Dodd-Frank is More Right than Wrong

About Douglas Elliott:

Douglas Elliott, a fellow in Economic Studies at The Brookings Institution, is a member of the Initiative on Business and Public Policy. An investment banker for two decades, principally at J.P. Morgan, he was president and principal researcher for the Center On Federal Financial Institutions, a non-partisan think tank.

We should not repeal Dodd-Frank. Although far from perfect, it goes a long way towards fixing many of the problems revealed by the severe financial crisis from which we are still recovering. Whatever the exact causes of the crisis, which are still a matter of argument, it vividly revealed a multitude of flaws in how the financial system had been regulated. Dodd Frank fixes many of those problems and others are being tackled through international agreements like the so-called "Basel III" accord, which substantially increases the safety margins of capital and liquidity that banks must hold. Taken together, the reforms mean that banks will be operating with much greater margins for error, the massive business of derivatives will be safer and more transparent, regulators will have considerably clearer knowledge of the risks in the system, securitizations will be saner, and the system as a whole will be safer in many other ways.

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We cannot make the perfect the enemy of the good. It is true that Dodd-Frank will not eliminate future financial crises--nothing could completely avoid the problems of recurring financial crises fed by basic human traits like greed and fear. Safety margins also generally have economic costs in the good times, as the price for reducing the frequency and severity of truly devastating financial crises that would wipe out the gains from operating more leanly. Safer cars may not go as fast, because of the weight of good bumpers, solidly constructed bodies, etc. However, they are a lot more likely to get you where you are going. Quantitative analyses by neutral experts, not funded by the industry, virtually always conclude that the benefits of financial reform considerably outweigh the costs.

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Again, Dodd-Frank is not perfect. More could be done to reduce the number of different regulatory bodies. The Volcker Rule seems to me to do more harm than good. I worry that the Federal Reserve's ability to intervene in crises has been cut back too far. The list goes on.

Even so, Dodd-Frank and Basel III probably move us two-thirds of the way from where we were to where we ought to be, which is a big achievement in the real world (and perhaps an even bigger achievement in Washington.) There is room for improvement, but it is important to start with the understanding that it is considerably more right than wrong.

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