Dodd-Frank: Toward First Principles?
31 Pages Posted: 24 Feb 2011 Last revised: 24 Feb 2012
Date Written: February 22, 2011
When confronting a major crisis, tinkering at the margins of policy will likely do precious little either to ameliorate the system or avert the next catastrophe. Rather, lawmakers need to return to first principles by examining the underlying causes of the crisis and stemming them. Writing over two years ago, well before the advent of the Dodd Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), I argued that to mitigate, or perhaps even avoid, future disasters, policymakers should focus on remedying four pernicious facilitators to scandal: (1) the dissemination of information that is false or misleading; (2) the ability to abuse regulatory gaps; (3) the willingness to exploit credulous consumers; and (4) the use of corporate size to privatize profits and socialize losses. This Article, written a few months after the passage of Dodd-Frank, builds on this prior work to assess whether the statute effectively addresses these four root causes of our financial meltdown.
Mapping the statute against these four facilitators, I argue that while a positive step forward in some respects, Dodd-Frank exhibits more of an intricate reaction to our last financial crisis than a concise attempt to address fundamental flaws in how Wall Street is regulated. To some degree, this might be unsurprising, given that regulators were reacting ex post to a crisis rather than averting it ex ante. Yet Dodd-Frank makes surprisingly few important decisions. Fascinatingly, along each of these four dimensions, the Act almost exclusively defers to agency rulemaking or the creation of new organizations.
The Article is structured into two principal sections. In Part I, I outline each facilitator and examine what a first principles-based response might encompass; then, I analyze what Dodd-Frank did. Each time, I find that while Dodd-Frank might contain some positive provisions, it ultimately fails to address the root causes of financial crisis. To the extent there is a mismatch between first principles and the legislation, Part II asks why sophisticated lawmakers would choose largely to defer these issues rather than confront them more simply and directly. While there are benefits to statutory vagueness and delegation to agencies and courts, the main factor underlying voluminous legislation that ironically postpones the major questions lies in the political economy of twenty-first century Congressional action and the jostling among interest groups. The Article concludes by suggesting that a path forward may lie in structural reforms pertaining to the legislative process.
Keywords: Dodd-Frank, Financial Reform
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