Saturday, February 18, 2017

The Heritage Insider news

Dodd-Frank ensures that the next financial crisis will be worse. Hester Peirce writes:
“Dodd-Frank not only embraces more prescriptive microprudential regulation for individual financial institutions, but it also adds another regulatory layer designed to target ill-defined and elusive ‘systemic risk.’ […] This form of regulation turns regulators into allocators of credit: regulators decide who gets financed and who does not, which, in turn, affects how the economy develops, which consumer and business needs are met, and where innovation occurs. Regulators, driven by an evolving understanding of the inscrutable ‘systemic risk,’ override the clear market signals through which consumers and Main Street businesses communicate their needs to financial service providers. Macroprudential regulation also displaces the market mechanisms that signal impending trouble at a financial company or in a financial sector. […]
“The next crisis is likely to be worse than the last because Dodd-Frank concentrates so much power in the hands of a few regulators. If these powerful regulators make mistakes, exercise poor judgment, or miss a key market development (all of which are inevitable because they are human), the consequences will be far-reaching. Every firm that has reordered its business to satisfy a regulatory directive will find itself in trouble if that directive proves unsound. And once a crisis happens, widely applicable regulatory mandates, such as liquidity rules, could intensify it. By contrast, if firms and individuals retain decision-making authority, their errors will be contained and firms will not walk in lockstep with one another.”
Peirce concludes: “Substantively, the complexity of Dodd-Frank should give way to simple, well-enforced rules that lower barriers to competition, accommodate innovation, and eliminate both the expectation and possibility of bailouts. Only then will the financial system effectively and safely serve consumers, businesses, investors, and the economy.” [Mercatus Center]