In 2008, a global financial crisis was in its prime and affecting the United States substantially. The government felt compelled to take immediate action to ensure the American people that they would never be subject to such financial vulnerability ever again (Smith & Muniz-Fraticelli, 2013). The response to this financial crisis was the Dodd-Frank Wall Street Reform and Consumer Protection Act. The act is complex and lengthy; it also states that its purpose is to promote the financial stability of the United States by improving accountability and transparency in the financial system, and most importantly to protect the American tax payer.
While the Act seems to have beneficial intentions, editors Hester Peirce and James Broughel seek to address the many flaws of the Act in the book “Dodd-Frank: What It Does and Why It’s Flawed”. Through extensive examples, the editors exhibit how the Dodd-Frank Act failed to complete its objectives in its attempt to solve the financial crisis. A major concern that appears to be reiterated throughout the book is the possibility that this Act could be laying groundwork for future financial crisis opposed to preventing one. Many of the flaws addressed throughout the book have confirmed that large consequences derive with the legislation of this Act and that it reinforces dangerous pathologies that were evident in the last crisis.
To extend further on the purpose of the Dodd-Frank Act and the crisis that led up to it, an essay written in the book by Lawrence White assisted in clarifying the event in detail. White suggests that it is imperative for the assessor to have a perspective on the cause of the crisis to further validate his/her point. One of the major contributing factors to the crisis was the housing boom that began in the early 90s.
Housing prices fluctuated over the year but declined about 35 percent after 2006 and ultimately led to a $7 trillion housing-sector loss (Peirce & Broughel, 2012). Some other important numbers that led to the legislation of the Dodd-Frank Act include 10.9 million homes in foreclosure proceedings, an average decline of income around $5,800 per household, and 9.5 million lost jobs (Min, 2011). These are devastating statistics that make it apparent as to how legislation felt compelled to take some sort of actions to prevent future financial crisis such as this one, and the result of that was the Dodd-Frank Act.
An important part of the Dodd-Frank Act that is often overlooked as being flawed is the creation of the Federal Insurance Office (FIO) in Title V. One of the main complications with this section of the Act is that it is unrelated to the financial crisis. The key role of the FOI is to monitor the insurance industry and play an international coordinating role rather than exercising a direct regulatory role (Peirce & Broughel, 2012). Not only will they monitor these areas, but the FOI will also serve as the United States representative in international insurance matters.
Challengers of the FOI fear these powers that the federal government now possesses and the influence that they carry over insurance matters. The Federal Insurance Office is also now responsible for deciding how and if insurance regulation should be reformed. When this discussion is brought to life, and a report on how to modernize insurance is issued, Americans will be able to easily determine the future of insurance regulation. Overall, there were barely any modifications to insurance regulation which indicates that the framers of the Act did not believe this played a vital role in the crisis.
Another major weakness in the Dodd-Frank lies within Title IX, containing information about the Securities and Exchange Commission (SEC). The SEC was originally created during the Great Depression of 1929 to protect investors affected by the crash and to maintain efficient markets. With this being said, it is no surprise that the Dodd-Frank Act addresses new roles within the SEC at an attempt to alleviate problems created by the most recent financial crisis. There are now new offices within the SEC such as the Office of the Whistleblower, the Office of the Investor Advocate, the Office of Credit Ratings, and the Office of Municipal Securities (Peirce & Broughel, 2012). A major problem with these new offices and responsibilities of the SEC is that it does not precisely address ways in which the United States can avoid another financial crisis.
One of the more complicated aspects to Title IX is the new whistleblower program within the SEC. The initial thought is that a whistleblower program can be extremely beneficial in informing the SEC of possible fraud cases, and it can, but there are also obstacles that make this new regime problematical. For example, if a whistleblower is to provide a qualifying tip to the SEC that leads to a high monetary investigation, the whistleblower is rewarded regardless. With this reward come many meaningless tips that must be sorted through along with managing claims for compensation (Peirce & Broughel, 2012).
The SEC will eventually get bogged down with thousands of tips that convert their attention and time to unnecessary matters. As if this program did not create enough concerns, potential whistleblowers are now apprehensive about reporting suspicious activity due to the AICPAs Code of Professional Conduct that states, “A member in public practice shall not disclose any confidential information without the specific consent of the client.” (Taylor & Thomas, 2013).
This fear within accountants creates numerous issues with the new program because they fear breaking a law and trust amongst their clients, along with possible retaliation by their employers. Ultimately, this whistleblower program could be a waste of time and also surface legal issues that accountants are not willing to subject themselves to. Once again, this lengthy section in the Dodd-Frank Act takes up unnecessary space that does not relate to one another or even to the financial crisis itself which could end up harming the securities markets and investors.
The final prime example in exposing the flaws of the Dodd-Frank Act is Title XIV, which addresses mortgages. As mentioned previously, the housing-sector was a large factor in the formation of the financial crisis, so it would be no surprise that the framers of the Act would feel obligated to make changes in some way to this particular matter. According to the book, 9 out of 10 mortgages are handled by the government, meaning that taxpayers are accountable for 90 percent of mortgages in the U.S. Americans are not particularly pleased with the upper hand that the government has on mortgages.
The government now has authority to veto certain types of mortgages therefore becoming the final decider if a consumer gets the mortgage or not. The dilemma with the government regulators having this amount of authority is that consumers are forced in to mortgages that they do not feel is best fit for their situation. A great example given in the book is say a person who only plans to reside in a house for five years will most likely prefer a mortgage with an adjustable interest rate to a 30-year fixed-rate mortgage (Peirce & Broughel, 2012). Instead of the consumer being able to make a decision that more accurately suits them, the government regulators are now making an irrational choice based off minimal knowledge. This is just another illustration of how the Dodd-Frank Act could have been better prepared and more thought out so that the same crisis does not result from senseless decisions.
The areas of focus in the framework for the Dodd-Frank Wall Street Reform and Consumer Protection Act are for the large part accurate. However, the biggest dispute that creates so many flaws within the Act stem from focusing on the wrong elements within each section. Instead of reforming these subjects, the “problem-solvers” have now placed the United States at greater risk for another financial crisis. It is so evidently clear that the majority of citizens in the United States do not support the Act based on actions following legislation. Wall Street lobbyists, who spent an astonishing $302 million in 2010, have played a large part in the delay of implementation to the law (Min, 2012).
Many of the new laws proposed in the Act have not even been given an opportunity to be fulfilled due to the strong beliefs of these lobbyists and have not faced the true test of reality. The campaign proved to be highly successful and a solid indication that the citizens of the U.S. see many flaws within the Dodd-Frank Act. So many of the contributing factors to the initial financial crisis have been overlooked and merely “touched-up”. The framers should have taken a closer look at the root of the problems; instead, the Act now just scratches the surface of these issues and poses a threat for future financial downfalls in the United States. Peirce and Broughel do an adequate job of addressing the flaws posed by the Dodd-Frank Act and have undoubtedly proven their case through a title-by-title breakdown of every single topic that they felt had inconsistencies.
Min, David, K. (2011). Associate Director; Center for American Progress Action, F. (n.d). Cost of Dodd-Frank Implementation. FDCH Congressional Testimony, Min, David, K. (2012). ASSISTANT PROFESSOR UNIVERSITY OF CALIFORNIA IRVINE SCHOOL OF, L. (n.d). IMPACT OF DODD-FRANK ACT: FAMILIES, COMMUNITIES AND SMALL BUSINESSES. FDCH Congressional Testimony, Peirce, H., & Broughel, J. (2012). Dodd-Frank What It Does and Why It’s Flawed. Arlington, Virginia: Mercatus Center, George Mason University. Smith, L., & MUÑIZ-FRATICELLI, V. M. (2013). Strategic shortcomings of the Dodd-Frank Act. Antitrust Bulletin, 58(4), 617-633. Taylor, E. Z., & Thomas, J. A. (2013). Enhanced Protections for Whistleblowers under the Dodd-Frank Act. CPA Journal, 83(1), 66-71.