Economics, Free Enterprise

Dodd-Frank is the poster child for crony capitalism

Photo Credit: Leader Nancy Pelosi/Flickr

Photo Credit: Leader Nancy Pelosi/Flickr

When policymakers respond to a perceived market failure (whether real or imagined) with “reforms” that instead create government failure, they tend to leave the overall economy much worse off — except for a few well-connected people and firms.

The 2010 Dodd-Frank Act has become the poster child for this phenomenon. We have a great deal of evidence that it entrenches the worst excesses of crony corporatism while raising costs to consumers and doing little to prevent another financial crisis. My AEI colleague Peter Wallison discusses this at length in his recent book Bad History, Worse Policy: How a False Narrative About the Financial Crisis Led to the Dodd-Frank Act.

Shortly before Dodd-Frank passed, Cliff Asness of AQR Capital Management (and AEI trustee) wrote in the Wall Street Journal that the bill was “perfectly designed to create the largest and most powerful crony system in history. It’s not that the people, regulator or regulated, are personally corrupt. It’s that the system will itself select for, reward and enforce corruption.”

In other words, a “reform” bill ostensibly aimed at fighting cronyism and self-dealing instead entrenched it.

On May 9 at 2 PM, Cliff Asness will join me at AEI for a conversation about how recent policy decisions have increased cronyism and decreased competition in the financial sector — and what this means for the American economy going forward. It’s a conversation I’m very excited about, so I invite you to join us, either at AEI or via the web.

And if you have suggestions for questions I should ask Cliff, please put them in the comments.

10 thoughts on “Dodd-Frank is the poster child for crony capitalism

          • defined: ” Crony capitalism is a term describing an economy in which success in business depends on close relationships between business people and government ”

            does that mean that business has a “close relationship” to govt when it comes to eminent domain?

            again – what justifies the govt takes sides with one property owner to force another to turn over their property or use of their property ?

  1. How about this for a question: If the abundance of regulation increases the opportunity for and likelihood of cronyism, is the solution to add even more regulation to try to control this exercise of regulatory power, or to remove the offending regulation and increase market discipline?

    This is not an academic question. The new Brown-Vitter bill proposes to address the problems of TBTF by adding even more regulation, giving regulators even more authority, and making it federal law that all banks are worse than nonbanks, that all big banks are bad, all small banks not quite so bad, and all mid-size banks a mix of good and bad.

    • re: the evils of regulation

      I do not see this argument being made about the FDIC which is govt bureaucrats regulating banks – and doing so in a way that IMHO has only benefited the banks and their depositors.

      Anyone remember Resolution Trust? another bureaucratic agency that benefited more than it harmed.

      How about the Pension Benefit Guaranty Corp – PBGC?

      the interesting thing about that entity – so far is:

      The PBGC is not funded by general tax revenues. Its funds come from four sources:
      Insurance premiums paid by sponsors of defined benefit pension plans;
      Assets held by the pension plans it takes over;
      Recoveries of unfunded pension liabilities from plan sponsors’ bankruptcy estates;[4] and
      Investment income.

      so can we really say that in all cases that the govt does a bad job of regulating banks and other financial instruments?

  2. Actually I would beg to differ and suggest that healthcare is an even stronger case as being the “poster child for crony capitalism” since almost all the problems stem from it, and Obamacare merely makes those worse. Usually free market advocates don’t focus on explaining the problem in terms of special interest influence (we speak in free market terms that are preaching to the choir). Instead we need to focus on the crony capitalism aspects because liberals fear corporate influence over government so it may be the hook to get them to pay attention to think through the issues.

    This page spins the issue as crony capitalism in gory detail:

  3. PS, though obviously it is *a* poster child for crony capitalism, I was merely suggesting there is a better candidate for *the* poster child.

    Dodd-Frank shows what happens when the public doesn’t grasp there is a vast difference between *bad* regulation driven by “crony capitalist” regulatory capture, which may appear to be minimal regulation to them, and true deregulation.

    When the government pretends to be solving a problem, e.g. keeping us safe, then the private sector doesn’t step in to address the problem since it fears getting squashed by government intervention, and has trouble explaining to the public why it should pay for private solutions . It is only with *full* deregulation usually that the public will turn to private sector solutions and entrepreneurs will step in to provide them.

    We risk seeing the same thing happen in healthcare as happened with the financial crisis which lead to Dodd-Frank. If there is a repeal only of Obamacare, or only part of it, the core government interventions that drive up prices will remain and prices will rise. Liberals will then claim “see, deregulation didn’t work”, and then push for even more regulation.

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