I recently posted a new article on SSRN lamenting the ineffectiveness of the Dodd-Frank bill to prevent another debt crisis accompanied by a financial sector meltdown. Entitled Dodd-Frank as Maginot Line, my thesis is that the financial reform act changes nothing in any meaningful time frame and that brewing debt crises in Europe and the US will likely trigger another Lehman Brothers type of financial meltdown that may prove more painful than the crash of capitalism in 2008-2009. The article will appear in the Chapman Law Review, and was initially presented at this symposium.
The article seems unfortunately prescient. As we look over the abyss today, and the Eurozone meltsdown before our eyes while the US suffers from a historic breakdown of responsible leadership, we may well learn very soon the deficiencies of the Dodd-Frank Act.
The sad truth is that even after the Act financial elites face every incentive to crash the global economy and pocket billions in profit. A comparison of those who hold credit default swaps on US Treasury debt with the financial supporters of the Tea Party would certainly prove an interesting test case of that central point: the legal system now fails to assure that those with economic power have any interest in the success of our economy.
Here is the abstract:
The Dodd-Frank Act will prevent a future debt crisis arising from subprime mortgage debt. The Act will fail, however, to prevent other future debt crises leading to future financial crises because the Act fails to address the distorted incentives to accumulate excessive debt and the distorted incentives for large financial firms to gamble on debt instruments. The Act preserves the power of the government to bailout financial firms deemed too-big-to-fail. The Act preserves the ability of such firms (at least over the short and medium term) to speculate in debt instruments through derivatives, securities and hedge fund activities. The Act also fails to assure the disruption of CEO primacy, as a matter of corporate governance law. In short, the Act constitutes a limited response to the crisis of 2007-2009, at best. CEOs still retain the power and still face incentives to saddle their firms with excessive risks at the expense of shareholders and society in general.