Will Dodd-Frank Trigger a New Financial Crisis?

A new book warns of the unintended consequences of the massive regulatory overhaul.


In the wake of the fiscal crisis of 2008, lawmakers in Washington rushed to craft legislation to curtail risky practices at the center of the financial collapse.

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

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  1. “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.”

    Sound familiar?

    Face facts: we’re fucked.

    1. We must do something.

      This is something.

      Therefore we must do this.


  2. Im honestly shocked that the government created a problem and then later made it worse trying to fix it. This report is clearly propaganda designed to discredit the hard working people that are only trying to make us as safe as possible from our decisions.


    1. That’s twice in two games for Lynch. He better make up for it like last time.

  4. Barney Frank triggers my gag reflex

    1. I’d be willing to bet he’s triggered more men’s gag reflex than just yours.

      1. Somehow I doubt the delicate and zaftic ex-representative from Massachusetts has the “throw weight” to tickle anyones tonsils.

    2. Really? It’s Chris Dodd that reminds me how much I fucking hate politicians.

      1. Barney I almost like. He’s entertaining, but it’s a shame he wasn’t on the pot, gambling and sex committee instead. Dodd just looks evil.

        1. Funny that the two that had the most to do with causing the housing mess in the first place wrote this last piece of shit legislation that does nothing to correct the original problems. Maybe funny is not the right word.

        2. Barney I almost like.

          No. Personally, I could give a rats ass about his sex life. Or pot smoking. Or gambling. But, after I watched that prick sit on CNBC and declare that he wanted to see the financial services industry shrink because of his law, I pretty much decided that he was one of the worse pieces of excrement sitting in Congress.

  5. What derangement syndrome allows someone to think that 8,000 pages of legislation can fail to make worse whatever problem its authors fantasized about solving?

    1. Your mistake is assuming the intent is to solve the problem.

  6. Dodd-Frank is terrible on its own, but it’s our monetary system that’s going to take us down. You can’t print paper and call it production, regardless of whether the counterfeiter is some guy in Okeechokee or the Federal Reserve.

    Dodd-Frank is just another reason to own physical gold and to invest your fiat paper in gold equities.

    1. Land and silver, man. And there’s still a lot of upside in a lot of other metals, namely copper, nickel and palladium.

      1. History and economics say you want gold. Silver is a good subordinate currency, but gold is where you need to be.

        And land is not all it’s cracked up to be. My family farms 3000 acres back in Ohio (thankfully owned outright for decades), but my dad is skeptical of what interest rate suppression has done to the price of farm land, which is averaging six to ten grand an acre in Ohio. Farm land is looking very bubbly, some land out west recently went for $17,000 an acre! There is a bubble in farm land, getting created by the Fed like they always are, and I say caveat emptor.

        The guys who bought land in the 70’s got taken to the cleaners in the early 80’s, but the guys who bought gold and gold equities got rich. Credit bubbles happen in land, but they can’t happen in gold.

        1. Silver is underpriced relative to gold. Silver has historically traded about 1/15 to 1/16 the price of gold, and if gold were monetized against all outstanding dollars, it would be somewhere between $50K and $100K/oz. Currently, about 9 oz of silver is coming out of the ground for every oz of gold. Silver gets used up. 40%+ of all silver mined is used in an unrecoverable industrial process. Buy silver, and you fuck JPMorgan Chase.

    2. Our monetary system is fine. Quit reading shit like ‘Creature from Jekyll Island’ and don’t listen to the Beckerhead.

      1. Our monetary system is fine

        Only by virtue of the rest of the world being even more dysfunctional than we are.

        1. Our monetary system is fine

          True, as long as you are not poor. If you are poor, however, inflating the only asset you have, dollars, really, really sucks.

          I suppose in your “mind”, that is a feature and not a bug?

          Could you be a larger piece of shit? It’s hard to imagine how.

          1. Yeah, like the poor are sitting on gold bullion waiting to benefit from inflation.

            You idiot.

            Really, read about the old Greenback Party and then come back.

            1. Uhh, wasn’t the Greenback Party an alliance of really ignorant farmers who thought circulating more dollars wouldn’t have any consequence as to their value, and so supported currency expansion that would have worked against their own interests?

              I understand that you share the same outlook, but I don’t know why you think your own imbecility proves your point.

              1. The Greenback Party was a farmer/labor party who got tired of seeing their savings vanish from defunct banks during the idiotic “gold standard/free banking” era.

                1. Right, because seeing your savings vanish as dollars lose their value at roughly double the rate of return from your investments is vastly preferable to losing them in a bank run.

                  A rose pile of dogshit by any other name, shreeek.

              2. Uhh, wasn’t the Greenback Party an alliance of really ignorant farmers who thought circulating more dollars wouldn’t have any consequence as to their value,

                No they were farmers that wanted their mortgages inflated away.

                1. this ^

          2. Could you be a larger piece of shit? It’s hard to imagine how.

            I see you haven’t met T o n y yet.

      2. And then you follow it up with something completely retarded.

  7. Legislation written by lobbyists at the behest of two of the most corrupt members of Congress. What could go wrong?

  8. setting up a potential chill in the securities market.

    That is a knee-slapper.

  9. The best thing about Dodd-Frank (this directed to Wingnuttopia) is that it prevents the government from bailing out another big bank through its Liquidation Authority.


      It cracks me up how much faith you have in that beast called rule of law as practiced in Wash DC.

      1. When it comes to something as nebulous as insider trading they get all fucking serious about enforcing rules.

        1. You really are dumb or wearing blinders.

          They change the rules at will.

          *shakes head* yep, still remarkable how willfully blind you are.

    2. Are you intentionally lying, or just an imbecile? The entire point of a designation of an institution as a SIFI is not to end its systematic importance, but to increase it’s integration with the regulatory apparatus. The Liquidation Authority is a joke that assumes no change in markets during periods of distress. All Dodd-Frank has done is to increase the distress correlations of major financial institutions.

  10. Does the bill increase borrowing costs for smaller banks? I thought I read that somewhere. How does that work? If true, then it means that the big banks will have a bigger monopoly and can fix prices.

    What the law should have done: Repeal Freddie/Fannie from selling ARM loans altogether. Private banks can still do this. Second, repealing the community lending standards that force banks to lend to minorities. Don’t worry, over time minorities will become rich. (They just aren’t rich now because for the longest time after slavery we had Jim Crow laws, and the welfare type laws, both of which drive a community further down.)

    1. The cost of lawyers and accountants to interpret this bucket of vomit is ginormous; it’s per company, of course, so unless Chase and BofA pass along their knowledge from the goodness of their hearts, itsy bitsy banks will have the same absolute overhead as the monsters. Some bank in Texas is suing on that account alone.

      1. My old man was the president of a county hayseed bank, maybe another reason I have come to despise central banking. For thirty years he ran that bank masterfully, on the same economic philosophy as a farmer; you can’t reap what you don’t sow, you can’t eat your stock seed. He never let that bank get anywhere close to subprime debt, and as a result it sailed right through the past five years.

        A successful banker, in a free market, is a pivotal man in his community; but the hate the dishonor which has been rendered to the profession by centuries of mystics and the free lunch economics of central banking & fiat money.

    2. No one ever “forced” a bank to make a loan. Quit listening to redneck AM radio.

      1. But they did, asswipe. On one hand, you have Community Investment Act and all the government mortgage underwriting and direct housing finance loans (though both fed and state depts.). I worked at my state’s “housing finance agency” in college, and my job was to write commitment letters all day long to every deadbeat non-profit that came to us with their sob story. A daily total for loans I wrote could run anywhere from 10 to 100 million dollars, and they were all shit loans that no private banker would ever have made.

        On the other hand, you had the Fed keeping interest rates in the gutter (as they still are today) in order to prop up government profligacy and largesse. It was the interest rate manipulation of the Fed, in cahoots with the government loan programs, that made the housing debt bubble happen; the speculators were along for the ride, but even they were just doing what the government wanted them to do.

        1. And that state housing finance agency wasn’t even technically an institution of my state, it was a local branch of HUD with a state seal on it. It was here that I first began to see the lines in the matrix.

          Statists hate the real, productive institutions made possible by capitalism and private property, and they are forever trying to steal it’s glory (and it’s wealth) in order to play in the neo-liberal sandbox of statism.

        2. You’re a lying idiot.

          First, the Community REINVESTMENT Act simply prevented redlining and nothing else.

          And states do not do federal housing mortgages.

          1. You’re a disingenuous cunt. When “preventing redlining” consist of denying M&A to banks who won’t make loans in minority communities because, by sheer coincidence, they tend to go bad at a higher rate, you are indeed “forcing a bank to make a loan”. DemocraticUnderground is not a good source for your news.

            1. STFU. States relaxed all the merger laws for banks right after the notorious CRA was passed. That is precisely why Charlotte became the second banking capital after buying the largest California bank.

              The CRA is nothing but a wingnut conspiracy theory just like the NAFTA highway and UN Agenda 21.

              Really, you are way out of your league here. Go back to Glenn Beck radio or Andrew

              1. Why don’t you at least head to Wikipedia to read a summary of the regulatory changes made since the law passed. Better yet, go check out Cato’s writing on the subject from the late 90’s before you or any of the other basement dwelling Kos groupies had ever heard of something called a Community Reinvestment Act:…..isnt-there

                Or you could just substitute dimwitted name-calling and vacuous insults of conservative radio figures that nobody has mentioned or cares about for an actual argument. Oh wait…

                1. I destroyed your point, you fool.

                  Bank M&A went wild in the 80s/90s aftermath of the CRA. Charlotte Bank of NC bought the largest banks in Georgia (C&S), Florida (Barnett), and California (Bank of America).

                  Who exactly “forced” them? And your Cato link is a non sequitor. I don’t care about discrimination.

                  1. Palin’s Buttplug| 1.13.13 @ 5:00PM |#
                    “I destroyed your point, you fool.”

                    Shitstain, that’s not possible. Go suck a turd.

                  2. You know I knew there were some ad Hominem reliant debaters on Reason’s board, but you win the prize. You couldn’t argue your way out of a wet paper bag without name calling. Asshole :p

              2. = WINGNUTZ!!!111!!11!!!

                New Study Finds CRA ‘Clearly’ Did Lead To Risky Lending

                To satisfy CRA examiners, “flexible” lending by large banks rose an average 5% and those loans defaulted about 15% more often, the 43-page study found.

                1. They rose 5% and defaulted 15% more often? 5 fucking percent?!?! 15 fucking percent?!! Shit, no wonder the whole banking sector crashed!!!

              3. Yes, when I look for sober, reasoned Internet commentary I look for people named “Palin’s Buttplug”.

          2. First, the Community REINVESTMENT Act simply prevented redlining and nothing else.

            So the act itself was two, maybe three sentences long? 800 pages of “no redlining”? Science you are a turd.

            I can’t decide if you are really as stupid as you appear or if you are hoping that we are.

          3. Palin’s Buttplug| 1.13.13 @ 4:18PM |#
            “You’re a lying idiot.”
            Projection, shitstain, projection.

            “First, the Community REINVESTMENT Act simply prevented redlining and nothing else.”
            Well, no, you lying piece of shit:
            “New Study Finds CRA ‘Clearly’ Did Lead To Risky Lending”

      2. Palin’s Buttplug| 1.13.13 @ 3:35PM |#
        “No one ever “forced” a bank to make a loan…”

        You sleazy asshole; you’ve been called on this bullshit more times than a care to count.
        Please tell us how distorted a market has to be before it collapses, shitstain.
        Oh, and fuck you and your stinking lies.

      3. I’m going to call sockpuppet at this point. The tone is all wrong, and the complete ignorance of Janet Reno’s autocratic prosecutions of banks for their “racist” lending practices is literally unbelievable.

        1. Shriek aka Palin’s Buttplug is batshit I-only-have-a-tenuous-connection-with-reality insane. He’s the Internet equivalent of a unkempt homeless guy reeking of urine screaming at a wall.

          I’m amused that people debate him like he’s people… Just walk away and don’t give him any change; he’ll only waste it on booze.

  11. Foreseeable consequences are not unintended.

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  15. I’m shocked, shocked I tell you to find out that Barney “Roll the dice” Frank and Chris “Friend of Angelo” Dodd wrote a bad piece of legislation.

    Though to Chris’ everlasting credit he *did* co-found the Waitress Sandwich.

  16. Dodd-Frank has done next to nothing to protect the safety and soundness of the financial system. Rather, it has effectively dried up liquidity in the shadow banking system. In effect, a dramatically larger portion of market liquidity is now directed through the banking system than through channels outside regulatory control. That tightening is why you see the surge in the monetary base without a corresponding uptick in either economic growth or headline inflation. Moreover, within the banking industry, it’s been a boon for the competitive positions of the established money center institutions. Smaller institutions have seen their ability to lay off risk curtailed significantly while the risk tolerance of the regulators has been dialed down. One almost wonders if all this was the goal, rather than a side effect.

  17. Shriek aka Palin’s Buttplug is batshit I-only-have-a-tenuous-connection-with-reality insane. He’s the Internet equivalent of a unkempt homeless guy reeking of urine La Sposa Marina Bridal Gown

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