In the wake of the fiscal crisis of 2008, lawmakers in
Washington rushed to craft legislation to curtail risky practices
at the center of the financial collapse.

The product was the 2010 Dodd-Frank Wall Street Reform and
Consumer Protection Act, a massive slate of regulations that
expanded the role of government to police everything from debit
card purchases to insurance.

Now, a new book argues that the ongoing complexity and reach of
Dodd-Frank could plant the seeds for another collapse.

Dodd-Frank: What It Does and Why It’s Flawed, produced
by the Mercatus Center of George Mason University, provides a
thorough dissection of the more than 8,800-page law.

“I think it really didn’t get to the problems we saw in the last
crisis. In fact, I think it made them worse in many ways,” said
Hester Peirce, a senior research fellow at Mercatus and,
with James Broughel, co-author of the book.

Peirce maintains that Dodd-Frank created an intricate web of
governance, producing uncertainty in many industries.

“There was this need to do something,” she said of the law’s
genesis. “Congress was more concerned about doing something than
about doing something right.”

By creating new agencies like the Bureau of Consumer Financial
Protection and expanding the role of existing entities like the
Securities and Exchange Commission, Federal Reserve and others,
Peirce said Dodd-Frank puts the nation’s financial health in the
hands of regulators while providing little clarity for the rules
they enforce.

Among the book’s key criticisms is the law’s underlying
philosophy, that some companies are so large and interconnected
throughout the economy that their default would result in
disastrous market contagion. The authors contend that Dodd-Frank
responds with the sort of regulatory overreach that guarantees
government protection for companies that, like insurance
giant AIG, are considered too-big-to-fail.

“In 2008, people weren’t exactly sure how far the government
safety net went,” she said. “I think a lot of people were surprised
that AIG was rescued. Now, under the (Dodd-Frank) regime, AIG is
likely to be designated as a systemically important financial
institution, which means it will be regulated by the (Federal
Reserve). It will be clearly anticipated that if something were to
happen, that it will be rescued.

“We’ve basically broadened (oversight) from just banks to all
sorts of new entities. It’s just going to be very expensive.”

While some regulations have expanded, others have vague
constraints, such as the Volcker Rule. Named for Fed chairman Paul
Volcker, the rule was designed to keep banks from investing
customer assets in risky speculation. But the rule brought more
questions about how banks can legally invest, setting up a
potential chill in the securities market.

While Dodd-Frank is responsible for much new financial
regulation, Peirce said the law provides no oversight for the
housing industry that was at the center of the financial crisis.
Nor does it clarify government’s role in the home mortgage
business.

“Big components like housing finance reform, that issue was
totally not addressed by Dodd-Frank,” she said. “That was a huge
part of the problem in the crisis, the government’s involvement in
(backing mortgages). It made the government more likely to step in
and save entities because the government itself was so deeply
entrenched.”

The bigger problem: the natural risks of the marketplace have
been replaced by Dodd-Frank’s confidence in the wisdom of
regulators.