Dodd-Frank: Obama’s other big bad law

In July 2010, four months after President Obama signed his universal healthcare act into law, he enacted his other signature achievement, the Dodd-Frank financial reform law. Although we haven’t paid as much attention to it, Dodd-Frank is as flawed in its own way as Obamacare, with a similar potential to harm ordinary Americans. And the failures have similar origins.

For starters, both Obamacare and Dodd-Frank are too long. Obamacare clocks in at 906 pages; Dodd-Frank is 849 pages. By contrast, the 1965 act creating Medicare ran 138 pages, and the Securities Act of 1933 — a cornerstone of financial regulation that helped prevent meltdowns for five decades — ran just 93 pages.

Length isn’t merely an inconvenience. A brick of a law that directs regulators to write more bricks of rules means that neither lawmakers nor the president know exactly what’s in the law. Nor do they know how each part of the law eventually will work with — or against — other parts.

Take the president’s repeated — and false — promise that any American who wanted to keep his or her health plan could do so. He appears to have genuinely not understood that the voluminous law would lay the groundwork for what we are seeing now: widespread cancellation notices to insured Americans.

It’s harder to grasp Dodd-Frank’s failure. But it’s equally simple: a promise made and not kept. In signing Dodd-Frank, Obama pledged that “the American people will never again be asked to foot the bill for Wall Street’s mistakes.... There will be no more tax-funded bailouts — period.”

Just this past May, though, Treasury Secretary Jacob Lew told Congress that “getting Dodd-Frank implemented is still a fair amount of work.” On the procedures that are supposed to allow financial firms to fail in an orderly fashion, he said: “I think the challenge is now to make sure that we know that those can work.... The operational issues are not insignificant.”

Somewhat obliquely, Lew concluded that we’re “still determining how to set the levels in various areas” so that “in the end we’ll be able to say that too big to fail has ended.”

Five months later, in October, the Davis Polk law firm found that regulators had missed 61% of 280 deadlines to make rules for Dodd-Frank — rules governing crucial aspects of the law, including how much money banks can borrow to trade opaque financial instruments such as derivatives and how much cash people must put down before they can get a mortgage.

What’s the holdup? Just as with Obamacare, it’s easy to blame the complexity itself.

But the solution to “too big to fail” was always pretty easy: prevent financial firms from borrowing too much, by forcing them to put down more “capital” — non-borrowed money — behind their businesses.

Dodd-Frank’s complexity was a symptom, then, of a simple problem: the unwillingness of either party to level with voters. Ending too-big-to-fail for real would require ending decades of implicit government subsidies for financing firms.

Banks have been able to borrow cheaply since the early 1980s because their investors know the banks will receive government help in a crisis. If banks can’t expect such help, they’ll have to pay more to borrow in accordance with the higher risk. Then the banks will have to charge people higher interest rates for mortgages and other loans.

That’s a good thing in the long term. Part of the reason the country is still in so much trouble economically is because people were able to borrow way too much way too cheaply for too many years.

In the short term, though, ending the era of too-big-to-fail would be bad for banks and bad for consumers. That’s why the government wrote hundreds of pages pretending to solve the problem without doing so.

Likewise, making sure everyone has health insurance isn’t all that difficult. Some people will pay more — either in insurance costs or taxes — so that others can pay less. Young, healthy people will pay higher rates so that older, sick people can at least afford some insurance.

But Obama never really explained this, so people are surprised. He should have said: You may know your wife’s not going to get pregnant again because you had a vasectomy. But getting insurance for your own healthcare means you pay for others’ care, including their pregnancy care, so you can’t pick a plan that doesn’t cover pregnancies anymore.

With healthcare, Obama didn’t dare touch popular aspects of the status quo, even though they were at the heart of the issue. If you get health insurance through your employer, for example, you enjoy a huge tax subsidy, one that keeps healthcare costs artificially high for everyone. But that subsidy was viewed as untouchable.

The same concept held with Dodd-Frank. Neither Obama nor Congress dared to “reform” Fannie Mae and Freddie Mac, two deeply flawed entities that have given many Americans a government benefit in the form of a cheap mortgage.

Big chunks of the existing healthcare industry also have a stake in keeping things largely as they are. Healthcare in America is more expensive than it is in other Western countries, partly because insurers and providers have benefited from an opaque marketplace with costs borne by third parties. (If you have to pay $315 for a 10-minute visit, you don’t care because your insurance company pays — but someone without insurance has a headache wriggling out of a similarly inflated bill.)

Dodd-Frank and Obamacare have similar problems, but there’s a difference. If American healthcare keeps failing, people will be able to tell. They may not be able to do much about it, but at least they’ll know. If financial regulation keeps failing, few people will know until the next financial crisis — one that likely would cost millions of jobs, just as the last one did.

Nicole Gelinas is a contributing editor to the Manhattan Institute’s City Journal. A longer essay she wrote on Dodd-Frank’s failures will appear in the fall issue of City Journal. Twitter: @nicolegelinas