Lessons From Dodd-Frank And Financial Crisis

President Barack Obama addresses reporters abo...

President Barack Obama addresses reporters about the economy and the need for financial reform in the Diplomatic Reception Room of the White House on February 25, 2009. (Photo credit: Wikipedia)

The American Action Forum held a panel discussion to examine the financial crisis and the impact of the Dodd-Frank Act. Not surprisingly, five years after the collapse of Lehman Brothers the causes of the crisis are still hotly disputed.

Economist Douglas Holtz-Eakin explained that the financial crisis was more complicated than merely the government’s housing policy or Wall Street greed. “I think the two popular versions that you’ve heard are wrong. They are too simplistic, miss important elements of the crisis,” Holtz-Eakin said. “First, it wasn’t just a housing story. It was a broad credit problem. Number two. It was characterized by instances of under regulation…but also over regulation. It isn’t a simple story there either on the policy front.”

Dodd-Frank co-author and former congressman Barney Frank, said the Act’s goal was to equip regulators with the ability to combat future financial crises that no one can foresee. "We did consciously say we are going to empower these regulators to the extent possible to deal with the problems we don’t know about yet.”

Frank also suggested some aspects of the Act were left intentionally vague in order to “empower the regulators to be innovative.” According to Frank, “that’s basically why we didn’t write a lot of these things in concrete. They can be changed."

Frank argued that government action prevented the 2008 crisis from potentially exceeding the Great Depression in terms of its economic impact: “People said that this could have been as bad as the Great Depression, in some ways, it could have been worse for this reason: Seventy years ago you had geographic particularity. Things could happen in one part of the world and it wouldn’t necessarily destroy the other. By 2008, we were on one grid.”

Liu Mingkang, the former chairman of the China Banking Regulatory Commission, echoed Frank’s statement in a recent piece in Project Syndicate: “Perhaps the most important lesson learned in the aftermath of the collapse of Lehman Brothers is that we can no longer afford to examine problems in terms of individual institutions and from regulatory ‘silos.’ The global economy’s high degree of interconnectivity, interdependence, and complex feedback mechanisms imply that one weak hub can bring down the entire system.”

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