The American Mortgage System: Crisis and Reform

11. The Expanding Financial Safety Net: The Dodd-Frank Act as an Exercise in Denial and Cover-Up

C h a p t e r 11 The Expanding Financial Safety Net: The Dodd-Frank Act as an Exercise in Denial and Cover-Up Edward J. Kane In 1766, Voltaire famously opined that “Men use thought only to justify their wrongdoings, and speech only to conceal their thoughts.” The behavior of many government officials confirms this dictum. Officials routinely misinform the public about the reasons for—or the probable effectiveness of—their economic policies. This behavior violates a duty of accountability that every public servant owes to citizens of his or her country. Because the integrity of representative democracy turns on this duty, government or media deceptiveness poses a professional and ethical challenge to conscientious news reporters and academic economists to uncover the spin and explain the deception to citizens that might be harmed by it. Ethically, the right to protect high officials from painful criticism that government spokespersons implicitly invoke is overwhelmed by duties of loyalty and care that, as agents, high officials owe to other members of society. In signing the massive Dodd-Frank Wall Street Reform and Consumer Protection Act, President Barack Obama issued a seemingly straightforward prediction about the effectiveness of the Wall Street reform section of the Act: “The American people will never again be asked to foot the bill for Wall Street’s mistakes. There will be no more taxpayer-funded bailouts. Period” (McGrane 2010). 272 Edward J. Kane To expose assumptions that might be embedded in the President’s prediction , it is sufficient to note that he did not exclude “mistakes made by managers of federal agencies or government-sponsored enterprises (GSEs)” from his first sentence and did not distinguish implicit from explicit taxpayer funding in the second. This potential logic chopping suggests that we should dismiss the one-word third sentence as a deceitful rhetorical flourish. The Dodd-Frank Act puts responsibility for avoiding future crises squarely on future regulators, and the insuperable presumption that they can succeed year after year in this task is the wishful element that undermines the President’s rosy forecast. As Figure 11.1 shows, at 2,319 pages, the Dodd-Frank Act is orders of magnitude longer than previous financial legislation. Despite its length, the Act ignores the GSEs (whose appetite for risk fed the housing and securitization bubbles) and offers hundreds of opportunities for the regulatory community to miss its marks. In particular, the Act asks the federal financial regulatory agencies to prepare numerous reports and studies and assigns to these agencies the hard work of specifying and implementing crucial details of the proposed new regulatory structure. Moreover, it authorizes lengthy phase-in periods for most of the changes it mandates. During these periods, lobbyists will seek to undo provisions the industry doesn’t like. Dodd-Frank Act (2010): 2,319 pages Gramm-Leach-Bliley Act (1999): 145 pages Sarbanes-Oxley Act (2002): 66 pages Interstate Banking Efficiency Act (1994): 61 pages Glass-Steagall Act (1933): 37 pages Federal Reserve Act (1913): 31 pages 0 500 1,000 2,000 2,500 1,500 Figure 11.1. Growth in size of legislation. The Expanding Financial Safety Net 273 Our legal system conditions us to accept (and even to admire) the use of clever evasions. Still, even though inviting listeners or readers to misinterpret a shrewdly worded statement is definitely more elegant than lying, most moralists regard such “spinning” of facts as disreputable (Strudler 2010). Producers of artfully spun phrases routinely defend themselves by blaming their victims for swallowing the deception. They can and do argue that listeners ought to realize that they are in a position of caveat emptor and should look for and discount exaggeration and distortion. From this cynical perspective, verbal sleight of hand is okay because it offers its audience an opportunity to reason their way through the deceit. However, the fairer this opportunity becomes, the fewer people the misdirection can ultimately fool. A Bloomberg National Poll conducted during the week before the signing of the Dodd-Frank Act suggests that that presidential and congressional misdirection failed to sell the U.S. public on the effectiveness of the Act’s legislative thrusts. Only 21 percent of respondents believed that the Act “will require big Wall Street banks to make major changes in the way they do business” (Miller 2010). To explain the divergence in expectations between the political establishment and ordinary citizens, we can make use of Elisabeth K...