Chapter 9

Why Financial Regulation Has Failed, and What to Do about It

Detailed below are various shortcomings of recent financial regulation, with recommended solutions to make the global financial system safer for investors and other market participants.

The Failed Promises of Dodd–Frank

July 21, 2010, was the day of a supposed new order.

A new era of progressive Dodd–Frank legislation intended to prevent financial crisis, fraud, and the collapse of global economic institutions. Upon signing the legislation, President Barack Obama’s comments were exceedingly rosy.

The president envisioned the statute as the cure for all of Wall Street’s perceived ills:

This reform will help foster innovation, not hamper it. It is designed to make sure that everybody follows the same set of rules, so that firms compete on price and quality, not on tricks and not on traps. It demands accountability and responsibility from everyone. It provides certainty to everybody, from bankers to farmers to business owners to consumers . . .

So, all told, these reforms represent the strongest consumer financial protections in history. (Applause.) In history. And these protections will be enforced by a new consumer watchdog with just one job: looking out for people—not big banks, not lenders, not investment houses—looking out for people as they interact with the financial system.1

Unfortunately for President Obama, Congress, economists, and others who helped draft the bill, Dodd–Frank has done little to shun ...

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