Tomorrow, July 21, is the date that the White House has set for the signing of the historic Dodd Frank Financial reform bill. We can expect a lot of hoopla as the White House celebrates the passage and signing of this bill as a hallmark achievement of the current administration. But the Obama administration is not content just to let the new rules govern the United States; President Obama is hoping that the new financial rules will become a blueprint for implementation by other countries.
The Dodd Frank bill is a highly ambitious piece of legislation which appears to me to be coming under increasing criticism in the days leading up to the President's signature. Take for example, a Wall Street Journal piece, published July 1, 2010, authored by John Taylor, a professor of economics at Stanford and a senior fellow at the Hoover Institution, who highlights various flaws in the new regulations including the fact that the new bill leaves Fannie Mae and Freddie Mac intact, and allows for a system of bailouts for financial institutions who are "participant in any program or facility with broad based eligibility." He concludes, "The continuing debate over the Dodd Frank bill in the days since it emerged from conference is good news. People may be waking up to the fact that the bill does not do what its supporters claim. It does not prevent future financial crises. Rather, it makes them more likely and in the meantime impedes economic growth."
One huge problem with the Dodd Frank bill is that it calls for a lot of new studies--I counted around 30, but another article I read stated that there are 68. Hundreds of new regulations will be written in response to the new bill, so we won't know the full impact for many years to come. While we know that the new Consumer Financial Protection Bureau will have regulatory authority and the right to investigate complaints and that any statement made to them is actually sworn testimony given under oath, we won't begin to see the effects of that for probably 9 months to a year when the agency is in place, and the full effects will not be seen for several years as the bureau writes new rules and begins to regulate businesses. We know that one of the first mandates of the Bureau is to create a new good faith estimate and truth in lending which will be one combined form, but we have no idea what that form will be. We know that the bill will limit compensation--such as the Merkley amendment capping loan officer compensation--but we don't know what that will mean in real terms.
With so many unknowns, it seems a little premature to be calling for other nations to adopt similar laws. And, obviously, the other nations think so too. An article posted today in Bloomberg Businessweek quotes Federal Reserve Governor Daniel Tarullo as saying that "some countries will decline to follow the US in adopting limits on proprietary trading at banks and other regulatory restrictions." According to the article, the undersecretary of the Treasury for international affairs, Lael Brainard, has stated, "The challenge before us now is to ensure that the world's standards are every bit as strong as America's....Our reform efforts are focused on the largest and most consequential economies in order to reinforce our domestic reform efforts...International consistency is at a premium." This, according to Ms. Brainard, is important to stabilization of the world economy since the collapse of hedge funds can impact on the global banking system.
But a concentrated effort to force our laws on the world's "largest and most consequential economies," may end with dialogue straight from school recess, as other countries remind us, that "You're not the boss of me!"
And with so many unknowns wrapped into a 2300 page bill, maybe other nations want to see what direction we are leading them into before they decide to get on board.
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