Last July, Congress passed the Dodd-Frank Act, the most far-reaching reform of financial regulation in this country since the Great Depression. A year later, I am often asked if we are any safer now. The short answer is: not much at this point, but we will be. Some helpful reforms have already been implemented, however it will take longer for the most important changes to be put into place through binding rules.
Is there something wrong with this pace? It might seem so, since the various regulators have missed many Congressionally-imposed deadlines, but this is deceptive. The simple fact is that the deadlines, taken as a whole, were unrealistic from the beginning. Our nation’s financial system is immensely complicated and it is no surprise that the Dodd-Frank Act and resulting regulation is also extremely complex. There were so many things to fix that regulators are being required to write hundreds of regulations of one kind or another. This cannot be accomplished in a single year and attempts to do so would have risked grave harm, especially as many of the regulations interact with each other and therefore need added time for coordination. There are also many international ramifications that create a further need for coordination with regulators in other countries.
Fortunately, the great bulk of the new rules will be finalized and implemented over the course of the next year. There will doubtless then need to be some adjustments as we see how all the changes play out. No one has ever taken a financial system this complex and made this many alterations to it. It takes time to do this and mistakes will inevitably be made. However, the alternative of inaction would have been far worse. The financial crisis that reached a crescendo in 2008 revealed the need for wide-ranging changes and increases in many different safety margins. This is what Dodd-Frank tackled. It has its flaws, but the overall effect should be to make our financial system much more resilient than it was a few years ago.
I am also asked if a lessened sense of urgency, as the crisis recedes, combined with nearly-united Republican opposition, will keep Dodd-Frank from being implemented or even cause important legislated changes to be rolled back. This seems unlikely. Our political system is designed to have massive inertia, pushing us strongly along whatever path we are already on. Even if the 2012 elections were to bring a fully Republican Congress and a new Republican President, the newly demoted Democratic minority in the Senate would almost certainly successfully filibuster any major changes to financial reform. These senators generally believe in Dodd-Frank and also believe in the electoral appeal of financial reform. The Republicans would need not only to win a majority in the Senate, but to reach 60 seats, or to miss by only a couple of seats, in order to be able to overcome a threatened filibuster.
That said, there could certainly be changes around the edges of Dodd-Frank. Indeed some of this might occur even without a switch in the control of Congress. However, everyone should get used to Dodd-Frank, because at least the core of it is likely to still be in place 20 years from now. It is every bit as important as it was claimed to be and it should make us substantially safer over time, despite its imperfections.