Being at least six hours ahead of most the rest of the Masters participants, I don’t even have to wake up early to start this Forum. Perhaps I should have stayed asleep: how to start a commentary about a mammoth act (800 to 2300 pages depending on how you count them)? Is Congress, like those old serial novelists, being paid by the word?

Luckily, now after financial reform legislation has passed and the SEC and Goldman have settled their little tiff, all is right with the world of financial regulation. So this should be a really easy Forum, right? I’ll take the old law professor strategy -- when in doubt, ask questions – and perhaps some of them will frame the discussion for some of the other participants in the Forum.

How does it compare to the New Deal era statutes?

The Great Recession/Panic of 2008 is often compared to the Great Depression/1929 Crash. How does this bill stack up against the Depression-era financial reforms? It is not an easy comparison. The Roosevelt Administration passed over a half dozen financial reform statutes from 1933 to 1940, including the ’33 and ’34 Acts, Glass-Steagall, the Investment Company Act and more forgotten bills like the Federal Credit Union Act and the Public Utilities Holding Company Act.

In terms of sheer size, what explains the move from more discrete pieces of legislation to a legislation super-size (yes – I’d like fries with that please)? Part of the reason lies in the fact that the Great Depression rolled on and on and Democrats maintained control of Congress and the Presidency. So far, this crisis seems shallower and shorter (I write this sentence more out of hope than conviction – I am not so sure we are out of the crisis woods yet.)

In terms of substantive effect, Dodd-Frank also doesn’t compare to the New Deal. Dodd- Frank is just grafting a few new ideas onto early to mid 20th Century legal technology. We’ve added a lot of doo-hickeys, but we are still running on the same regulatory rails. Does this mean the train can still run off the rails too? Should reform have been ambitious? Made more use of more recent legal and economic thought?

Do we need to reform the legislative process too?

Part of the explanation for why we have a mammoth bill instead of smaller bills is that horse-trading in Congress makes it easier to do mammoth bills than more tailored legislation. To digress a little, I’d like to explore more how the dynamics of the legislative process leads to often bizarre results. The legislative process explains the peculiarly American penchant for adding more agencies and councils with every crisis. Sure – the Office of Thrift Supervision met its demise, but how many failures did that take? The only convincing explanation for why we need a separate CFTC and SEC is that different Congressional committees oversee the two regulators and no baron/baroness in any Committee easily cedes the fiefdom.

Meanwhile we are adding new agencies. There is some justification for the consumer protection agency. On the other hand, the new Financial Stability Oversight Council is a typical D.C. solution to a crisis. Adding bureaucracy to coordinate regulators without carefully thinking through their incentives to play nicely together often does more harm than good. The Director of National Intelligence position created to coordinate intelligence agencies in the wake of 9/11 is a case study in point.  (Pop quiz - name the Director of National Intelligence.  <Buzz> So sorry, we don't have one.  They keep resigning - utterly beaten down by the intelligence bureacracy they are supposed to manage).  

The clutter of agencies has a high cost in terms of missing accountability and the risk of capture. In all of the finger-pointing on the political and regulatory failures leading up to the crisis, how many in Congress looked at their own institution? The recent passing of Senator Byrd and Professor Frickey creates an interesting juxtaposition. One fancied himself a Roman senator, but spent his career making Congress more like Byzantium. The other devoted himself to helping us understand the legislative process. This new financial reform bill argues that we need more Frickeys in the legal academy. In other words, we need to inspect not just the sausage but the sausage factory too.

How many regulators does it take?

We also need some better theories to determine the ideal number of financial regulators and the allocation of authority among them. For a long time, many in the U.S., including in the legal academy, pined for Britain’s approach of a unified financial regulator with a “light touch.” Then came the crisis, with the FSA not putting on a good show. Now, to a large extent, many countries are drawing different and often opposite lessons from the crisis. In the United States, the Federal Reserve’s reputation as a regulator took major flak (even if the Fed wasn’t harmed that much by the reform bill). While here in Germany, the talk is to give the central bank more regulatory authority. Is all reform local?

Is there a coherent theory of how many regulators and who should regulate what? Or will we forever go round and round the bramble bush?

Financial Crisis, Masters: Dodd-Frank | Bookmark

TrackBack URL for this entry:
https://www.typepad.com/services/trackback/6a00d8345157d569e20133f263820c970b

Links to weblogs that reference Dodd-Frank Forum: a new New Deal?, reforming Congress, and how many regulators does it take to screw in a reform?: