Sunday, July 24, 2011

Dodd-Franks and the financial crisis - have lessons been learned?

A year ago last week, the Dodd–Frank Wall Street Reform and Consumer Protection Act was signed into law. While positioned as the most significant financial regulation changes since the Great Depression, debates persist on its interpretation and how new agencies such as the Financial Stability Oversight Council, the Office of Financial Research, and the Bureau of Consumer Financial Protection will be funded.

MY TAKE: High level contributing factors to the financial crisis included a lack of oversight and accountability by policymakers, businesses and consumers. Specific contributing factors included: 1) the expanding power and influence of Fannie Mae and Freddie Mac, 2) the November 1999 repeal of Glass-Steagall Act which regulated the financial services industry for 60 years, 3) interest rate cuts by Fed Chairman Alan Greenspan to stabilize the economy after the 9/11 attack – which lead to the “punchbowl” era of monetary policy, 4) an SEC exemption, in 2004, that allowed 5 investment banks to increase their leverage ratio to 40:1, up from 12:1 (they were Lehman Brothers, Bear Stearns, Merrill Lynch, Goldman Sachs and Morgan Stanley – each either collapsed or needed significant bailouts) and 5) a declining saving rate by U.S consumers. Sometimes simplicity is a good indication that lessons were learned from past mistakes. In 1933, the Glass- Steagall Act passed in Congress without controversy and its length was 30 pages. Dodd-Frank is 2,300 pages long, and its regulatory interpretations continue to expand. Perhaps we have more learning to do.

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