Understanding the complexities of today’s economic policies can lead to a range of physical responses, from tension and fatigue to doubt and skepticism. A constant state of confusion often results in symptoms like dry eyes and a weary posture, while a critical approach may lead to anxiety manifested in facial tension and nighttime teeth grinding. But these challenges may be worth it when we witness the missteps of those at the helm of economic governance.
Take, for instance, Fed Chair Janet Yellen’s recent remarks at the annual gathering of central bankers in Jackson Hole, Wyoming. During her address, she proudly claimed credit for what she considers to be a successful implementation of financial regulations:
“The events of the [2008] crisis demanded action, needed reforms were implemented, and these reforms have made the system safer.”
However, the efficacy of these reforms is ambiguous. Much like France’s infamous Maginot Line, the regulations Yellen praises are primarily reactive, designed to prevent the last crisis while neglecting new and potentially more severe threats that are lurking on the horizon.
Among these emerging threats, the Fed bears considerable responsibility. After a staggering $4 trillion increase in its balance sheet and maintaining near-zero federal funds rates for years, the Fed is just beginning its complicated journey to ‘normalize’ monetary policy.
In reality, the landscape is anything but normal. Years of unconventional monetary practices have resulted in distorted economic conditions. It seems inevitable that something will break before the system can be righted, if it ever can be.
Misguided Regulations
The reforms Yellen highlighted include the Dodd-Frank Act, which emerged in response to the 2008 financial crisis. The involvement of Barney Frank, a former congressman whose tenure was filled with controversy, continues to taint economic policy even years after his departure from office.
Dodd-Frank represents a classic case of regulatory overreaction, with President Trump promising to reduce certain regulations within this framework, particularly concerning stress tests and capital requirements. These mandates force banks to retain more capital instead of allowing it to be invested in revenue-generating assets.
Additionally, the rules dictate how banks distribute their assets among sectors, favoring highly liquid securities over illiquid loans. Rolling back these requirements would ease compliance burdens on banks and grant them more freedom in managing their lending processes.
Yet, as a staunch advocate of regulation, Yellen believes that increased control equates to a more stable financial environment. Unfortunately, this view is fundamentally flawed.
The post-2008 reforms have instead stymied economic growth. U.S. GDP growth has lagged behind both asset price and debt expansion, with the number of businesses disappearing outpacing those being founded. Barney Frank’s regulatory framework has made it more challenging for small businesses and entrepreneurs to access essential capital for expansion and job creation.
Charting a Safer Course for Finance
Furthermore, these new financial regulations have failed to truly mitigate risk. In fact, they may be setting taxpayers up for future bailouts. Congressman Robert Pittenger pointed out this contradiction in a Forbes article last year:
“Even Dodd-Frank’s biggest selling point, that it would end ‘too big to fail,’ has proven false. Dodd-Frank actually created a new bailout fund for big banks–the Orderly Liquidation Authority–and the Systemically Important Financial Institution designation enshrines ‘too big to fail’ by giving certain major financial institutions priority for future taxpayer-funded bailouts.”
This reality prompts the question: What’s wrong with the system?
In essence, regulations aim to impose control by decree. However, laws do not inherently create compliance. They often fail to achieve their intended goals while complicating other areas of the economy.
Dodd-Frank’s stipulations regarding loan allocations grant preferential treatment to select corporations and institutions, amounting to a tiered system of pricing for borrowers. As Senate veteran Wallace Bennett remarked over fifty years ago, price controls are as effective as using duct tape to manage diarrhea.
Planning for future taxpayer bailouts as a part of flawed regulatory compliance is nonsensical. Instead, we propose a radically different approach that counters Yellen’s central planning philosophy. It’s straightforward and highly effective.
The most effective way to oversee banks, lending institutions, and corporate finance is to minimize regulations and impose one stringent rule: there will be absolutely no government bailouts.
By implementing this approach, the financial landscape would undoubtedly become significantly safer.
Sincerely,
MN Gordon
for Economic Prism
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