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 Watchdog.org.