Morgenson: With Dodd-Frank, next crisis will come sooner, not later

April 12, 2011

Gretchen Morgenson and Alex Jones

Gretchen Morgenson and Alex Jones

April 12, 2011Gretchen Morgenson, New York Times assistant business and financial editor and columnist, has some good things to say about the Dodd-Frank financial-regulation act, but the list is short. Enacted after the 2008-2009 financial crisis, the bill’s stated intent is to reform Wall Street and protect consumers. The resulting legislation is far less transformative than Morgenson had hoped.

Speaking at a Shorenstein Center talk, she said Dodd-Frank had “so much wiggle room a truck could drive through it” and was “riddled with loopholes.” One tip-off is the bill’s 1,500-page length, which contrasts with the mere 32-page Glass-Steagall Act, enacted after the onset of the Depression. Set Glass-Steagall next to Dodd-Frank, she said, and it’s clear that “less is indeed more.”

Morgenson’s brief list of Dodd-Frank’s merits includes its forcing the Federal Reserve to be more open about its activities. Abusive mortgage fees are also limited, she said, and the bill does a “good job” in mandating that derivatives such as credit-default swaps be traded more transparently.

The bill’s limitations required considerably more time for Morgenson to enumerate. First up was Dodd-Frank’s “comprehensive delegation of duties to regulators,” an item that required its own sublist of negative consequences. This aspect of the bill constituted a “dereliction of duty by lawmakers,” she said, and provides banks and their lobbyists yet another chance to influence the final outcome.

“Essentially they’re getting two bites of the Dodd-Frank apple,” Morgenson said, noting that legislators had dozens of meetings with financial-services companies during the bill’s formulation, but only one with the public. Dodd-Frank also fails to “resolve the disasters known as Fannie Mae and Freddie Mac,” she said. “Just that fact that the most ‘sweeping’ legislation fails to deal with them speaks volumes about how ‘sweeping’ it wasn’t.”

The most troubling outcome of the bill, according to Morgenson, is that it does little to reduce the threat of “too big to fail.” Indeed, she said that since the financial crisis, large banks are now even larger: “The top 10 banks hold 77 percent of all bank assets, compared with 55 percent of the total before the crisis.” Dodd-Frank also confers special status on institutions considered “systemically important,” sending a signal to markets that large institutions are special.

“We are not where I had hoped we’d be four years after the crisis began,” Morgenson concluded, “and what I think it means is that while Glass-Steagall protected us for almost 70 years, the flaws in Dodd-Frank almost guarantee that the next crisis will come sooner rather than later.”

This article was written by Leighton Walter Kille, Shorenstein Center. Photos were taken by Heather McKinnon, Shorenstein Center.