Don’t Count on Dodd-Frank… Yet

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Almost three years after President Obama signed the Dodd–Frank Wall Street Reform and Consumer Protection Act into law, few of its provisions have actually come into effect. Thanks in part to the banking lobby, the process is stuck in what The Washington Monthly calls “the seventh circle of bureaucratic hell.” We checked in with Economist Simon Johnson to find out where things stand and whether we should be worried.

Simon Johnson. Photo credit: Robin Holland

Lauren Feeney: What’s the current status of the Dodd-Frank Act?

Simon Johnson: Implementation of the Dodd-Frank act has been painfully slow – and much slower than anyone imagined when the legislation passed in the summer of 2010.

The good news is that efforts to repeal Dodd-Frank have largely, although not completely, run out of steam.

Feeney: Why is progress so slow?

Johnson: The financial sector is a very powerful lobby. They have many friends on Capitol Hill and some parts of our country’s regulatory apparatus remained unduly captivated, if not captured, by the mystique of mathematical finance.

Feeney: The Volcker Rule, one of the key components of Dodd Frank, was supposed to go into effect in July 2012. It’s still not in place. What’s the holdup?

Johnson: The lobby.

Feeney: What are some of the regulatory tools that are already available under Dodd Frank, and how have they been used so far?

Johnson: The Federal Reserve acquired considerable powers under Dodd-Frank, particularly to change practices that it regards as dangerous to the system as a whole. There is now a healthy debate within the Fed about whether and when it can use these powers. Unfortunately, the most powerful officials are – so far – reluctant to act.

Feeney: What important tools are we still waiting for?

Johnson: How much time do you have?

Detailed rules for derivatives, sensible thinking on bank capital, rules for measuring risk, meaningful living wills, a resolution procedure for megabanks that would work across borders, clarity on how foreign subsidiaries will be regulated.

Dodd-Frank stipulates that the Board of Governors should have a new vice-chairman for supervision. It is shocking that, nearly three years after Dodd-Frank, no one has even been nominated. I strongly recommend that the president ask Sheila Bair, former chair of the FDIC, to fill this position.

And while you are waiting for officials to act, I strongly recommend that you read The Bankers’ New Clothes by Anat Admati and Martin Hellwig. The bankers are naked, intellectually speaking. Admati and Hellwig lay out a compelling agenda. Read the book and send a copy to your senator.

Feeney: Is our financial system still at risk as we wait for these rules to be put into place?

Johnson: Yes, our financial system – and the global financial system – remains vulnerable. This is not to say that another crisis is imminent, but rather that many of our weaknesses have not been addressed. As the credit cycle develops and investors again become optimistic, we should expect trouble.

The most glaring example is that we have not ended the “too big to fail” problem. Our largest financial institutions receive implicit government subsidies in the form of downside protection. When things go well, their executives and traders get the upside. When things go badly… of course, you know who pays that cost.

Simon Johnson is a former chief economist of the International Monetary Fund and now a professor at MIT’s Sloan School of Management and senior fellow at the Peterson Institute for International Economics. His most recent book is White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You. Johnson spoke with Bill Moyers in May about JP Morgan’s multi-billion dollar loss . 

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