Dodd-Frank; Total Fail

It’s been five years since Dodd-Frank was enacted.  The law re-regulated financial markets.  Feel safer?  Not so much.  One of the problems with this kind of legislation is that most people are illiterate when it comes to markets, banking, and economics.  That’s a different problem that Dodd-Frank wasn’t designed to solve, and likely cannot be solved with any government program.

What’s the real effect of Dodd-Frank?

• Higher costs
• More power into the big banks.
• More influence into larger corporate institutions.
• More money spent on lobbying, creating more jobs for the political class
• Less access to credit for the working poor and middle class
• Too Big to Fail still here; and more institutions are bigger than they were before
• Consolidation has accelerated
• Reduced liquidity
• No access to banking or credit for lower middle class or poor people

Costs went up, and some were transparent.  Jeb Hansarling writes today, “Before Dodd-Frank, 75% of banks offered free checking. Two years after it passed, only 39% did so—a trend various scholars have attributed to Dodd-Frank’s “Durbin amendment,” which imposed price controls on the fee paid by retailers when consumers use a debit card. Bank fees have also increased due to Dodd-Frank, leading to a rise of the unbanked and underbanked among low- and moderate-income Americans.”  In the places where Americans bank, we lose a minimum of one community bank, or one credit union per day.

Other costs were not so transparent.  For example, commodity traders have to put up a lot more capital to trade these days.  That’s created less liquidity on bid/ask spreads in some markets.  Moves have been more volatile than before.  Ask a grain, meat, or metals speculator about the markets they trade.  Small lots can have outsize effect on market price over the short term.

MF Global happened.  Jon Corzine is still free as a bird.  There have been mini-flash crashes.  There has been manipulation in the US Treasury market.  Sometimes stocks get manipulated.  Dodd-Frank hasn’t made trading better, safer or created any sort of benefit to anyone.  It’s actually created gaps in the national financial system that weren’t there before.

Startups are filling in the gaps.  Avant Credit in Chicago has filled a gap on lending.  Lending Club was successful because of Dodd-Frank.  Mortgage Hippo helps people get a mortgage.  Akouba Credit is a Chicago startup that targets voids that used to be filled by community banks which were shuttered by Dodd-Frank.

In wealth management, there has been a movement towards RIAs.  Companies like Ycharts and Riskalyze are helping them service their customers better, and more efficiently.

Dodd-Frank has done virtually nothing but gum up the works.  Dodd-Frank was probably the second dumbest piece of legislation ever passed in the last eight years.  Obamacare being the first.