An Interesting Perspective on Dodd-Frank

President Obama signed the Dodd-Frank financial reform bill into law on Wednesday.  The law is generally regarded as “the most sweeping overhaul of U.S. financial-market regulations since the Great Depression,” as Victoria McGrane reported Wednesday on wsj.com.  Writing on Forbes.com last week, economists James S. Henry and Lawrence J. Kotlikoff, criticized Dodd-Frank as a “dog’s breakfast” that’s 10 times larger than the Glass-Steagall Act of 1933 (our copy has 2,323 pages) and “addresses everything but the root causes of the financial collapse” of 2008 (italics ours).  Dodd-Frank, they say, fails to deal with “the central problem – Wall Street’s ability to hide behind claims of proprietary information to facilitate the production and sale of trillions of dollars in securities who true values are almost impossible for outsiders to determine.”  Henry and Kotlikoff argue for an alternative system of “Limited Purpose Banking,” where all financial intermediaries with limited liability would be transformed into mutual fund companies.  As such, they would in effect be small banks with 100-percent capital requirements at all times and thus could never fail.  It is not our role to endorse their solution, but we think theirs is an interesting perspective.  In any event, whether Dodd-Frank has failed to enhance the visibility of financial firms’ assets and liabilities is likely an open issue.