“Some will say it’s a bad thing and others will say it’s a good thing but too few will say ‘Dodd-Frank risks the following bad things, but there is an alternative,’” said Kevin Warsh ‘92, former member of the Federal Reserve Board of Governors, Wednesday.
Throughout his talk, Warsh emphasized what he deemed the “three fundamental pillars” of the economy — regulators, market discipline and capital standards — and how they should be applied to government legislation.
Warsh, currently a visiting fellow at the Hoover Institution and a lecturer at the Graduate School of Business (GSB), spoke to an audience of approximately 70 people at Paul Brest Hall Wednesday evening, in a talk titled “Real Regulatory Reform: A Practitioner’s Perspective.”
The regulation in question, the Dodd–Frank Wall Street Reform and Consumer Protection Act, is a federal statute signed into law by President Obama in July 2010 and intended to provide more extensive regulation of financial institutions following the recession in the late 2000s. The Dodd-Frank Act has come under extensive criticism for its complexity and, for some, excessive regulation.
Although Warsh joked that his experience practicing law extends only to a 14-week internship stint at a law firm, he asserted, “my legal training and my exposure to law made me a better regulator.”
“I would never claim to be an expert, but I learned a lot from observing the system as a regulator and policymaker,” he added.
Warsh criticized, however, the bias toward regulation as a remedy for the post-recession economy, stating that the other two “pillars” have not received enough attention and investment. He called the notion “that with more regulators, with more funding and more power, bad things won’t happen” an over-simplistic and erroneous one.
“These three pillars need to be complementary,” he said. “I am worried that market discipline and capital standards are being relegated instead of revived.
“The risk of Dodd-Frank is that we end up with several oligopolistic systems on top of the financial center that will make it increasingly difficult for smaller regional banks to function,” he added.
While Warsh expressed general support for reform in the banking system, he expressed concern that “at the core…[the] Dodd-Frank act will be no equal to the task.”
He also emphasized that looking toward other countries for examples of successful reforms of the banking sector isn’t an option, due to sustained and extensive differences in banking systems between nations.
Criticizing the concept of “too big to fail” as static, Warsh advocated for a system in which “an early assessment of financial firms and vibrant competition among them is the best way to avoid another financial crisis.”
“The largest firms must tell regulators [that] their failures will not endanger the economy,” he said. “If they can’t pass this simple test then they should be diminished.”
Prior to his 2006 to 2011 term on the Federal Reserve Board of Governors, Warsh served from 2002 to 2006 as special assistant to the president for economic policy and executive secretary of the White House National Economic Council. He previously worked at Morgan Stanley as vice president and executive director.