the act are also under challenge. The financial regulators charged with developing the new rules for housing finance have extended the comment period for new rules initially proposed in April. This came after most of the major business associations active in the field signed a letter asking for a delay and complaining that the proposed rules would impair the the housing market. In a count by the New York law firm Davis Polk, there are 243 regulations required by the DFA and 67 reports or studies, of which only 24 have been completed in the year since the law was passed. Extensions of time to comment on major proposals have now been granted to affected industries to comment on regulations and, according to the New York Times, 28 statutory deadlines have already been missed.
There are also clear indications that the Consumer Financial Protection Bureau—another of the act’s controversial provisions—will not have a director before it is slated to begin operations on July 21. Without a director, it may not be able to exercise any of its broad authorities. The CFPB has a very troubling structure. The agency has exceedingly broad power and scope, covering virtually every institution (except insurers and securities firms) that has financial dealings with the public, from the biggest banks to the smallest check-cashing stores. It is headed by a single administrator, appointed by the president for a five year term; the administrator cannot be removed except for cause. It gets its funds not through annual appropriations but as a statutory allocation from the Federal Reserve, of which it is technically a subordinate bureau. Yet, the Fed is forbidden by the act to have any influence over the agency’s decisions. A few weeks ago, the Senate Republicans told the White House that they would unanimously oppose any director who might be appointed, unless the agency were turned into a multi-headed commission and subjected to the normal appropriations process. To prevent a recess appointment, the Republicans appear to be preventing a formal Senate recess this summer.
These issues hardly exhaust the problems for our economy and financial system caused by the Dodd-Frank Act, and these likely effects have led conservative lawmakers to propose both repeal or substantial modifications in the new law. In the Senate, repeal legislation has been introduced by Senator DeMint, and in the House presidential candidate Michelle Bachmann and several cosponsors introduced repeal legislation shortly after taking office in January 2011.
Repeal makes sense. There is a good case that the slow recovery of the U.S. economy—despite substantial spending increases and stimulative monetary policy—may be the result of the uncertainties for business created by the Dodd-Frank as well as ObamaCare. If the Republicans can take the Senate in 2012, both laws will be in their sights.
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Dec '10
Re: Dodd-Frank Seems to be Unraveling
Very interesting post, Peter. I want to press you, however, on your view that derivatives ought not be subject to more regulation.
You rightly point to the utility of derivatives in managing risk, which certainly ought to be a consideration. But you do not mention with the prospect of purely speculative derivative trading, which does not (to my eyes) appear to serve any similarly constructive purpose. Such speculative trading certainly factored into the 2008 crash.
Your AEI piece on derivatives (CDS)--which I read some time ago--was somewhat unpersuasive for the same reason. Basically, you assume that the holder of swaps was always using them to hedge against a risk to which they were already exposed, and you do discuss trading that is merely speculative.
With that context, here are my questions for you: (1) Does speculative derivative trading serve a constructive purpose? (2) if not, and in light of the risks involved, oughtn't it be subject to greater regulation; (3) if so, is there a way to regulate speculative trading that would not inherently undermine the "positive" use of derivatives as hedging tools?
Thanks!
Re: Dodd-Frank Seems to be Unraveling
If I want to sell a stock because I think it is going down, the person who buys it is speculating that it will go up. It's difficult for me to see what people have against speculation. It is essential to markets. The same thing happens in the credit default swap market. When someone who is hedging a risk buys protection from someone who is selling protection, the seller of protection is speculating. If there were no speculator (such as the seller of the protection) there wouldn't be a market. There is no such thing in the credit default swap market as empty or meaningless selling or buying. Everyone in the market is doing one or the other because he believes that there is a profit in it. The buyer of protection pays the seller for it, just like in an insurance market, and if the risk turns into an actual loss, the seller of protection pays up. Neither of them was "speculating" in the sense that they were doing something that had no economic consequences or no "constructive purpose.".
Nov '10
Re: Dodd-Frank Seems to be Unraveling
This is another instance in which the "experts" are to rule a large part of our lives.
As I have posted on other threads on Ricochet, we will NOT win back this country unless and until the power of the agencies to Rule by Regulation is curbed.
We need an amendment to the Constitution that provides that no regulation of any governmental agency may take effect unless and until it has been submitted in its final form to Congress, lain over for consideration for not less than sixty days, and thereafter received the approval of a majority of both houses. The Supreme Court has given the agencies virtually carte blanche to make law, relying upon the idea of delegation. The current system is an abomination and the key to the rise of Leviathan, the bureaucratic state run by "experts" and Governor Wallace's "Pointy-Headed Bureaucrats".
Oct '10
Re: Dodd-Frank Seems to be Unraveling
The only problem I see with credit default swap market is that the government must stay out of it and allow the buyers of CDS to bear all of the counter party risk inherent in CDS. The fact that firms like Goldman Sachs and DB received 100 cents on the dollar from the CDS positions that they purchased from AIG is one of the most outrageous things that happened during the financial crisis.
Oct '10
Re: Dodd-Frank Seems to be Unraveling
By the way Mr. Wallison, thank you for being part of Ricochet. I remember reading some of your work about 10 years ago(with Bert Ely?) and it was memorable because you were saying something that sounded ridiculous to many at the time- that Fannie and Freddie were inherently unstable and were going to need a massive taxpayer bailout sometime in the near future. Fannie responded with these slick presentations about how wonderful and sophisticated their risk management was, but we now know who was right.
Edited on Jun 15, 2011 at 5:57pm