Harvard Profs Love the Dodd-Frank Bill (Except for a few minor problems)

Harvard Business Review asked four members of the Harvard Business School faculty about the new The Dodd-Frank Wall Street Reform and Consumer Protection Act (pdf). Though, ahem, they all had at least minor reservations.

Robert Steven Kaplan, Professor of Management Practice said he was:

cautiously optimistic about Dodd-Frank. It's not everything I might have wanted, but the legislative process seldom produces that.

Certain elements of this reform are positive and helpful...

But he did have one small, very tiny, problem with the bill. No one knows what will come out of the damn bill, since most of the details have been left up to the regulators. For Kaplan this is a cautionary point:

On the cautionary side of the ledger, much of this reform is yet to be determined. Many parts of the legislation are subject to study and the discretion of the regulators. For example, many elements of the so-called Volcker rule will be left to regulators to study and then implement. It will take some time, therefore, to see how this law will be implemented in practice.

Yup, not knowing what the result of the bill will mean would be a cautionary point.

Kaplan also thinks there might be a small problem with credit for consumers, once the bill is implemented. As he puts it:

...there are likely to be some unintended negative consequences... Will the consumer "protections" and other limitations on bank fees ultimately reduce the availability of credit?

David A. Moss, John G. McLean Professor of Business Administration also thinks the bill is great, except for a couple of minor problems:

The financial reform bill represents a major step forward for our financial system and our country. Like virtually every product of American democracy, it is a creature of compromise, and therefore fully satisfies no one, including me. But the legislation deserves to be recognized as a large and impressive accomplishment nonetheless.

So what could be the problem with such an "impressive accomplishment"? It's all up to the amazing power granted to the regulators. As McClean notes:

The financial reform legislation gives regulators the necessary tools, but it will be up to the regulators themselves to use these tools wisely.

Robert C. Pozen, Senior Lecturer of Business Administration, says:

The financial reform legislation takes three steps forward, two steps to the side, and jumps over a large pothole.

What's the problem? Why not all steps forward? Pozen explains:

Congress tried to turn back the clock by prohibiting banks from engaging in proprietary trading for their own accounts, subject to complex exemptions. Trouble is, proprietary trading was not a cause of the financial crisis and may reduce risk in certain situations. Moreover, this prohibition is likely to be ineffective, since nothing in this legislation or prior law prevents banks from proprietary trading outside the United States...Congress missed the main cause of the financial crisis — Fannie Mae, Freddie Mac, and the housing agencies. Given the fragility of the US housing markets, Congress was unwilling to reform these mortgage finance institutions, although they seem to be incurring potential losses of over one billion dollars a day. This glaring omission will clearly have to be addressed sooner rather than later.

Clayton S. Rose, Professor of Management Practice, doesn't  want to have anything to so with loving the bill. He comes right out swinging:

If the goal of Dodd-Frank is to prevent another crisis or substantially blunt its effects, then it is a disappointment...We should...be wary of the claim that the government will no longer bail out distressed firms. If a large, systemically important firm is failing, the political, financial, and economic pressures will be intense for the government to do what it has always done (directly or through surrogates) -- intervene. (Rhetoric notwithstanding, the government will do what it wants to do in this regard.)

Perhaps because of its effectiveness as political theater, there is too much focus on proprietary trading and hedge funds, both of which had limited culpability for the crisis...Bottom line: By not dealing effectively with "too big to fail" and the funding issue, Dodd-Frank may actually raise the risk to the system.

Now to be sure, if your read these Harvard profs' full comments, some of them want even more regulation, but they all recognize some of the problems with the current bill. They recognize  that the Bill leaves it up to the regulators to set down most of the rules, and no one really knows what that will mean. They recognize that the Bill has not addressed the continuing problems of Fannie Mae and Freddie Mac, that the Bill (depending on the regulator)  might destroy credit for consumers and small businesses, that the Bill was much about theatre and leaves the oligarchs with plenty of room to operate.