Media Coverage: July 2010 Archives

by Roy C. Smith

After two years of effort, the US Congress last week gave President Obama a massive and very ambitious financial reform bill, the Dodd-Frank Act, to sign.

The 2,300 page law in 15 sections affects all financial service activities in various ways but it does little to improve systemic risk control. It strengthens the hands of regulators, but relies on them entirely to identify and avert future crises, things they have not been successful in doing in the past.

Too-big-to-fail financial firms (those with more than $50bn of assets, of which there are about 40 in the US) are largely left alone, free to be as large and complex as before.

However, if one of these financial firms faces a liquidity crisis in the future, which is likely given their aggressive business strategies, rescuing it with taxpayer funds to avoid a systemic crash will be much more difficult. Precluding bailouts when they are necessary will severely limit the government's ability to manage the next crisis.

Read the full opinion editorial on eFinancialNews.com

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.
by Roy C. Smith

The financial overhaul bill set for passage sometime next week is supposed to "bring accountability to Wall Street." In announcing an agreement between the House and Senate last week, Senator Christopher Dodd noted that "the American people have called on us to set clear rules of the road for the financial industry to prevent a repeat of the financial collapse that cost so many so dearly."

The final bill, though, does little to prevent a systemically important bank from failing, and makes it far more difficult for regulators to assist one seeking to avoid failure. This all but insures that the system-wide calamity the bill should be trying to prevent will, in fact, occur again.

Read the full opinion editorial on Bloomberg.com

About RegulatingWallStreet.com

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