For those of you still recovering from Gary Becker‘s take on immigration, you might want to skip his assessment of the financial-reform bill that looks set for passage. But if you can stomach it, here are a few highlights:
A 2,300-page bill is usually an indication of many political compromises. The Dodd-Frank financial-reform bill is no exception, for it is a complex, disorderly, politically motivated, and not-well-thought-out reaction to the financial crisis that erupted beginning with the panic of the fall of 2008. Not everything about the bill is bad — e.g., the requirement that various derivatives trade through exchanges may be a good suggestion — but the disturbing parts of the bill are far more important. I will concentrate on five major defects, including omissions.
Becker’s first objection:
The bill adds regulations and rules about many activities that had little or nothing to do with the crisis.
Here’s an omission he dislikes:
[T]he bill essentially says nothing about Freddie Mac or Fannie Mae.
And here, in its trenchant entirety, is his final objection:
Many proposals in the bill will have highly uncertain impacts on the economy. These include, among many other provisions, the requirement that originators of mortgages and other assets retain at least 5% of the assets they originate, that many derivatives go on organized exchanges (may be an improvement but far from certain), that hedge funds become more closely regulated, and that consumer be “protected” from their financial decisions. Most of these and other changes in the bill are not based on a serious analysis of what contributed to the financial crisis, but rather are the result of political and emotional reactions to the crisis. Usually, such reactions do more harm than good. That is likely to be the fate of the great majority of the provisions of the Dodd-Frank bill.
Someday, if you’re ever wondering why economists don’t get elected to high office in this country, think back to this assessment by Becker.
Becker’s co-blogger Richard Posner doesn’t go into as much detail but is on the same page:
I agree with Becker’s criticisms of the new law (not quite a law yet-it has not been passed by the Senate, but I am guessing it will be, because an ignorant public demands action). It’s a monstrosity, and a gratuitous one, as there is no urgency about legislating financial regulatory reform. … There are little nuggets here and there, such as the abolition of the fainéant Office of Thrift Supervision, but on the whole, so far as I can judge, the new law is a political measure in the worst sense.
and 
. You can also watch it on 
Glass Steagall was apparently a 34 page document.
Not a good thing you did, Prez. Clinton! (And who was in office in 92 (GH Bush) when the hedgefunders got their privileged tax status.
St. Ronald Reagan was exactly not that.. (Do we still believe in the “AntiChrist??” — just a question.. in the Middle Ages, it was tossed around all of the time as a term of disapproval!)
No urgency to passing financial reform? Really? (? Seth & Amy)
This legislation is why a pox is upon both their houses. You can only fool all the people some of the time. Its time to vote all incumbents out before our country is totally destroyed by their foolishness, hypocrisy and irresponsible dishonesty.
I don’t love the bill either, but I disagree with a couple of Gary’s points.
If you look at the delinquency and foreclosure rates for mortgages that Bank of America and Wells Fargo (two of the largest mortgage originators) retained for their own portfolios, vs. those levels for mortgages that they repackage and securitized, you will see that the ratios were about 10 TIMES worse for the mortgages that they securitized. Forcing mortgages originators to have skin in the game gets the incentives right for mortgage originators by internalizing an externality. Gary should reconsider his view.
The reason that placing derivatives on exchanges is important, is that the level of open interest in derivatives can indicate to regulators that there systemic risk in the derivatives themselves. When derivates take the form of private contracts there is no way for the regulators to calulate open interest. For example, there were $600B of credit defaults swaps outstanding on Lehman Brothers compared with Lehman’s $200B of debt. When Lehman failed the losses in the system from derivatives dwarfed the losses from Lehman itself (counter party issues made the losses even greater, but that is a separate issue).
M Kagan
I agree with most Becker’s conclusions, save one: his dislike of forcing mortgage loan originators to keep a minimum of 5% of the loan asset.
It became a very common practice for shady originators to give low teaser rates that virtually guaranteed the loan would default once the rate reset. It didn’t matter to the originator, as he/she would sell the loan (literally) a day or two later.
Retaining some of the loan asset discourages this practice, though I would have liked to have seen a greater precentage than five; alternatively, I would have suggested that an originator must keep the ENTIRETY of the loan for at least six months past the time that an interest rate resets for the LAST time.
The only way to reform healthcare was with a comprehensive bill that tackled both insurance reform and requirements (and financial ability) for the public to carry insurance at the same time – without one, the other was impossible.
Not so with financial reform. Many good ideas (consumer protection agency, derivatives exchange) could be accomplished on their own. It remains to be seen whether the political horse trading larded on comprises a major portion of this bill, or just the requisite grease to get a normal bill through.
Opinions are wonderful things, and the Freakonomics team has lots of them. All of this is meaningless without facts, figures and analysis, but that would be hard, so they don’t do it.
For all voters: The choice is as crystal clear as any I can think of. Over the previous 30 years, the republicans have controlled the Presidency for 2/3 of the time, or 20 years. Also, they controlled Congress 40% of the time and controlled it all for 20% of the time. Now, with that much time in power, how is it that this country is in the ditch? Easy, republican governing philosophy, or lack there of, has been an abject failure. If, the electorate wishes to reward republicans for their failure, fine they have the right to do so. Just do the rest of us a favor, we would rather not listen to you whinning about how bad the economy is!