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Obamacare Part II: Dodd-Frank

When Obamacare passed after nearly a year of grueling debate, the Democratic faithful popped open the champagne and celebrated a hard-fought victory. Eight short months later, that success turned to ashes. Republicans delivered a “shellacking” to the Democrats in the midterm elections, hammering them on a healthcare bill that has remained stubbornly unpopular despite predictions that Americans would “get used to it” with time. Obamacare looks less and less like a triumph of social engineering and more and more like a poorly drafted, poorly designed mess.

Only two years later, it looks like a similar fate may befall the other signature piece of legislation to pass through Congress under the Obama administration: the 848-page Dodd-Frank Act, which aims to regulate the operation of the financial system and prevent another crisis like that of 2008. A recent piece in the often Obama friendly Economist presents a withering critique of the new law, which is exceedingly complicated, practically incomprehensible, and threatens to drown American industry in an ocean of red tape:

Take the transformation of 11 pages of Dodd-Frank into the so-called “Volcker rule”, which is intended to reduce banks’ ability to take excessive risks by restricting proprietary trading and investments in hedge funds and private equity (Paul Volcker, a former chairman of the Federal Reserve, has argued that such activity contributed to the crisis). In November four of the five federal agencies charged with enacting this rule jointly put forward a 298-page proposal which is, in the words of a banker publicly supportive of Dodd-Frank, “unintelligible any way you read it”. It includes 383 explicit questions for firms which, if read closely, break down into 1,420 subquestions, according to Davis Polk, a law firm. The interactive Volcker “rule map” Davis Polk has produced for its clients has 355 distinct steps. […]

The overall cost of all this—both directly to public and private institutions and indirectly to the markets—is staggering. At the same time as banks are sacking employees in operating roles, they are adding swarms to cope with various requests from government agencies and other new filings, all to avoid violating rules that may never come into existence and temporary measures that may be rescinded. That is without looking at losses in terms of business not done. Loans that might not fit into a category favoured by regulators are being trimmed or withdrawn.

Though it has seen some policy successes, the Obama Administration and its Democratic allies in Congress seem cursed with a dysfunctional mess of large ambitions and poor skills when it comes to major legislation. Its two attempts at major reforms have created massive, bloated laws that will become a cash cow for lawyers and bureaucrats for years to come. In both cases, “repeal and replace” is the way to go; the medicine is worse than the disease.

The GOP has problems of its own, but the Democratic failure to manage finance and health is disheartening to say the least.

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  • Anthony

    Three keys for me: (1) poorly drafted, poorly designed; (2) large ambitions and poor skills when it comes to major legislation – campaigning is distinct from governing; (3) cash cow for lawyers and bureaucrats – regulations must be interpreted (the Economist article thoroughly laids out rule making requirements for Dodd-Frank).

  • aHumbleFenderLwyr

    And the Republicans did the same thing after Enron, etc. with Sarbanes-Oxley. That was the latest piece of “smart” legislation designed to avoid the next financial crises. It did succeed spectacularly as a full-employment law for lawyers and accountants. And the next crises, and with it the next SOX, came.

    Part of the genius of the Anglosphere, and reason for its enduring prosperity, was the good old common law. As we moved from that legal regime to one dominated by statutes, regulations, and administrative oversight, we increasingly lost the flexibility, predictability, relative simplicity, and fairness of the old legal regime.

    This will be a significant problem for the change you envision, the move to a more freewheeling and unstructured system. The governmental response to such complexity is, as SOX and now D-F show, to write laws that are increasingly complex and unworkable, and, it would seem, now even incomprehensible. Then you entrust their execution to a sclerotic bureaucracy and toll-exacting professionals. And when the version 1.0 fails, you come up with version 1.35.b.IV, ii.

    When I think of “smart” legislation, I think of the story told of Teddy Roosevelt. During a military crises, the then-(I think)-Asst. Secretary of the Navy needed to buy ships and buy them fast. Rather than spend days drafting pages of specifications to put in the contract, he simply said — I’ll buy them if you get them to point X by date Y. The point being, if the ships could do that, they would measure up to the task in a way that no set of specs, however long and detailed, could ensure. This can be done, but you really do need to be “smart” about it.

    One sign of the crises of the blue model is just this perversion of the rule of law. One challenge for moving ahead will be the design of new rules for the game. Can we regulate in a way that ensures fair play and deters the worst bad actors but without having the umpire as the twelfth man on the field or stopping the game after every play for a rules conference or booth review? Better yet, can we make rules that facilitate the process, by providing a modest set of default rules and expectations that eliminate the need to reinvent the wheel with each new deal?

    Somewhere, Teddy’s watching, and no doubt laughing.

  • A
  • Anthony

    A professor once said: as far as a supportive system of enforceable laws, rules, and regulations are concerned, continuing adaptations are required to keep them up to date with the tenor of the times (WRM’s 5.0 America). His intent was to make aware accredited norms and reconciling mechanisms (laws, rules, etc.) binding on future parties – implication being istrumental value (common law) becomes terminal value (interpreted as conformance).

  • Jim.

    That article is the most devastating counter-argument to the Pelosi / Obama “just shut up and let us govern” nonsense.

    They’re incompetent at governing. Staggeringly so.

    They need to be thrown out of office, and the entire body of legislation they passed, dismantled.

  • WigWag

    If Obama-Care/Romney-Care is as unpopular as Professor Mead claims it is, Romney (who invented Obama-Care) will not win the Republican nomination and whoever does (Gingrich, Santorum or Paul) will defeat Obama at the polls. If Romney is nominated or Obama is reelected it will demonstrate that the health care reform package passed by Congress is not as “stubbornly unpopular” as Professor Mead claims it is.

    The same thing is true of Dodd-Frank. If the public thinks Dodd-Frank is as bad as its critics say it is, the President who went all out to push for it will lose the election. If President Obama is reelected, it proves that all the political criticism is little more than idle chatter.

    As for the complexity of Dodd-Frank what would anyone with even a modicum of intelligence expect? The financial system is extraordinarily complicated and the derivative instruments that have come to play a central role in the financial system are so hard to understand that even the people who invented them don’t fully comprehend the implications of the system that they’ve created.

    Is it really reasonable to expect that a regulatory scheme designed to reign in the bad behavior of financial executives should be less complicated then the system those executives are abusing?

    The Securities Acts of 1933 and 1934 are relatively simple. The 1934 Act in particular allows plaintiffs to sue (either as individual litigants or as members of an injured class) companies that may have committed securities fraud. Despite the relative simplicity of those statutes Republicans tend to hate them because they encourage what they believe is litigious behavior by lawyers whom they assume to be little better than ambulance chasers.

    Here’s a little clue for Professor Mead; effective regulation of the financial industry will never be so simple, straightforward or easy to fathom that financial regulations will be understood by average Americans exercising their common-sense; you might just as well ask the average American to understand quantum mechanics or string theory. Just as in quantum mechanics or string theory, sometimes reality is both more complex and more counterintuitive than you might like; sometimes you just have to accept a degree of cognitive dissonance in your life.

    A more simple way of putting it is that the Via Meadia team has struck out with this post; it is just dumb. With all due respect to the team, which usually does a much better job than they’ve done with this essay, crying out for simplicity in a complex world is for simpletons.

    As for financial executives or financial reporters who criticize the Volker Rule; why exactly would anyone care what they think? Doesn’t it stand to reason that they would oppose any regulatory scheme that attempted to hinder their ability to cause a new financial calamity on the heels of the last one they created?

  • Brett

    So what if Obamacare was a mess? Lots of key bits of law were a mess when they first passed (Social Security excluded a whole ton of groups, conveniently including positions filled mostly by black people and women). We can always reform it later.

    In the mean-time, it’s the reason I have health insurance. For that, Obama and the Democrats get my vote.

  • Luke Lea

    Then why not back to Glass-Steagall? The problem is gambling with other people’s money.

  • Jim.


    Your critique might have some merit if the article only cited man-on-the-street sources; however, it is careful to make the point that even the experts involved in the industry — bankers and lawyers — can barely make heads or tails of it. There is a problem, that no knee-jerk argument in support of the administration can hand-wave away.

    It is perfectly reasonable to conclude that a system too complicated to be understood by its creators can have problems that can only be solved by a simple “knock it off”. Also, a system of rules too complicated for its creators to understand is a stupid thing to implement, if your goal is to advance the common good; how in the world can anyone rationally argue that it will help if no one understands what it actually does?

    All such rulesets do is favor those well-connected and opportunistic enough to find the loopholes in those rulesets and exploit them until they get closed. The rest of us just have to suffer through the miles of red tape, firing the competent and hiring the brain-dead boxchecker… or ignore the rules entirely.

    Or better yet… REPEAL.

  • Kris

    In the highly unlikely event that I ever serve on a jury, I will not consider “Ignorance of the law is no excuse” to be an ironclad principle.

  • Richard Treitel

    Yes, WigWag, it is reasonable to expect that the law against stealing from my house be less complex than the techniques for picking the lock on my front door, that the Highway Code be less complex than the maker’s manual for a late-model car and much less complex than the engineering work to design a freeway, and so on.

    Trying to match the complexity of the financial system with an equally complex regulatory system is just fighting the battle on the enemy’s choice of terrain. Prof. Mead could tell you a few things about Quintus Fabius Maximus if you were willing to listen.

  • WigWag

    Thank you for your response, Richard. The problem with your comment is that you set up a false dichotomy.

    In fact, the criminal law and everything that goes into adjudicating whether someone has violated the law by breaking into your house is a great deal more complicated than the technique used to pick the lock on your front door. Even if we exclude the myriad of rules, regulations and procedures which govern the police investigation of the putative crime and even if we exclude the arcane procedures which govern the manner in which the judicial system seeks an indictment and conviction, even the terms of the larceny statute itself is more complicated than picking a lock. After all, any uneducated low life can be taught to pick a lock.

    As for the rules, regulations and statutes governing public roads, in terms of bureaucratic complexity they certainly approach the manual for producing a late model car. If you dont believe it, let me recommend to you Professor Mead’s recent posts on the Port Authority of New York and New Jersey.

    My larger point is that while I think Professor Mead is right to point out that millions of Americans are viscerally turned off by complex counter-intuitive solutions, I think he is wrong to celebrate this fact.

    That millions of Americans are simpletons who don’t do nuance, can’t hold mutually opposed ideas in their mind at the same time, find counter-intuitive ideas off putting and can’t deal with a modicum of cognitive dissonance makes our country weaker not stronger and is likely to lead to poor decisions being made.

    As I said in my earlier comment, when it comes to public policy, simplicity is for simpletons.

  • Richard II

    WigWag – You’ve missed Richard’s point and confused criminal procedure, the rules of process for a criminal defendant, with criminal law, the “thou shalt not steal.” Criminal procedure is something of an insiders game and it is helpful to have a lawyer’s guidance. But any criminal law that was as complex as you seem to think it is would be unconstitutional.

    The Supreme Court has long held that any penal statue that is too complex for an average citizen to understand is in violation of both due processes clauses. Think about the ill-defined vagrancy laws of the Jim Crow schemes to see what sorts of abuses you can have when citizens cannot understand what conduct is prohibited and prosecutors can define criminality after the act.

    I did appreciate your comment that the federal securities scheme is relatively simple. Very nice. By the way, when’s the last time you read those statues or any of the various filings they require, like a S-1, S-3, S-43, S-8, S-11, F-1, F-3, F-43, 8-K, 8-K5, 10-D, 10-Q, 10-K, 10-QSB, 10-KSB? Beach reading, I know.

    And your blanket statement that any law must mirror the complexity of the regulated activity fails to account for antitrust law or consumer fraud statutes. For the last century, the Sherman Act has simply prohibited unreasonable restraints of trade and monopolization — sections 1 and 2. This sort of scheme is informed by a certain modesty, that it’s impossible to define ex ante all the illegal restraints of trade (or schemes to defraud consumers) and doing so would cause more problems than not. So you provide some general guidance by statute, and let the courts work the details out on a case-by-case basis.

    Your analogy to quantum mechanics really gives away the game. That’s how kings and priests used to talk about the law – the law of heaven and earth surpasseth the understanding of mere mortals, so just shut up and listen to us when we tell you what it is. Liberal democracies and the rule of law are, needless to say, based on an antithetical understanding — that the best and most just society is one in which people are able to govern and be governed, which necessarily means being able to articulate and understand the governing laws; writing laws down presumes that you can understand them.

    One of the nice things about this arrangement is that, for all its flaws and intellectual inelegance, it does allow even for people like you who don’t subscribe to its tenets.

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