, Salem, MA


February 18, 2013

Watson: Dodd-Frank bank regulations have varied effects

As a person who believes in capitalism and the market, and all of the better attributes and consequences of their dynamics, I quite naturally share the concomitant belief that government — to the extent possible — should intervene in or regulate the private sector only when necessary.

But at the same time, I also believe that there have been and are many occasions when government regulation is warranted.

The causes of the housing bubble disaster and Wall Street meltdown of 2007 and 2008 were many. From homeowners to banks to regulatory agencies, nobody performed well. But the recklessness and irresponsibility displayed by some banks, mortgage lenders, ratings companies and hedge funds were enormous and destructive, and that behavior has precipitated new federal regulation.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law in July 2010, is legislation that was written as a direct response to the bad practices and abuses that contributed to the crisis. Congress examined the banking system, the financial markets, the explosion of complex financial instruments and the risk standards involved, and attempted to create rules that will reduce the chances of the same mistakes and duplicity occurring again.

The Dodd-Frank bill contains two types of prose. It describes in layman’s terms the broad goals and intentions of the act. It also outlines more technical, specific regulations to achieve those goals. Roughly 30 to 40 percent of the actual Dodd-Frank rules have been written — and they take effect on an intermittent, unfolding basis — while the rest will continue to be written and implemented during the next two years.

This long process is not ideal, but the entire business of understanding and regulating the mammoth, American — but globally interconnected — financial system is incredibly difficult.

Paul Volcker, chairman of the Federal Reserve from 1979 to 1987, calls Dodd-Frank “an important step in the needed direction.” It attempts to do many things. In an effort to control excessive risk and conflicts of interest, it puts new limits on proprietary trading by banks, and restrains their use of hedge and equity funds. In an effort to address the “moral hazard” of very large banks taking very large risks — knowing they are too big for the government to allow them to fail — the legislation requires banks to create their own rescue fund, and it hopes to establish orderly rules (living wills) for the liquidation of big banks, or parts of those banks.

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