The Dodd-Frank Act is dedicated to managing systemic risk, but that risk had no substantive role in the financial crisis. The law also compounds a stifling regulatory regime which kills competition by preventing new banks from entering the market.
These were the standout insights from a panel discussion hosted by the Competitive Enterprise Institute (CEI) on April 11. The gathering focused on the Financial Stability Oversight Council (FSOC), created by Dodd-Frank to monitor systemic risk and pop asset bubbles. This central clearinghouse brain trust brings together heads of key agencies like the Federal Reserve, Department of Treasury, and Securities and Exchange Commission. But non-voting members include “a state insurance commissioner” and “a state banking supervisor.” FSOC is yet another twist in a tragicomically counterproductive regulatory strategy.
Former SEC commissioner Paul Atkins complained that Fed officials lack the experience and expertise to police money market funds and was bluntly skeptical that the same bureaucrats who missed the real estate bubble would catch another. Oversight is a whole other barrel of toxic assets. Mercatus Center senior research fellow Hester Peirce noted that, in lieu of any indication that agencies were more effectively coordinating, the new arrangement may undermine accountability. When failures do occur, participants are likely to point fingers over their shared responsibility.
Two issues illustrate that the status quo is fundamentally flawed. CEI senior attorney Hans Bader claimed that systemic risk played no substantive role in the financial crisis. As he explained and Atkins confirmed, the market was unsettled by authorities’ inconsistent interventions. The Bear Stearns bailout built expectations that shattered when Lehman Brothers was allowed to fail. The tipping point a mass recognition that mortgage debt was garbage. That risk was systemic in the sense of ubiquity—on an individual basis.
Musing about the barriers to market entry created by burgeoning financial regulations, CEI Center for Economic Freedom director John Berlau said no new bank has been allowed to form since 2009, so the system cannot deal with the loss of a major player. No one could step in to liquidate resources and rearrange them more productively. If entrepreneurs cannot operate, there can be no market process. Instead, the government arranges rescues with established firms, as in the case of Bear Stearns and Goldman Sachs. This is one reason big banks have gotten so big. Berlau warned this is an overlooked contributing factor to Too Big To Fail.
An insulated oligopolist faces little competitive pressure to be efficient, innovative, or responsive to customers (to say nothing of moral hazard). Wall Street eminence Jamie Dimon recently said that Dodd-Frank creates a “bigger moat” between his firm JPMorgan Chase and potential competitors. Until the moat narrows enough for new players to enter the market, the entire economy will be tied to the health of a few large banks.