There are plenty of legitimate arguments to be made against the Dodd-Frank Act. Unfortunately, in its anti-Dodd-Frank piece published last week, The Economist doesn’t make any of them. The article begins:
SECTIONS 404 and 406 of the Dodd-Frank law of July 2010 add up to just a couple of pages. On October 31st last year two of the agencies overseeing America’s financial system turned those few pages into a form to be filled out by hedge funds and some other firms; that form ran to 192 pages. The cost of filling it out, according to an informal survey of hedge-fund managers, will be $100,000-150,000 for each firm the first time it does it. After having done it once, those costs might drop to $40,000 in every later year.
Hedge funds command little pity these days. But their bureaucratic task is but one example of the demands for fees and paperwork with which Dodd-Frank will blanket a vast segment of America’s economy.
These rules require hedge funds, which for the most part exist in a regulatory blind spot, to report information related to their exposures, leverage, risk profile, and liquidity to the SEC and CFTC so that they can better monitor and reduce systemic risk. If regulators want to reduce systemic risk, they need to what’s going on in the financial system, so greater disclosure from hedge funds seems like a pretty reasonable thing to ask for. What’s more, there are two sets of reporting rules–one set for large funds and one set of significantly less onerous rules for smaller funds, so their burden is reduced.
It’s not really clear to me which part of this is objectionable. All The Economist says is that the forms are long–192 pages!!–and that hedge fund managers say they’re going to cost up to $150k the first year and $40k from then on. That doesn’t sound like an unreasonable amount for hedge funds with $1 billion or more assets under management to spend so regulators can have a basic idea of what they’re up to.
This is only one example among many that The Economist cites as evidence that Dodd-Frank is too long, too expensive and too complex. The issue here isn’t that The Economist is criticizing Dodd-Frank–it’s that if you’re going to say the Act is too long and too expensive, you’ve got to do more than just stating that it’s long and expensive. Even if Dodd-Frank is long and expensive, that’s not self-evidently a bad thing. Financial reform which builds off our current regulatory system is going to be complex, because the current system is complex, and successful reform should be expensive and cause the financial sector to become less profitable.
Other examples of The Economist’s complaints about Dodd-Frank include: The act is so long it hasn’t been read by anyone outside Beijing. (What?) Independent funding through the Fed (because what’s a regulatory agency if Congress hasn’t been given the chance to starve it) and funding through new fees for banks are “exotic.” (Like the SEC?) Treasury’s Office of Financial Research is unnecessary because think tanks and academics already try to forecast financial crises (because that worked out so well in the past). And so on.
After complaining about the CFPB, living wills and stress tests, The Economist writes, “But the befuddling form the act gives such ideas unintentionally opens a path to much more state interference.” Well, yes. Regulators failed to prevent a crisis in 2008, so Dodd-Frank is meant to give them greater authority to regulate financial institutions so it doesn’t happen again. State interference is pretty much the idea. Maybe banks who want to be left alone by those pesky regulators don’t like this, but for the taxpayers who funded the bailout of the financial sector, it should sound pretty good.
As for the costs that Dodd-Frank’s going to impose on the financial sector, The Economist’s sources include an informal survey of hedge fund managers, the U.S. Chamber of Commerce, a risk factor from BB&T’s 10-K, Jamie Dimon and SIFMA. And surprise, they think the Act is going to be too expensive and not going to work. This is the equivalent of asking fifth graders if they think they have too much homework and using their response as evidence that they do.
If there was any doubt about where The Economist’s loyalties lie, they’re put to rest by a correction at the end of the article:
Correction: The direct annual cost to JPMorgan Chase of these regulations is not going to be $400 billion-600 billion as we first wrote. A figure between $400m and $600m is rather closer to the mark.
On one hand, this could just be a typo, but I think the fact that the author of the article wrote this without thinking twice and that it also got through The Economist’s editing process tells you all you need to know about the point of view of the article.