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The Law of Unintended Consequences

In addition to the insightful comments by John’s friend who works in finances, I wanted to call attention to an editorial in the Wall Street Journal on the Dodd-Frank financial “reform” bill.

According to the Journal,

The bill represents the triumph of the very regulators and Congressmen who did so much to foment the financial panic, giving them vast new discretion over every corner of American financial markets. … In the name of responding to a crisis, the bill greatly increases the power of politicians and regulators without addressing the real causes of that crisis. It makes credit more expensive and punishes business without reducing the chances of a future panic or bailouts.

Politico is reporting that several factors have converged, from the death of Senator Robert Byrd to the early negative reactions to the conference report by at least one key Republican, Senator Scott Brown of Massachusetts. This means that the Democrats face the real possibility of falling several votes shy as they try to finish the bill.

What ruffled several Senate feathers is the late addition of a 10-year, $19 billion tax on banks — something added without proper scrutiny, discussion, or debate. None of the Republican senators from Maine, Olympia Snowe and Susan Collins, were pleased. Neither was Senator Brown, who said he was “surprised and extremely disappointed” with a $19 billion bank tax added to the conference report and who signaled he might switch his vote from yes to no. “While I’m still reviewing the bill’s details, these provisions were not in the Senate version of the bill, which I previously supported,” Brown said. “My fear is that these costs would be passed on to consumers in the form of higher bank, ATM and credit card fees and put a strain on lending at the worst possible time for our economy. I’ve said repeatedly that I cannot support any bill that raises taxes.”

The Dodd-Frank legislation has generated attention in the world of finance. But if it passes, its ramifications will be felt far beyond Wall Street. It is an example of the law of unintended consequences, a concept understood by most social scientists but very few politicians. In this case, legislation that was crafted to respond to a very real problem would make things many times worse. The temptation for lawmakers to do something, anything, is often injurious.

What has emerged from Congress is a bill that is deeply flawed. If that legislation becomes law, it will do enormous harm to our financial sector and our country. It would, indeed, be fitting, if the addition of the dead-in-the-night tax on financial institutions helped bring this monstrosity down. We saw these kinds of shady dealings and legislative tricks during the health-care debate. It is becoming standard operating procedure for the 112th Congress, and something that will eventually cost them. The same may be true, alas, for the rest of us.