Why Dodd-Frank is Bound to be Trouble

Chris Dodd and Barney Frank both weigh in on the Economist letter page with predictably umbrageous responses to the trashing administered last month to their baby, the Dodd-Frank financial reform act.  Frank says:

SIR – Does The Economist seriously contend that the grave, systematic and repeated errors of the ratings agencies were irrelevant to the causes of the financial crisis? Simply repeating the claims of a few in the industry, who fear that we are moving away from the disastrous era of light-touch regulation, falls short of the independent analysis that your readers have a right to expect.

Link.  Hardley a surprise that Frank is combative--he's always combative--but push comes to shove, I'd say that's a fairly casual response, as if he has other things on his mind at the moment and doesn't think of the big E as worth worrying about,.  "Grave, systematic and repeated errors"--well yes, and whatever you may think of the E overall, I'd say they've done a fairly decent job of spotlighting "grave, systematic and repeated errors" that led up to the big pop. But wait--"of the ratings agencies"--huh?  Indeed the ratings agencies appear culpable for a lot but two things.One, I'm not at all sure they were just "errors"--I'd say a good case could be made for the proposition that we are observing something like outright fraud, deliberate corruption of the ratings agency process.  And two, the ratings agencies are part of the problem, but has Frank of all people already forgotten the "grave, systematic and repeated" (something) of so many other players in the late farrago?

But beyond that: "moving away from light-touch regulation"--c'mon, be fair..  There's a lot  more to the big E critique than that. The argument (correct or not) as that Dodd-Frank is unintelligible, indigestible, unmanageable and well-nigh unenforceable--and damned expensive to boot, a net loss to human welfare.

I tend to think there is more truth than poetry in the assessment though I, like the vast majority of humankind, have not actually read it.  And if there is a problem, I suspect I can identify one important root of the problem: Barney Frank.  No, no, not that he is venal or corrupt or even inattentive.  Not at all: I'd grant that he's one of the smartest (and funniest) people to sit in Congress in his generation.  But for  present purposes, I think he has two fatal flaws.

One: he believes in the therapy of the word.   He believes there is no problem too big or intractable that it cannot be brought to book by pouring on more language from the statutes or (even worse) the regs.  It's a déformation professionnelle: if there is a problem with legislation as a remedy, he's the last guy who is going to see it. He's spent his entire life in an insatiable quest for social improvement--24/7/365, with all his abilities and all his energies.  He just doesn't understand that the rest of the world can't be expected to go about the task with his intensity, focus and drive.  Worse, there's the problem of the surrounding apparatus: the legions of lawyers, lobbyists, accountants, economists you need to push the wagon out of the mud.  To the rest of us, they're a barrier.  To Frank after all these years, they're just invisible.

Two--okay, I guess this is just a subset of one.  But anyway: Barney Frank is just too smart for the job.  Note, I do not mean wily, slippery, crafty in the Odyssean sense (though I suspect he can be that when he needs to).  I mean only that he just doesn't understand that the rest of us just don't have the cranial capacity to comprehend his handiwork.  Really good statutory draftsmanship has to be simple, not because the world is simple (it's not) but because human beings are simple and if it's too complex, they are bound to get it wrong.  In his light, from the E's report, here is the most telling passage of all:

Even Dodd-Frank’s creators can bring no similar clarity to its intentions. In 2009 Mr Frank attempted to frame the new law’s goals under four heads: securitisation, compensation, liquidation and systemic risk. But in a single speech his ambitions overflowed to consumer protection and the reform of ratings agencies, too. Ambition is often welcome; but in this case it is leaving the roots of the financial crisis under-addressed—and more or less everything else in finance overwhelmed.

 Bingo.