The fiscal cliff deal painfully hammered out in the waning hours of 2012 likely foreshadows the battles yet to come this year over the country's fundamental mismatch between revenue and spending. But these fiscal fights are not the only reason 2013 promises to be interesting. The new year will bring with it an intense period of Dodd-Frank rulemaking and the implementation of rules recently put in place.
As Dodd-Frank comes to life, its harmful effects will come into plain view. Solutions crafted without a clear focus on the problems that need fixing can create new, even more severe consequences. These issues are described in detail in an upcoming book entitled Dodd Frank: What it Does and Why It's Flawed, due out tomorrow by the Mercatus Center at George Mason University. A quick overview of the law's shortcomings is a stark reminder of the dangers of legislating in haste:
- Codifies Too-Big-to-Fail. Rather than eliminating the market's expectation that certain big financial firms are too big to fail, Dodd-Frank creates an explicit set of too-big-to-fail entities—those selected by the Financial Stability Oversight Council for special regulation by the Fed.
- Threatens Small Businesses. Dodd-Frank's complex web of regulations favors large financial firms that can afford the lawyers to analyze them. New requirements will be disproportionately costly for small banks and small credit rating agencies. Dodd-Frank's complex derivatives rules will further concentrate an already concentrated industry.