Echoing the earlier commentators, I commend Professor David Driesen on his important contribution to legal scholarship and public policy with The Economic Dynamics of Law. I am hopeful that the economic dynamic approach can be used in the academy and on the front lines of financial reform.
As Driesen observes, the centerpiece of financial reform in the U.S., the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) “mandates only minimal structural reform.” Moreover, efforts persist to rollback, dilute and delay the modest improvements accomplished through Dodd-Frank. The result has been to emphasize bank-collapse intervention tools without sufficient focus on prevention. Consider that this modest reform effort began while the 2008 crisis was still fresh in mind. As memories fade and passions cool, the ability to enact structural reform diminishes.
And, this is exactly where use of an economic dynamic analysis is needed. Let me present just one real-life fact pattern. This coming Tuesday morning, the U.S. House of Representatives Committee on Financial Services has scheduled a hearing entitled, “Who’s In Your Wallet: Examining How Washington Red Tape Impairs Economic Freedom.” The invited witnesses are the general counsels of five federal financial agencies, including the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, the Federal Reserve Board, the National Credit Union Association, and the Office of the Comptroller of the Currency. In the memo announcing the hearing the following agenda is described:
“Among other things, the hearing will examine how federal financial regulatory agencies evaluate the costs and benefits to consumers of their regulatory, enforcement, and supervisory actions. The Committee will explore whether products or services are no longer being offered to consumers because of agency actions and the steps federal regulators take to measure the impact on consumers if they no longer have access to specific products or services as a result of regulatory action. The Committee will also consider the procedures or standards agencies follow in determining whether to engage in formal rulemaking under the Administrative Procedures Act.”
The intent appears to be to treat as a cost the potential failure to satisfy individual preferences in the present without considering broader costs and harms that particular financial products can create for individuals and the system at large. As Driesen describes in Chapter 2, by emphasizing allocative efficiency, “the law of financial regulation ceases to function as a means of avoiding a depression, and instead becomes thought of as a product of balancing a proposed regulation’s benefits against its costs.”
Consumers may have had preferences for very low-money-down, negatively amortizing mortgages for which there would or could be a payment shock upon recast. And many did show those preferences (even when the bank in-house marketing studies showed the product had to be pushed on them with minimal disclosure). However such toxic products and others led to millions of foreclosures and bank safety and soundness problems, and ultimately a global financial meltdown.
It will be interesting to see whether the witnesses on Tuesday reject the assumptions underlying how the hearing has been framed and instead apply an economic dynamics approach to their testimony and answers.