Tilting at Windmills: Some Final Thoughts on Dodd-Frank

If Senators needed any further reason not to vote for the misguided Dodd-Frank bill two stories over the last week should have pushed them into the NO column.

The first was the jobs report.

Unemployment remains high at 9.5 percent and job growth is anemic. A better measure of the sad state of employment is found in the U.S. Bureau of Labor Statistics’ report on underutilized workers: 16.5 percent of the labor force is unemployed or underemployed because, for example, they have been forced to take part-time jobs. Between May and June that figure barely nudged from 16.6 percent. Even those figures don’t fully reflect the distress in the labor markets because they don’t measure people who have had to take full-time jobs at drastic pay cuts.

What does this have to do with Dodd-Frank which is after all supposedly about the cause of this mess? For that you need to look at the other big story—one that is hardly news.

Small businesses can’t get loans This is a problem that Federal Reserve Board Chairman Bernanke highlighted. As has been widely documented, new businesses, which are often small and need credit to expand, create most of the new job jobs in this country. There are many reasons credit has dried up for small firms but one of the problems has been the CARD Act which discourages financial institutions to lend money to risky individuals. Many new small businesses rely on credit cards for short-run financing.

In an article with Professor Joshua Wright of George Mason University, he and I explained why the consumer protection board that was proposed by the Obama Administration would risk job creation in this country. We documented extensively that small businesses rely on credit cards and other consumer financial products for loans and that these businesses are a major source of job creation. We then explained how the new financial agency, by imposing red tape on lenders and pursuing the objective of its advocates to reduce borrowing, would directly impact small business lending. While we were subject to some ad hominem attacks by some of the advocates of the regulation, no one has ever challenged our reasoning. Some of the worst parts of the original Obama legislation were eliminated, we would like to think partly in response to our work (and a Wall St Journal editiorial suggested this), much of concern, however, remains.

Decreased job creation might be a price worth paying for financial reform that would prevent a future financial crisis or even deal with some of the real problems revealed by the crisis. The Dodd-Frank bill, while it has its merits, is simply a political sop to the voters to make Congress seem as if it has taken on the big bad bankers. See my article on this. Nothing has changed. The bill doesn’t provide the reform that Americans should have expected a responsible Congress to adopt—including dealing with Fannie and Freddie and the dysfunctional system of banking regulation—and adds in miscellany that has nothing whatsoever to do with reform. The regulation of debit card pricing, which is going to lead to at least a short-run wealth transfer from consumers to retailers, is one of the more misguided aspects of this failed efforts.

Anyway, as the title suggests, I’m tilting at windmills and it will soon be time to move on to minimizing the damage that, it appears, 60-odd Senators will inflict on the country at just about the worst possible time.


 

David S. Evans is an economist and a business advisor to payment companies around the world. His recent work has focused on helping companies create, ignite and profit from payments innovation. He is the originator of the Innovation Ignition Framework® , a tool provides a systematic way for companies to evaluate and implement innovative ideas and achieve critical mass.


 

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