What offends me about the bill is that it serves to raise the status of those who least deserve it. Start with the name, "Dodd-Frank bill." Will Chris Dodd and Barney Frank go down in history as heroes of this era?
It also greatly raises the status of regulators, despite their strong culpability in the errors leading up to the crisis. In fact, despite the bill's length, most of the regulations have yet to be written. Inevitably, those rules be written to the specifications of the largest banks, because the large-bank mindset will be the only one present in the room. My first prediction is that the biggest long-term consequence of this legislation will be a significant increase in concentration in the U.S. financial industry. My second prediction is that the financial consumer protection agency will turn out to be the financial incumbent protection agency. It will be captured by legacy financial firms, who will use it to outlaw new competing products as unsafe.
On the most important issue of "too big to fail," the legislation does exactly the wrong thing. It gives regulators discretion to use resolution authority to break up at-risk institutions. But the regulators already had that. What they need are hard and fast rules that require them to use resolution authority under well-specified conditions. On a case-by-case basis, it is always is safer to do a bailout, just as on a case-by-case basis it always seems easier to just pay ransom to the kidnapper. Resolution authority that is discretionary is resolution authority that will never be used. And the big banks know it.
[UPDATE: Yves Smith says that size isn't everything. Some banks are so important as broker-dealers in particular markets that they will not be allowed to fail for fear of disrupting those markets.
The problem is that it would take a radical restructuring of the very biggest banks, the critically placed dealer firms, and the most important payment and clearing operations to make a real dent in systemic risk. The officialdom the political lacked the will to do so at the peak of the crisis, and there is no basis for fantasizing that it will suddenly develop more nerve now.
I worry about these highly sophisticated financial mechanisms that enjoy de facto government insurance. My concern is that insurance that is free, or very much under-priced, is going to foster a lot of economically unsound financial practices.]