Dodd's Bill

Posted by Jeff Carter
on March 15th, 2010

Senator Chris Dodd will introduce his bill to the Senate without bi-partisan support. I blogged about it earlier here. It’s generally a bad bill. Why? It doesn’t address the root causes of the financial crisis and colors outside the edges. It’s like a kid that just colors on the outlines of a drawing, rather than actually coloring in the picture.

It also doesn’t introduce any legislation that addresses incentives. Government policy was the root cause of the crisis, which lead to skewed incentives in the market. Skewed incentives lead to human behavior that was detrimental to the marketplace.

Let’s look at the highlights point by point:

Consumer Protection Division: Bad idea. More bureaucracy. Higher costs for consumers as banks will pass them along. Consumers were hurt by the crisis, but the cause of it was from the two agencies of the government, Fannie and Freddie. They provided a ready unbreakable backstop to all the loans in the market. Reforming Fannie and Freddie would be the correct way to protect the consumer.

Fed oversees Big Banks: This actually is a good provision. The Fed lends to the banks, it ought to be able to change capital requirements. However, what happens when the Fed decides to halt certain speculative practices? How does the Fed decide what’s speculative? Why is speculation so bad for a market in general? I actually think speculation is good for a market. If done correctly it leads to more liquidity and transparent price discovery.

Failing companies provision: Terrible idea. In the US, we have a thing called bankruptcy and we ought to be confident and use it. Any bank that was broke in August of 2008 should have been allowed to go under. Bankruptcy would have cleared the assets through the system. Again, adds uncertainty and regulation to the system where it’s not needed.

Systemic risk: This is bull. There is no thing as systemic risk. They ought to focus on how markets are structured. Focusing on correct structure will allow the market to check any imbalance. Systemic risk is there because of the current structure. Too few players are dominating markets without any competition or transparency.

Corporate governance: Again, how is the shareholder threshold going to be set. Who gets to vote? Lots of gray areas here. Compensation is also very biased. It is almost impossible to set an objective standard.

Hedge funds: Registration is dumb. Hedge funds were not the problem. This will limit how many hedge funds start up, and increase costs. You should increase competition in hedge funds. This will limit it, and favor already existing funds. Bad idea, really bad idea.

Transaction tax: The tax has been proposed in various forms over the years. All I can say is there are not two sides to this debate. It will kill the business. Singapore is very nice all times of the year, as are other off shore places. That’s where your money will go, as will the market. Even funds or people that are not in/out daytraders will be penalized severely by this tax. It exponentially increases costs across the board.

Start over on this, and health care too!

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