I never cease to be amazed by the gap between what defenders of Dodd-Frank claim is a problem with the financial system and the solution enacted under the Act.
A recent Bloomberg editorial illustrates this:
it’s worth revisiting why the FSOC was created in the first place, and why its core mandate is so important.
Many of the vulnerabilities at the heart of the 2008 crisis can be traced to the growth of activities outside the core banking system, in the so-called “shadow banking” system. Regulators did not have sufficient legal authority to oversee shadow banking activities. As a result, risks metastasized outside their view….
In January 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which created the FSOC to extend supervisory oversight to certain systemically important financial institutions, improve coordination across U.S. regulators, increase awareness of emerging financial stability risks, and collectively mitigate those threats.
So let’s see. The problem at the heart of the financial crisis was a shadow banking product: opaque, toxic mortgage-backed securities.
And FSOC addresses this how?
Quick answer is: it doesn’t.
After all, the solution to a problem caused by opacity isn’t regulation or the creation of a council of financial regulators. The solution is to bring transparency to these securities.