Dodd-Frank's Epic Fail and what the GOP won't do to fix it

            Tuesday’s midterm election raised questions about the fate of the Democrat’s financial reform and consumer protection act, after Republicans gained control of both the United States House of Representatives and U.S. House Committee on Financial Services, which oversees many of the provisions of the act. Barney Frank, D-Massachusetts, the “Frank” in Dodd-Frank will likely lose his position of chairman to Spencer Bacchus R-Alabama, the committee’s current GOP ranking member. Yet, few seem to anticipate a complete overhaul of the Republican opposed legislation as any major changes are likely to  fail in the Senate or be vetoed by President Barrack Obama.
           Still the change in party power raises several questions about the future of the Dodd-Frank Wall Street Reform and Consumer Protection Act. But my favorite is does this 2,300 page bill actually do anything or does it miss the point?
            In his blog Maximum Utility on MarketWatch.com (Thoma), Mark Thoma details what a swing to the right means for the act. He predicts the Republican party will not attempt to change the resolution authority the act grants to regulators, which allows regulators to unravel failing financial institutions in the same way they are allowed to unravel traditional banks, so they will not have to rely on taxpayer bail-outs. That’s a good thing. Bank of America can gobble up all of the pieces, along with all the banks that fail because of the Durbin Amendment. In the spirit of Major League Baseball’s “World Series,” B of A can then remain itself Bank of the World.   So, the bill does something at least. It also created the Bureau of Consumer Financial Protection though I wouldn’t bet on the bureau doing a whole lot of anything useful.   
            But, as Thoma notes, the act does little to prevent the run on the shadow banking system, which includes investment firms, money market mutual fund and securities dealers. Thoma details the problem here in the blog The Fiscal Times. Unlike regular banks, deposits in these banks are not insured by the Federal Deposit Insurance Corporation (FDIC), but rather were backed by “high quality collateral,” aka mortgages. Because, people always pay their mortgages…or not. Essentially, this led to the Great Depression Part Two. Except without that whole setting up FDIC deposit insurance or at least extending some form of insurance to the shadow banking system. 

          Big miss by Dodd-Frank. Democrats had the golden opportunity to push any reform package through the Democrat controlled Congress. To miss such an opportunity to regulate a run on banks, which has twice led this nation into severe financial hardship is special--the kind of Democratic common sense the nation has come to love. Yet to look to Republicans, which largely voted against the Dodd-Frank, to be the voice of reason would be naive. Prospects look grim, especially as GOP focus shifts to Dodd-Frank's other great miss...the inclusion of a sensible plan for government backed mortgage giants Fannie Mae and Freddie Mac.