January 25, 2011
David Skeel on the Dodd-Frank Act
I just finished reading David Skeel’s new book on the Dodd-Frank Act, The New Financial Deal: Understanding the Dodd-Frank Act and Its (Unintended) Consequences. Skeel’s book is a very good introduction to the major provisions of the Dodd-Frank Act, including its regulation of major financial institutions and the new requirements relating to derivative clearinghouses and exchange trading of derivatives. He has less to say about the corporate governance aspects of Dodd-Frank, but those provisions are, after all, a very minor part of the Act. The discussion is straightforward and not laden with legal jargon, so this book is not only great for lawyers, but also for intelligent lay people wanting to know more about the Dodd-Frank edifice.
Skeel argues that Dodd-Frank, with its partnership between large financial institutions and government regulators, is a massive exercise in corporatism. U.S. government corporatism didn’t begin in 2008, of course. The recent government bailouts and government control of business corporations like GM continues a long-term trend that includes massive subsidies to ethanol and even the longstanding mortgage interest deduction.
Recently, both liberals and conservatives have been criticizing corporatist polices. This is an issue on which Tea Party conservatives and liberal populists could naturally coalesce, but I doubt it’s going to happen. It’s hard to make common ground when you’re questioning each other’s character.
Skeel also argues that the discretion Dodd-Frank gives government regulators to intervene in business on an essentially ad hoc basis seriously undermines the rule of law. Skeel and other worried about this issue cannot be comforted by developments in recent days at the Financial Stability Oversight Council. Under the Council’s proposed rules, intervention depends on a determination that “the nature, scope, size, scale, concentration, interconnectedness, or mix of activities of the firm, could pose a threat to the financial stability of the United States.” In other words, we’ll know it when we see it. The Wall Street Journal recently ran an opinion piece on the ad hoc nature of federal intervention. [This may be behind the WSJ's firewall, so a subscription may be required.]
Whether or not you agree with Skeel’s argument, the book is worth reading, and it’s only about 200 pages—less than a tenth of the size of the Act itself.