Paul Krugman, in today's New York Times, assures us that Dodd-Frank is working, despite claims to the contrary from critics all across the political spectrum. To make his case, Krugman points to consumer protection, resolution, and the designation of systemically important financial institutions. On each of these fronts, his defense falls short.
Krugman counts the Bureau of Consumer Financial Protection a success on the grounds that the crisis showed a need for more consumer protection. A new bureaucracy and a raft of new regulations do not necessarily mean consumers will be better protected. After all, regulations played an important role in encouraging the subprime lending that Krugman identifies as the problem. Nudging everyone into look-alike thirty year mortgages favored by the CFPB is not the solution. Krugman cites the CFPB's crackdown on "billions in excessive overdraft fees" as evidence of its success, but the result may be even higher fees as consumers look for alternatives to overdraft protection. The regulatory costs associated with the CFPB can hinder competition, which serves and protects consumers. And the CFPB's structure, which Krugman appears to defend, impedes its ability to weigh accurately the costs--direct and indirect--of the agency's actions.
Krugman also celebrates what he calls the "Ordinary Liquidation Authority." Title II of Dodd-Frank created the Orderly Liquidation Authority as an alternative to ordinary bankruptcy. Regulators can arbitrarily invoke it at their whim and have great discretion once it is invoked, which creates unproductive uncertainty for creditors and allows the government to play opaque games with troubled companies at the expense of taxpayers, disfavored creditors, and the rule of law.
Krugman also celebrates the fact that the systemically important label appears to be an undesirable one--not the sought-after government seal-of-approval that others believe it to be. The fact that nonbank financial institutions do not want to be designated as systemically important and shoved into the Federal Reserve's eager, but inexperienced regulatory arms is not surprising. Over time, the relationship between designated firms and the Fed will develop into an unhealthy codependence with the Fed supplanting the firms' own decision-making process in exchange for a promise of perpetual survival.
Krugman's optimistic take on Dodd-Frank, like the statute itself, is grounded in the unrealistic expectation that regulators can outperform the competitive marketplace and existing legal structures in protecting consumers, winding down failing firms, and upholding systemic ones. This "success story" needs a rewrite.