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Pierce: Dodd-Frank failed to achieve many of its goals

Hester Pierce

Hester Pierce

Though the Dodd-Frank Act was intended to reform America’s financial system, limit risk to taxpayer funds and eliminate bad practices in the banking sector, the controversial financial reform law has so far failed to accomplish many of its goals.

The federal government played a large role in the latest subprime housing crisis and later bailed out numerous large American banks. Dodd-Frank, though intended to limit the risk of taxpayer funds to future bailouts, did little to reform the housing finance system, leaving taxpayer funds at risk, according to The Daily Caller.

The CFTC and SEC both overlap in their jurisdictions, and Dodd-Frank only exacerbates the problem. Under Dodd-Frank, both agencies are authorized to regulate the derivatives industry, creating even more overlap.

“A merger would reduce regulatory duplication, lower regulatory costs and curb wasteful interagency miscommunication,” Hester Pierce, the co-author of “Dodd-Frank: What It Does and Why It’s Flawed,” said, according to The Daily Caller.

Dodd-Frank also did little to promote the growth of private sector risk management. Shareholders and creditors have little incentive to monitor and reduce the risk of financial institutions. The reduction of deposit insurance and the reintroduction of double liability could force more firms to take on private risk monitoring.

Though Dodd-Frank did implement constraints on future bailouts, Pierce said that further constraints are necessary.

“Clear, credible constraints would limit moral hazard and lessen the likelihood of harmful government intervention,” Pierce said, The Daily Caller reports.

Dodd-Frank also did not reform the money market fund industry or the repo and securities lending market, both of which contributed to the deepening of the financial crisis. Pierce said that Dodd-Frank promotes the previous approach that contributed to the financial crisis.

“Dodd-Frank should have established straightforward capital regulations that are less susceptible to manipulation and less likely to encourage the financial industry to concentrate it assets in homogenous, risky securities,” Pierce said, according to The Daily Caller.

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