Making Sense of the New Financial Deal

Abstract:     
In this Essay, I assess the enactment and implications of the Dodd-Frank Act, Congress’s response to the 2008 financial crisis. To set the stage, I begin by very briefly reviewing the causes of the crisis. I then argue that the legislation has two very clear objectives. The first is to limit the risk of the shadow banking system by more carefully regulating the key instruments and institutions of contemporary finance. The second objective is to limit the damage in the event one of these giant institutions fails. While the new regulation of the instruments of contemporary finance - including clearing and exchange trading requirements for derivatives - is promising, its treatment of systemically important financial institutions is likely to create a troublesome partnership between these institutions and the government. I also argue that our financial world is just as prone to bailouts after Dodd-Frank as it was before, and that it would have made a lot more sense to focus on bankruptcy as the solution of choice for troubled financial institutions.

After this initial assessment, I discuss the CEO compensation issues that have gotten so much attention in the press. I conclude by considering the legislation from a distinctively Christian perspective.

Number of Pages in PDF File: 21

Keywords: Banking and finance, Dodd–Frank Wall Street Reform and Consumer Protection Act, derivatives, securities, leverage, risk, too big to fail, bailouts, financial regulation, 2008 credit crisis, law and economics, bankruptcy, executive compensation, Christianity, sacrificial love

JEL Classification: G18, G24, G32, K22, K23

Accepted Paper Series