The Law of Unintended Consequences: Part III

In part II of this series, I explained the omniscient, omnipotent, and omnibenevolent attributes of the Dodd–Frank Wall Street Reform and Consumer Protection Act, based on insights from Arthur Brooks’ interview with Hedge Fund Manager, Cliff Asness of AQR Capital Management. I present the larger implications of Dodd-Frank in relation to Europe, and the unintended consequences of regulation in this third and final part of the series.

The Eternal Nature of Dodd-Frank

The most nefarious feature of Dodd-Frank—as attested by Dr. Asness—is its self-sustaining, amorphous pool of money that enables the creation of agencies that did not yet exist when the Act was passed. Dr. Brooks likened this feature to France, a country that is largely run by unelected officials through bureaus that were established outside of the political process. The result is “a permanent and unaccountable socialist bureaucracy,” and in Randian terms, a promising environment for the Wesley Mouches in Congress.

“As the government keeps growing, a point will come when Americans must choose a course.”

Dr. Asness inferred that Dodd-Frank is a “giant leap” towards this type of French system, as the Consumer Financial Protection Bureau is designed to be “permanent and unassailable,” with its own sources of funding and little oversight. This expansion of government encourages cronyism, as it provides a scenario where institutions must play defense, and are more inclined to lobby or support politicians who could potentially assume positions in these bureaus. In other words, the Orren Boyles take advantage. As a result, firms spend money unproductively, and costs get passed on to consumers. Dr. Asness explains:

If we make a much more regulated financial industry that’s much less dynamic, every single thing will cost more and be less efficient. Costs they impose tend to be diffuse, small taxes, small inconveniences on many people that add up to a ton.

Hence, the “beatified little guys” are hurt through higher costs, and more bailouts. Regulation that was supposed to end too-big-to-fail and prevent another 2008 financial crisis bears the unintended consequence of injecting more risk into the system: “Crises are more likely, they will be more severe, and you will still be on the hook for it.” Dr. Asness said that as the government keeps growing, a point will come when Americans must choose a course.

Based on the U.S.’s economic track record versus Europe’s over the past couple centuries, the more viable and compelling course is quite clear. Yet, the prospect of Americans choosing a freer and less bureaucratic system necessitates a collective response to a dramatic government overreach. As long as Hollywood and D.C. project their misinformed perceptions of the financial sector, a unified strike against regulations that are sold as protecting the “little guys” from the fat cats on Wall Street is unlikely. In the meantime, there’s always Obamacare…

Dodd-Frank is just one example of the countless regulations that are inefficient, and often counterproductive. Given the complexities inherent to free markets, the law of unintended consequences runs rampant in government intervention. Can this be solved? Who is John Galt?

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