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Election Economics: Assessing Dodd-Frank

Jul 23, 2012 • Behavioral Economics, Businesses, Economic Debates, Financial Markets, Households, Money and Monetary Policy, Regulation, Thinking Economically, Uncategorized, US Presidential Election • 255 Views    No Comments

University of Chicago professor Luigi Zingales tells the story of being asked to tape his windows during a tornado watch in Boston. A similar mandate in Italy, he said, would mean that the brother of the mayor was in the tape business. Furthermore, when instructed to stay inside, he recalled the Italian attitude toward government meant you would fare well if you did the opposite.

Dr. Zingale alluded to his experience in Boston when discussing the appropriate economic role for government. At its core, government needs to be trusted. One source of trust is simplicity and transparency.

For a prototype, he suggested we look at the 37 pages of the 1933 landmark banking law, Glass-Steagall. To eliminate banking abuses, Glass-Steagall simply said investment banks and commercial banks had to be separate businesses. Banking monoliths like J.P. Morgan & Co. had to divide themselves into institutions that provided traditional banking services and those that focused on securities work for businesses.

By contrast, covering everything from derivatives to systemic risk to consumer protection, the scope of Dodd-Frank is broad. As a result, to implement its 848 pages, specific rules have to be written. Currently 30% complete, 8843 pages of rules have been articulated.

The 11 pages, for example, that focus on the Volcker Rule are about diminishing banks’ risky behavior. Implementing those 11 pages, 4 regulatory agencies wrote a 298 page proposal with 383 questions and 1420 “subquestions.” Called an interactive Volcker rule map, it has 355 steps.

One agency that the law created has begun to function. In the news recently, the Consumer Finance Protection Bureau initiated a suit against Capital One Financial. For deceptive marketing of consumer credit cards, Capital One has been fined $210 million.

How to assess Dodd Frank?

Supported by President Obama and opposed by Mitt Romney, Dodd-Frank had its second birthday on July 21. There is a definitive Democratic/Republican divide on the Act. While most of us agree that many financial institutions engaged in wrongdoing, we disagree about how to constrain them in the future.

And that returns us to Dr. Zingales. For you, does Dodd-Frank evoke more or less trust in our financial system? Your answer should help you select your candidate.

Here is the complete transcript and link to the podcast of Dr. Zingales’s excellent econtalk interview while this Davis-Polk interactive displays the current status of Dodd-Frank’s implementation. For more on the law itself, here is its text and here is an econlife post on it.

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