Dodd-Frank as Maginot Line
25 Pages Posted: 29 Jul 2011
Date Written: January 27, 2011
The Dodd-Frank Act will prevent a future debt crisis arising from subprime mortgage debt. The Act will fail, however, to prevent other future debt crises leading to future financial crises because the Act fails to address the distorted incentives to accumulate excessive debt and the distorted incentives for large financial firms to gamble on debt instruments. The Act preserves the power of the government to bailout financial firms deemed too-big-to-fail. The Act preserves the ability of such firms (at least over the short and medium term) to speculate in debt instruments through derivatives, securities and hedge fund activities. The Act also fails to assure the disruption of CEO primacy, as a matter of corporate governance law. In short, the Act constitutes a limited response to the crisis of 2007-2009, at best. CEOs still retain the power and still face incentives to saddle their firms with excessive risks at the expense of shareholders and society in general.
Keywords: corporate governance, financial regulation, Dodd-Frank-Act, CEO Primacy
JEL Classification: E44, E65, E66, G18, G38, H60, K22
Suggested Citation: Suggested Citation