Ok, let's take the Dodd bill point by point, using the summary written by Dodd's own committee staff.
1)Creates "a strong consumer protection watchdog" which though housed in the Fed will be able to "autonomously write rules for consumer protection."
Dodd's justification: "The economic crisis was driven by an across-the-board failure to protect consumers"
Our Take: Imprudent "pro-consumer" lending helped drive the crisis. Separating consumer protection from bank safety and soundness will invite another disaster.
Reality: The mortgage crisis was largely created by an across the board effort to "protect" consumers: the drive by Bill Clinton, George Bush, Chris Dodd, and Barney Frank to force banks to stop "redlining" i.e. start giving bizarrely "innovative" mortgages (e.g. liar's loans, zero down payment loans.) Barney Frank and Chris Dodd are the leading predatory lenders in U.S. history.
The new consumer protection agency won't make exactly the same mistake again. But it will make new mistakes for a simple reason. The principle behind the consumer agency, that bank safety and soundness rules should be separated from consumer protection rules is wrong. Prudent lending is good for consumers; "pro-consumer" lending isn't.
2. Creates a "Financial Stability Oversight Council" to create an early warning and response system to address "systemic risks."
Dodd's justification: Only a coordinated regulatory response can save us from the bad behavior of megabanks whose demise could crash the system.
Our Take: Discretionary regulation, which helped cause the first crisis problem would only be reinforced. Banks and regulators will again use it to maximize their power and privileges and invite another crisis.
Reality: The existing regulators, national and global, including the Fed, the FDIC, the SEC, and virtually every developed nation central bank knew exactly what the banks were doing on the way to creating the mortgage crisis and heartily approve and encouraged it. National and global regulators actually penalized banks that preferred old-fashioned retained mortgages and rewarded banks that helped turn the mortgage market into a casino.
Even the "good stuff" in this section isn't real. The bill does not really set higher capital requirements for mega banks or impose other safety and soundness regulations, it simply encourages the council to do so. That brings us right back to discretionary regulation, which is what got us in trouble in the first place. Once again the mega banks and the regulators will get together to design "flexible" regulations that maximize the power of the regulators and the privileges of the big banks"”just like last time.
3. Supposedly ends "too big to fail" by discouraging "too big" and creating orderly mechanisms for failure. Banks would have to create "funeral plans" to show they are prepared to go broke safely. A new FDIC administered "liquidation mechanism" allowing the government to shut down failing banks without damage to the system would be funded by the mega banks to avoid need for taxpayer bailouts.
Dodd's Justification: The crisis was created by banks that behaved recklessly because they knew the government would bail them out.
Our take: Dodd's rules reinforce exactly the approach that caused bank risk to go undetected last time and won't make megabanks less likely to fail.
Reality: Dodd's account of how the crisis happened is utterly divorced from reality. It is not credible that the banks behaved recklessly because they believed that government would bail them out. The bank executives in question lost billions by driving their banks into the ground. Bear and Lehman were among the most "employee owned" firms in the industry.
The banks went down for two reasons:
(a) Both the bankers and the regulators bought into disastrously flawed "state of the art" risk management practices they still believe in and which would be even more strongly enforced by regulators under this section of the bill.
(b) Investors were denied the information they needed to rationally assess the banks' financial health. Though the megabanks are quasi-public institutions they operate largely in secret. The details of their balance and "off-balance" sheets are secret. Lacking hard information, the investors that fund the banks (by buying bank bonds) relied on the regulators. Result: for years investors, taking their cue from regulators, were too easy on the banks. Then when the crisis came, the regulators, continuing to operate in secret, panicked markets into concluding that all the banks might be broke, though many probably weren't. To this day we don't know whether Bear Sterns was "really" broke or just the victim of a run.
The Dodd bill would do it all over again. The new reports the banks would have to prepare for the regulators (and Congress) will inevitably be couched in terms that obscure more than they reveal. Risk management "metrics" will replace true disclosure to citizens and investors. Officially endorsed obfuscation and resulting rumor will continue to be the order of the day. Markets will fail again because government again will keep them from functioning. The only way to solve this is to require full, line-by-line, investment-by-investment, disclosure of every investment on (or off) the banks' books.
The best section of the bill, the bank-funded liquidation scheme, is underfunded: $50 billion will not be nearly enough for a crisis on the scale we just went through. The underfunding implies huge over-confidence that the regulators will intervene in a timely way "next time." They won't. We'd be much better off with black-letter law increasing capital requirements for megabanks to a level that would make them very unlikely to fail.
4. Streamlines Bank Regulation, establishing "clear lines of responsibility, reducing [regulatory] arbitrage" and improving "consistency and accountability.
Dodd's Justification: The current convoluted complex of banking regulators (the Fed, FDIC, Treasury, OTS, SEC,etc.) was a big part of the reason regulators were caught flat-footed by those clever bankers.
Our Take: Pointless rearranging of the regulatory schematic. To the extent it increases faith in the regulators it will make the system more dangerous by lulling investors and citizens to sleep"”again.
Reality: The regulators were not confused, caught flat-footed, or deceived by the banks. They were with the banks every step of the way and now they are trying to cover their rears.
True, the regulators had no idea the banks were on the verge of oblivion until it was far too late BUT NEITHER DID THE BANKS.
As we write in Panic: "the government did not know the banks' financial condition . . . because the banks themselves did not know. Believing that statistical systems could transcend the need for human judgment, the bankers created and the regulators encouraged financial institutions with balance sheets no one could judge."
None of that has changed. Bankers and regulators alike are still working on a flawed theory the main effect of which is to deny markets the information they need to function. Until this changes we will either repeated market panics or, if regulators clamp down sufficiently to avoid that result, a constipated credit system hobbling the US economy.
5. Brings "Transparency and Accountability to the Derivatives Market" by subjecting credit default swaps to the same sort of regulations, e.g. margin requirements, central clearing, etc, that stock traders are held to.
Dodd's Justification: The CDS market linked together the fate of good banks and bad spreading the contagion and dramatically increasing the cost of the bailout.
Our Take: Regulating the CDS market like the stock market will not spell the end of Capitalist Civilization but don't expect too much good to come of it either. (As we all know, stock market regulation has completely eliminated booms and busts and replace the bad old days with the reign of pure reason.)
Reality: The role of CDS in creating the crisis is grotesquely exaggerated by regulators, politicians, and the media all of whom have a vested interest in the story that says "?deregulation caused the crisis.'
Hardly ever noted is that it was the CDS market"”not the regulators–that ultimately blew the whistle on the banks, exposing how worthless all those junk mortgages were. CDS were the vehicle the shorts used to bet against mortgage securities, even while the regulators kept insisting everything was fine.
Without the shorts, the banks would have kept writing bad mortgages for another year at least. Since the last mortgages written were the worst several times over, the resulting crisis would have been even more devastating, the cost of the bailout would have at least doubled, and it might not have worked.
Translation: short sellers wielding CDS probably prevented the Great Depression II
6. Tighten up regulation of hedge funds.
Dodd's Justification: "Hedge funds are responsible for huge transfers of capital and risk, but some operate outside of the framework of the financial regulatory system"
Our Take: Gee, could that be the reason that the only hedge fund that has ever posed a systemic risk to the system was Long Term Capital Management, which was funded to the tune of hundreds of billions of dollars by the megabanks with full approval of their idiot regulators. By all means lets put the regulators in charge of the hedge funds too, create a level playing field in which all the nation's capital allocation is done by clueless bureaucrats.
The Reality: This one has nothing to do with reality.
7. Establishes a new office of Credit Ratings Agencies to impose new rules on the same regulated entities the government trusted to get it right last time. (Sorry, the effort to take this stuff seriously is wearing us down.)
Dodd's Justification: "Flawed methodology, weak oversight by regulators, conflicts of interest, and a total lack of transparency" led to rating junk as AAA.
Our Take: Actually it was both U.S. and international banking standards that caused mortgages securities built up from junk"”which the governments and regulators in question knew were junk"”to be passed of as AAA. The ratings agencies were part of that, but they were regulated at the time.
Reality: Totally divorced from. Rapidly approaching alternate universe.
There are half a dozen other significant provisions, but we can go no further. The attempt to calibrate our Earth-based systems to the Dodd Frank Universe, is causing extreme disorientation, oxygen shortages to the brain, and feelings of impotent rage.
As we pull out of orbit to protect the crew from permanent brain damage our doublespeak translation hyper drives pick up an oddly rhythmic chant that seems vaguely like language but performs none of the information-carrying functions of human speech:
"It's not our fault."
Trust us"
"We knew nothing"
"Trust us."
"We know all."
"Trust us."
"The banks tricked us."
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