Last week, President Obama met with the top regulators to talk about financial reform. Given the daunting amount of Dodd-Frank implementation work on regulators' plates, a presidential pep talk was in order. In addition to words of encouragement for the weary regulators, the discussion ought to have included some soul-searching and tough love.
White House spokesman Josh Earnest gave a few hints about what might be discussed at the closed-door meeting. Dodd-Frank should be "implemented promptly and, most importantly, implemented in a way that protects the long-term stability of our financial system and the financial interests of middle-class families all across the country." Moreover, the regulators should be exercising their Dodd-Frank "responsibility outside of the influence of some Wall Street firms and other large financial institutions that are seeking to water this down."
The call for prompt but careful implementation ought to be accompanied by some soul-searching questions about whether Dodd-Frank, once it is implemented, will actually be helpful or harmful to the financial system and to consumers. Middle-class consumers could end up paying more to get credit cards, mortgages, and other loans as a result of the new rules and enforcement threats emanating from the new consumer agency created by Dodd-Frank.
And rather than giving us a more resilient financial system, Dodd-Frank, once it is fully implemented, will give us a financial system more dependent than ever on Washington regulators, and thus vulnerable to their whims and weaknesses. Under Dodd-Frank, the Financial Stability Oversight Council will identify any potentially systemically important company or financial activity. The Fed will make sure no financial company is taking on too much risk. The Bureau of Consumer Financial Protection will ensure that no consumer is getting ripped off. The Securities and Exchange Commission will force credit rating agencies to do a good job. And the Commodity Futures Trading Commission will keep worldwide derivatives markets in check. With a crack regulatory team like that at work, companies and consumers are going to be assured that they can stop asking their own questions and transact with trust. Fewer people asking questions will make it more likely that problems can grow unnoticed, instead of getting diagnosed and fixed before regulators feel compelled to design a taxpayer bailout.
Discussions about whether Dodd-Frank should be changed and how it should be implemented must include the full range of opinions. That's where the tough love comes in. Critical voices need to be part of the debate. Those who want to silence everyone but representatives of the "public interest" seem to define that category based on their favored policies. For example, it is assumed that someone who calls for revisiting Dodd-Frank's unwieldy and dangerous derivatives regulatory structure-out of concern for the effect that it will have on taxpayers' pocketbooks-does not represent the public interest. But an advocate of tougher derivatives regulation is given that benefit of the doubt, even if that person is speaking for a hedge fund.
Admittedly, a regulator-centric statute such as Dodd-Frank gives private companies an incentive to try to beat out competitors through the regulatory process, rather than by providing better and cheaper products and services to customers. If a company can get regulators to write a rule that closely tracks its business practices or runs counter to its competitors' practices, that company will have an advantage. Policymakers need to be on the lookout for such attempts to manipulate the regulatory system.
Nevertheless, financial regulators cannot simply refuse to consider concerns raised by the financial industry. Policymakers need input to inform themselves of the likely consequences of their actions. They do not-and cannot fairly be expected to-have all of the knowledge necessary to understand how their rules will reshape the marketplace.
When I was in kindergarten, my teacher asked the class whether anyone played a musical instrument, and I responded that I played the recorder. "The tape recorder is not an instrument, it is a machine," she chided. As I attempted to correct her misconception, she told me to be quiet and proceeded on the assumption that a child as impudent as I could not be part of any kindergarten orchestra.
Sometimes even well-intentioned people in positions of great power are not operating on accurate information. The consequences can be small-as in the case of my childhood musical trauma-or large, as in the case of the harm wrought by Dodd-Frank regulations promulgated without adequate input from affected people and companies.
We should pause to ask fundamental questions about Dodd-Frank's efficacy and discuss whether regulatory agencies are following good rulemaking practices that allow for broad, transparent input, rulemaking might be slower than some would prefer, but it should yield a genuinely better result-one that will achieve the desired outcome while keeping undesirable fallout to a minimum. Silencing Dodd-Frank's critics may produce a regulatory process as orderly as my kindergarten classroom, but it won't produce a better financial system or better-off consumers.