Failures of the Dodd-Frank Act

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by Viral Acharya

Last month, Friedrich Hayek's classic "The Road to Serfdom", a warning against the dangers of excessive state control, was the number one bestseller on Amazon. At the same time, the foundation of much modern economics and capitalism - Adam Smith's "The Wealth of Nations" - languished around a rank of ten thousand. It is a telling reflection of the uncertain times we are in that precisely when confidence in free markets is at its all time low that scepticism about the ability of governments and regulation to do any better is at its peak. It is thus no trivial task for Messrs Dodd and Frank to put up the Wall Street Reform and Consumer Protection Act and convince the suspecting audience that financial stability will be restored in the near future.

The backdrop for the Act is now well understood. When a large part of the financial sector is funded with fragile, short-term debt and is hit by a common shock to its long-term assets, there can be wholesale failures and disruption of intermediation to households and corporations.

Read the full opinion editorial on the Financial Times' website.

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The Dodd-Frank Act, signed into law in July 2010, represented the most significant and controversial overhaul of the U.S. financial regulatory system since the Great Depression. Forty NYU Stern faculty, including editors Viral V. Acharya, Thomas F. Cooley, Matthew P. Richardson, and Ingo Walter, provide a definitive analysis of the Act, expose key flaws and propose solutions to inform the rules’ adoption by regulators, in a new book, Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance (Wiley, November 2010).

About Restoring Financial Stability

Previously, many of these faculty developed 18 independent policy papers offering market-focused solutions to the financial crisis, which were published in a book, Restoring Financial Stability: How to Repair a Failed System (Wiley, March 2009).

About the Authors