This National Review editorial provides a helpful overview of the worst aspects of the financial reform bill. This seems most important:
The bill establishes a ten-member Financial Stability Oversight Council tasked with monitoring and addressing risks to financial stability. But it is highly unlikely that such a council would have seen the housing bubble as a risk at the time. Its membership will be drawn from the same pool of high-ranking government officials who failed to see the last crisis coming. They failed, not because they were not concerned with financial stability before, but because almost all of them shared the assumption, which Barney Frank so eloquently expressed, that home-price inflation was not a speculative bubble and everything would be fine.
The folly of this council is twofold: It creates the impression that the government has its eye on the ball, which breeds laziness and incaution in the banking sector, and it gives bankers an excuse to fall back on when things go wrong, enabling them to say, “How can we be to blame for this crisis when the Financial Stability Oversight Council failed to foresee it as well?” This is the sort of framework that makes bailouts inescapable – in fact, the assumption that future bailouts will be necessary is built into this bill. The Dodd-Frank Act gives the FDIC the power to seize insolvent financial institutions and wind them down in an orderly fashion, the way that it does now with insolvent depository banks.
People shouldn’t expect government to be able to prevent bad economic outcomes-and allowing that expectation increases the chance of not just bad, but horrific outcomes. It’s also an excuse for the government to micromanage all aspects of the financial arena. Along those lines, NRO highlights the creation of the Consumer Financial Regulation Bureau that will create reams of regulations that are designed to “protect” individuals by limiting access to some types of credit (as IWF wrote here).
This bill isn’t just a failure in what it does, but in what it fails to do. As NRO writes, there are some policies and regulations that really could help the market work more efficiently and prevent some of the worst outcomes:
This is not to strike a defeatist tone and say that no regulatory changes could have improved the financial sector. Limits on leverage, for instance, might have put limits in fact on bank size, reducing the damage they could inflict on the economy if they failed. Changes to the bankruptcy code could have made bank failures more orderly when they occurred. Breaking up the rating agencies’ oligopoly would have encouraged smarter risk assessment on Wall Street. Most important, a new approach to housing policy – starting with a plan for dealing with Fannie and Freddie – would have removed an enormous distortion in the economy that contributed to the crisis.
But the bill that Congress has produced, which President Obama is eager to sign, did not include any of these measures. Instead, it doubled down on an approach to regulation that has failed in the past and added a number of extraneous provisions besides – such as new price controls on debit-card fees – because the Democrats “never let a serious crisis go to waste.”