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OPINION: Dodd-Frank regs go too far
On July 16, over 200 new rules and regulations are going into effect as a result of the Dodd-Frank financial “reform” bill.
This will not be a good experience for our economy. It will hurt job creation and our international competitiveness. Other than the corporate bar, I cannot think of anyone this side of Harvard Law School who is looking forward to this explosion in regulatory excess.
Even the regulators charged with implementing this piece of legislative chaos are finding it difficult to get past its incoherent ideology and lack of real-world workable language.
Derivatives are not monolithic. They come in many sizes and types. The notional value of the derivatives’ market is estimated to be many trillions of dollars and for many parts of our economy, especially our international companies, they are a critical element of doing business.
Until now, the U.S. financial markets have been the leaders in derivatives, creating credit for companies wishing to grow and hire. But this leadership and job-generating economic activity is put in serious peril by this regulatory effort.
The impact of July 16 and the succeeding new rules and regulations will dramatically affect the American economy. If these rules are promulgated in an arbitrary way or are grounded in some academic or ideological thought process divorced from the real world, their effect will not be helpful.
The consequence will be a massive transfer of economic activity overseas and an equally massive contraction in the liquidity and credit that keeps American business competitive and vibrant.
Many are aware of the potentially debilitating effect of these rules, including even some in the government. Treasury Secretary Tim Geithner recently gave a speech calling on the international community to coordinate its regulations of derivatives with the new American regime. This speech raised more questions than it answered.
Why, if America is going to unilaterally disadvantage its producers, should other nations follow suit? Does not this approach essentially guarantee that business will move offshore in order to find more affordable derivative transactions so they can keep themselves competitive?
What sort of economic policy is based on speeches as a way to protect American business and jobs while real laws and rules are implemented that cost American business and jobs?
This new regime’s stated purpose is to reduce systemic risk so we do not confront another financial meltdown as occurred in late 2008. In order to accomplish this, regulators and the Democratic Congress pushed to have all derivatives go through clearinghouses and ultimately be placed on an exchange, with significant increases in margin requirements.
This is an approach that will work for many derivative products but not for all. There is a large and very important part of our economy that depends on derivatives that cannot afford to carry the cost of large margin requirements.
The companies involved do not represent systemic risk but rather real economic activity. They use derivatives not as a tool for speculation but as a means of obtaining stability and predictability. Their needs for derivatives should not be held hostage to some academic or ideological concern about systemic risk.
For if these rules are implemented as proposed by the law, these companies will have no choice but go elsewhere to find the credit they need at prices that make them competitive in a global economy. No amount of press releases from this administration will make other countries pass up the lucrative opportunity to service them.
An American international company that has for years been selling its products using end-user derivatives does not need or want to be forced into a clearinghouse or exchange, and especially does not want to suddenly have its scarce working capital frozen to support higher margin requirements.
These markets are very fluid and fungible and one cannot fault companies that take their business overseas if they are confronted with excessive, expensive and irrational government regulations here. The fact that the Treasury secretary may call on the rest of the world to have equally excessive, expensive and unreasonable regulations is hardly a matter of solace to them.
The unintended consequences of the July 16 deadline are already apparent in a number of areas . There is a high likelihood that they will further retard an already sputtering recovery.
Congress could do everyone who cares about job creation in this country a large favor by calling a “time out” in the process. Hearings should be held to determine what is really needed and what the true impact will be. Then adjustments should be made that are well thought out.
The alternative is that we can have more speeches calling on the rest of the world to join us. But one suspects our international competitors are too smart to heed such requests.
Judd Gregg is a former governor and three-term senator from New Hampshire who served as chairman and ranking member of the Senate Budget Committee and also as ranking member of the Senate Appropriations Foreign Operations Subcommittee. He recently became an advisor to Goldman Sachs.
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