The product was the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, a massive slate of regulations that expanded the role of government to police everything from debit card purchases to insurance.
Now, a new book argues that the ongoing complexity and reach of Dodd-Frank could plant the seeds for another collapse.
Dodd-Frank: What It Does and Why It's Flawed, produced by the Mercatus Center of George Mason University, provides a thorough dissection of the more than 8,800-page law.
"I think it really didn't get to the problems we saw in the last crisis. In fact, I think it made them worse in many ways," said Hester Peirce, a senior research fellow at Mercatus and, with James Broughel, co-author of the book.
Peirce maintains that Dodd-Frank created an intricate web of governance, producing uncertainty in many industries.
"There was this need to do something," she said of the law's genesis. "Congress was more concerned about doing something than about doing something right."
By creating new agencies like the Bureau of Consumer Financial Protection and expanding the role of existing entities like the Securities and Exchange Commission, Federal Reserve and others, Peirce said Dodd-Frank puts the nation's financial health in the hands of regulators while providing little clarity for the rules they enforce.
Among the book's key criticisms is the law's underlying philosophy, that some companies are so large and interconnected throughout the economy that their default would result in disastrous market contagion. The authors contend that Dodd-Frank responds with the sort of regulatory overreach that guarantees government protection for companies that, like insurance giant AIG, are considered too-big-to-fail.
"In 2008, people weren't exactly sure how far the government safety net went," she said. "I think a lot of people were surprised that AIG was rescued. Now, under the (Dodd-Frank) regime, AIG is likely to be designated as a systemically important financial institution, which means it will be regulated by the (Federal Reserve). It will be clearly anticipated that if something were to happen, that it will be rescued.
"We've basically broadened (oversight) from just banks to all sorts of new entities. It's just going to be very expensive."
While some regulations have expanded, others have vague constraints, such as the Volcker Rule. Named for Fed chairman Paul Volcker, the rule was designed to keep banks from investing customer assets in risky speculation. But the rule brought more questions about how banks can legally invest, setting up a potential chill in the securities market.
While Dodd-Frank is responsible for much new financial regulation, Peirce said the law provides no oversight for the housing industry that was at the center of the financial crisis. Nor does it clarify government's role in the home mortgage business.
"Big components like housing finance reform, that issue was totally not addressed by Dodd-Frank," she said. "That was a huge part of the problem in the crisis, the government's involvement in (backing mortgages). It made the government more likely to step in and save entities because the government itself was so deeply entrenched."
The bigger problem: the natural risks of the marketplace have been replaced by Dodd-Frank's confidence in the wisdom of regulators.
"Because the government was such an active participant in the markets, the markets got lazy," she said. "They assumed regulators were doing more work than they were. Markets relied very heavily on credit agencies because the government told them it was okay to rely on them. It turned out that those agencies hadn't done a great job.
"If we look at the lead-up to the crisis, we see that a lot of the problems stemmed from government failures, not pure market failures, because the market was already too dependent on the government."
This article originally appeared at Watchdog.org.
The post Will Dodd-Frank Trigger a New Financial Crisis? appeared first on Reason.com.
]]>As far as flashy movie productions go, Steven Spielberg's new film Lincoln may have it all—an award-winning cast, big-name director, and the historic locations in Richmond and Petersburg, Virginia to showcase the sprawling tale.
But like a starstruck paramour, Virginia has lavished countless gifts to win the heart of the big-studio production, offering sweet tax deals and sexy film grants to guarantee the state gets a piece of the fairest industry of them all, Hollywood.
"The only reason I can understand why they focus so much on the Hollywood industry is because it's kind of a sexy industry and the governor gets photo opportunities with movie stars," said Chris Edwards, director of tax policy studies for the libertarian-leaning Cato Institute. "I think it's that superficial, which is frankly pathetic."
The film opens in theaters nationwide on Friday.
Behind the scenes, policy analysts and lawmakers say Lincoln, which received roughly $3.5 million in tax incentives ultimately from taxpayer pockets, offers a glimpse into Virginia's runaway tax preferential treatment to subjectively selected industries. It's a practice they say skews the level economic playing field and eats up tax revenue needed elsewhere.
"From my point of view, the state giving $5 million to a billionaire to make his movie in Virginia is a luxury our state can't afford right now when we are cutting education, Medicaid and the rest of our safety net," said Virginia Delegate Scott Surovell (D-Fairfax).
But Virginia isn't alone in this game of film favoritism. More than 40 states now offer tax incentives for filming in-state, creating a complicated and costly arms race, Edwards said.
"I think it's sort of like a cancer," he said. "It's getting worse and worse. The more states have special deals for certain industries, the more other states are induced to the same, and it's sort of like an arms race within the states that just leads to a more complex tax code."
The Virginia Film Office was established in 1980 to lure multimillion-dollar projects away from Hollywood and neighboring states.
The business incentives to entice these projects were sweetened in 2010, when Gov. Bob McDonnell signed Virginia's first film tax credit into law.
Feature films, made-for-TV movies, television shows, documentaries, and even commercials, filmed in Virginia are eligible for tax breaks through the Virginia Motion Picture Tax Credit Program. There is a litany of of tax code voodoo from which the studios can shave off production costs, including The Governor's Motion Picture Opportunity Fund. It make it easy for big productions like Lincoln to save a buck on their Virginia tax returns.
The theory is that with a healthy film industry, movie production can make an economic splash in the state, hiring skilled workers, actors and extras. The ripple effect spreads to industries that service the production, such as caterers, craftsmen, and others.
"For example, you've got the caterers who buy food and hire people to work catering the film," said Mary Nelson, communications manager for the Virginia Film Office. "The expanded impact then is that the grocer has to go out and purchase food from a distributor, who purchases it from a farmer. The grocer hires people to work in the grocery store and whatever. This is all economic theory, and it means any dollar spent in that community has greater impact than just that dollar."
That's what McDonnell spokesman Jeff Caldwell argued, too, saying the Lincoln production had direct expenditures of $32.4 million, for a total economic impact of $64.1 million. The company hired 1,1990 Virginia-based actors and extras and 380 crew members. The production used 23,580 room nights in local hotels and spread business to places like grocery stores, restaurants, hardware stores, and dry cleaners, he said.
"The incentives given to attract this major motion picture to shoot in Richmond were a direct investment in bringing jobs, tourism dollars, and investment into Virginia," Caldwell wrote in an emailed statement.
But like summer camp, movie productions are part of a "fly-by-night" industry, eventually coming to an end and taking their millions back to California to prepare for distribution, Cato's Edwards said.
Surovell said instead of chasing the celebrity culture that follows film productions, Virginia should be investing in long-term economic solutions and revenue growth.
"I also think that to the extent that we do spend money on economic development, it ought to be for projects that support permanent investments in Virginia and not sort of fleeting activities like movie productions," he said.
But the argued-for economic growth, according to a 2010 paper by the Center on Budget and Policy Priorities, a policy think tank based in Washington, D.C., doesn't even pay off. The paper claimed the state revenue the films generate falls far short of the cost of tax breaks and subsidies doled out to the productions. The best jobs go to skilled workers imported from the out-of-state studios.
Edwards said the economic argument for film industry tax incentives is flimsy, and shows the tax code is broken.
"I think that's a stupid argument they make," Edwards said. "If they focus on making the overall tax code low and fair and equal, they would attract industry, because industry would know that they could come to Virginia and Virginia would have a competitive and equal and fair tax structure."
And it's not like this industry needs any help, said Matt Mitchell, a senior research fellow at the Mercatus Center at George Mason University in Fairfax.
"This is not like spending money on orphans and infants or the elderly," Mitchell said. "These are pretty well-heeled production companies. It doesn't make a lot of sense to be raising the tax rates on everybody else in order to pay for basically concessions to well-heeled production companies."
Virginia's preferential treatment of the film industry, said Mark Daugherty, chairman of the Federation of Virginia Tea Party Patriots, is just one example of its "fundamentally unfair" tax favoritism, along with breaks for industries like beekeeping and wine. At its worst, it's nothing better than "crony capitalism," he said.
In offering preferential treatment to some industries over others, leaders can actually inhibit the growth they hope to create, Edwards said.
"The film incentives are really the poster child for what's wrong with (tax) incentives," Edwards said. "Economically, state governments should not be favoring some industries over others. I mean, why should the film industry be favored over some more mundane industry like furniture manufacturing? Virginia needs jobs in unsexy, normal industries like furniture manufacturing as well as fancy or artsy industries like the film industry. And we don't want politicians choosing which type of industries they think are good for Virginia."
And the negative effects of preferential treatment only snowball, leading to more lobbying and an arms race among the states for certain industries, said Edwards.
"If state policy makers start buying off certain industries with special deals it's going to encourage other industries to come forward and say, 'hey why don't we get the cool credits like this,' so it encourages more and more lobbying, and ultimately, that reduces the incentive for overall tax reform," said Edwards.
This article originally appeared at Watchdog.org.
The post How Steven Spielberg's <em>Lincoln</em> Benefited from Crony Capitalism appeared first on Reason.com.
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