LeftNavBar_Background_Color_Bar Bill Sargent for Congress > Click here and Go to the Home Page Your Are Here: Home > Index of Articles > The Economy See where Bill stands on the issues Take a look at Video Clips of Bill talking about the issues Contact the Bill Sargent for Congress Campaign Visit Bill's Facebook Page Tweet Bill from his Twitter Page TableContents

The Dodd-Frank Act vs. The Free Market Economy

The Dodd-Frank statute is a perfect example of what happens when one accepts the premise that government has the answers, when one acts quickly without thinking things through, and when we move away from free market economics. In the 1970s I learned at the Foundation for Economic Education that innovation and a healthy economy can only occur when individuals are allowed to make individual decisions.

Consider all the decisions that go into getting just one product from its conception to its delivery to us in a store. Somebody has to get the idea. Then they need to figure out how to make it, where to get the materials for it, and what equipment is needed to fabricate it. Once they make the product they need to determine how to distribute it and get it to its intended market. Finally the retailer needs to decide whether he is willing to sell it and for how much. Then you and I decide if we want this product and if so whether we are willing to pay the price at which it is offered. There are hundreds of decisions to be made just to get this "widget" to us. In the end, the person who had the idea and then risked his time and capital to develop it and bring it to market might make a profit or, he could lose his shirt! This is how free market economic works.

Now enters the government and the world view that a small group of people in Washington have enough knowledge to make these hundreds of decisions for us. Legislation like the Dodd-Frank Act is based this world view and not a belief in a free market economy. Hester Peirce, a senior research fellow at the Mercatus Center shows us what impact this law will have on us in 2013.

As the Dodd-Frank Act comes to life, its harmful effects will come into plain view. Solutions crafted without a clear focus on the problems that need fixing may create new and even more severe consequences (e.g., the cure may be worse than the illness!) A quick overview of the law's shortcomings is a stark reminder of the dangers of legislating in haste, says Hester Peirce. Dodd-Frank:

  • Codifies too-big-to-fail: Rather than eliminating the market's expectation that certain big financial firms are too big to fail, Dodd-Frank creates an explicit set of too-big-to-fail entities -- those selected by the Financial Stability Oversight Council for special regulation by the Fed.

  • Threatens small businesses: Dodd-Frank's complex web of regulations favors large financial firms that can afford the lawyers to analyze them. New requirements will be disproportionately costly for small banks and small credit rating agencies.

  • Hurts retail investors: The new rules impose costs on non-financial companies that will be passed on to investors and consumers.

  • Consumer "protections" harm consumers: The consumer financial products regulator established by Dodd-Frank, rather than helping consumers, threatens to raise the prices consumers pay and limit the products, services and providers available to help them achieve their financial objectives.

  • Sows the seeds for the next financial crisis.

  • Creates new unaccountable bureaucracies.

  • Gives more power to failed regulators.

  • Gives government unchecked power to seize firms.

  • Interferes with basic market functions: The Volcker Rule, which prohibits banks from engaging in proprietary trading and limits their investments in hedge funds and other private funds, is proving to be difficult to implement. It will be more difficult to comply with and will interfere with the functioning of the market.

  • Replaces market monitoring with regulatory monitoring: Dodd-Frank relies on the hope that regulators that failed before and during the last crisis will be able to spot problems in the future.