Yesterday, the House voted to roll back Dodd-Frank. This is a very good thing. Dodd-Frank was a reactionary law. It was a reaction to the financial crisis of 2008. If you are a person that wants to get lobbying out of government, you should be happy because Dodd-Frank was one of the most heavily lobbied bills ever passed.
Over the years, Professor Craig Pirrong, Professor John Cochrane and Professor John Taylor have written extensively on Dodd-Frank. Before anyone frets that we are on the path to another meltdown, I’d suggest you read what they wrote and think critically about how the nation’s banking system and financial system should be regulated.
I saw its effect in banks. I saw its effect in commodity markets and stock markets. I saw its effect in insurance. I saw its effect in OTC derivative markets. Dodd-Frank put the little guys out of business.
Did the banks do some nasty things? They did. However, if you think the banks did some nasty things and don’t also look at the root cause of how they were able to do it, you are missing the larger picture. The American government regulatory structure enabled banks. Dodd-Frank did nothing to change it.
Essentially, Dodd-Frank limited competition. It stopped new players from entering and forced existing players to combine in order to be able to meet the cost of the heavy regulation. Limiting competition caused money to flow out of community banking and away from neighborhoods that could most use the capital to rebuild themselves.
A lot of the press will focus on the poorly named CFPB. It’s gone. Good riddance. The CFPB was nothing more than a regulatory way for the government to legally invade any citizens privacy. It did nothing to protect citizens from capricious financial institutions.
If you read the links above, you won’t only be exposed to criticism. You will also be exposed to rational solutions. They are solutions that will increase the fervor of competition. Intense competition with new entrants coming into the market will be better for our financial system than a litany of centralized boards and bureaucrats.
I am the first to admit that we need some regulation in the financial services arena. I detest a lot of the tiered way finance is structured. The structures that are organized that way preserves gatekeepers and limits competition. Certainly, making sure that the market is not only competitive but flat with less hierarchy is the way to view regulation.
I have seen technology’s effect on other industries. Technology eliminates a lot of gatekeepers and hierarchy putting originators closer to consumers. Supply chains shorten. Prices go down. More people get products. The same will happen in banking and finance if we let it.
Last night, I was at the opening of the Blockchain Center in Chicago. Blockchain is a radical new technology that has the ability to really increase competition and alter the structures of finance. In a world governed by Dodd-Frank, blockchain acceptance would have a tougher climb to the mountaintop. West Loop Ventures is going to be active in the Blockchain Center. Dodd-Frank hurt entrepreneurs more than it helped them.
Dodd-Frank preserved all kinds of hierarchy and instituted new layers of hierarchy. I am glad it’s gone.