Dodd-Frank, whence uncertainty springs
Most used word as of late here at the BRT Blog? Next to "and" and "the," it has to be "uncertainty."
Business Roundtable-member CEOs consistently cite the policy uncertainty that stems from inaction by federal policymakers as a chief cause of the sluggish economy. (See results of the Q3 CEO Economic Outlook Survey, released Wednesday)
Along with the inaction, anticipation and apprehension contribute to the economy-stalling uncertainty. How is the Affordable Care Act going to be implemented and at what cost? What will the EPA dream up next? And the regulations for Dodd-Frank, which has already imposed huge new costs, have hardly even started.
Peter Wallison, a scholar at the American Enterprise Institute, makes the argument that Dodd-Frank could be the most damaging source of uncertainty of all. From his American Spectator column, "Could the Republicans survive Dodd-Frank?"
Much of the commentary about the weak Obama recovery has focused on the policy uncertainties created for business firms by Obamacare and, more recently, the so-called fiscal cliff. Cost uncertainties increase risks for business, reducing the willingness to invest and hire. But the Obamacare and fiscal cliff uncertainties can be computed arithmetically. All the data is there; what's uncertain is which scenario will play out.
The policy uncertainties of Dodd-Frank, however, are of a different order, and why they pose such a danger for the future. It is impossible for anyone in business to know what is meant by the "stringent" regulations -- including exposure limits -- that the act requires the Fed to impose on large banks and other large financial firms; or what new regulations and costs will be imposed by the Consumer Financial Protection Bureau on small banks and others -- from retailers to check-cashers -- that have financial relations with consumers. No one can tell whether firms that hedge their financial and supply risks through derivatives will be able to do so in the newly regulated derivatives markets. No one can be sure there will be a liquid and robust market for fixed income securities -- or the ability to issue commercial paper and other short-term securities -- after the Volcker rule restricts trading by banks. No one can tell whether any but the most creditworthy borrowers will be able to get a mortgage when lenders will suffer significant penalties if borrowers can't pay, and when private securitizers (but not the government agencies with which they have to compete) will be required to retain 5% of the mortgage pools they sell.
He notes that Dodd-Frank is also being challenged on constitutional grounds, an issue addressed Wednesday in a Wall Street Journal column, "Dodd-Frank's 'Orderly Liquidation' Is Out of Order." Attorneys General Scott Pruitt of Oklahoma and Alan Wilson write:
[The] 2010 federal financial-reform law known as Dodd-Frank continues to undermine economic growth and the rule of law by injecting immense uncertainty into our economy. As law professor David Skeel demonstrated recently in these pages, the law's Title II gives the Treasury secretary and the Federal Deposit Insurance Corp. unprecedented authority to "liquidate" financial companies. This grants immense power to a handful of unelected federal bureaucrats, empowering them to pick winners and losers among a liquidated company's investors. This arrangement destroys rights long protected by bankruptcy law.
For that reason and others, the attorneys general of South Carolina, Oklahoma and Michigan last week joined a federal lawsuit challenging Dodd-Frank's unconstitutional "orderly liquidation" provisions. Dodd-Frank's elimination of investors' rights directly harms our states because state pension funds are partly invested in financial companies. We must raise these constitutional objections now because once a company is liquidated, it will be too late.
See also the new paper from AEI's Shadow Financial Regulatory Commission, "Specialized corporate disclosure provisions in the Dodd-Frank Act." ."
Wallison and the shadow committee were among the first to accurately predict the collapse of the government-sponsored enterprises, Fannie Mae and Freddie Mac, so we take their views on Dodd-Frank very seriously.