Regime Uncertainty: Dodd-Frank

Regulations can be a major source of risk and uncertainty. Repressive and arbitrary regulations may diminish the entrepreneurs incentives to invest or allocate capital to productive ventures which in aggregate adds to economic woes.

Peter Klein at the Independent Institute quotes Peter Wallison on the adverse effects of the Dodd Frank law

“The question is why—why did this act have such a dramatic effect on the U.S. economy, essentially stifling the modest recovery that had begun almost a year earlier? The most likely explanation is uncertainty. The Dodd-Frank Act was such a comprehensive piece of legislation—and required so many new regulations before its effects could be fully evaluated—that many financial institutions and firms simply decided to wait for regulatory developments before expanding, hiring new workers, or rehiring workers who had previously been laid off. . . .

Following the precept of the president’s then-chief of staff Rahm Emanuel that “You never want a serious crisis to go to waste,” the law was rushed through Congress only 18 months after the Obama administration took office and 13 months after the first draft of the law was available to Congress and the public. This would have been warp speed for any one of the major provisions in the act. For a law with dozens of complex, radical, and occasionally contradictory provisions, adopting it so quickly and with so little real understanding of its effects verged on dereliction of duty.

Once business firms got a look at the language, they realized that they would have to change their financing arrangements in significant ways, and the costs were largely unknown.