Dodd Frank Act - Financial Instruments
Financial Instruments & Institutions – ECON 304
Financial Crisis and the Dodd Frank Act
Words: 3510
After the 2007 Financial crisis, confidence in free markets was at an all time low: the public was increasingly skeptical about the ability of governments and regulatory institutions to improve market conditions. In an attempt to restore financial stability and improve investor confidence, the Obama administration enacted the Dodd–Frank Wall Street Reform and Consumer Protection Act. Easily one of the most controversial pieces of legislation passed by the US government, this act was met with extremely varied reactions from the public, from fierce opposition to straight adulation. While the lack of hindsight prevents us from giving a fair assessment of the act’s outcome and efficiency, a few questions can be formulated: what prompted the US government to pass the Dodd Frank act? What kind of changes did it implement and how did this modify the already existing regulatory architecture? What were the main criticisms? To answer these questions, we will first examine the background of the financial crisis, how these changed the regulatory architecture and finally expose the differing views on the Dodd Frank act.
The 2008 global financial crisis resulted from the creation of massive fictitious financial wealth, which is disconnected from the production of goods and services (Bresser-Pereira, 2013). The financial system in the United States was designed to generate profit as leveraged capital, cycled from homeowners to investors. Capital began in the hands of homeowners, who borrowed from commercial banks in the form of a mortgage. The commercial banks profited from interest payments on the mortgages. Investment banks raised millions of dollars to buy mortgages then packaged the mortgages to sell them as financial instruments called collateralized debt obligations (CDO). Rating agencies are hired by the investment banks to rank the quality of the CDOs.
Financial Crisis and the Dodd Frank Act
Words: 3510
After the 2007 Financial crisis, confidence in free markets was at an all time low: the public was increasingly skeptical about the ability of governments and regulatory institutions to improve market conditions. In an attempt to restore financial stability and improve investor confidence, the Obama administration enacted the Dodd–Frank Wall Street Reform and Consumer Protection Act. Easily one of the most controversial pieces of legislation passed by the US government, this act was met with extremely varied reactions from the public, from fierce opposition to straight adulation. While the lack of hindsight prevents us from giving a fair assessment of the act’s outcome and efficiency, a few questions can be formulated: what prompted the US government to pass the Dodd Frank act? What kind of changes did it implement and how did this modify the already existing regulatory architecture? What were the main criticisms? To answer these questions, we will first examine the background of the financial crisis, how these changed the regulatory architecture and finally expose the differing views on the Dodd Frank act.
The 2008 global financial crisis resulted from the creation of massive fictitious financial wealth, which is disconnected from the production of goods and services (Bresser-Pereira, 2013). The financial system in the United States was designed to generate profit as leveraged capital, cycled from homeowners to investors. Capital began in the hands of homeowners, who borrowed from commercial banks in the form of a mortgage. The commercial banks profited from interest payments on the mortgages. Investment banks raised millions of dollars to buy mortgages then packaged the mortgages to sell them as financial instruments called collateralized debt obligations (CDO). Rating agencies are hired by the investment banks to rank the quality of the CDOs.
Bibliography: Acharya, Viral V., Thomas F. Cooley, Matthew Richardson, and Ingo Walter. Regulating Wall-Street: The Dodd-Frank Act and the New Architecture of Global Finance. New Jersey: John Wiley & Sons, Inc., 2011. Anonymous, (18th fevruary 2012) “Too Big Not too fail” The economist, available from http://www.economist.com/node/21547784 Bresser-Pereira, Luiz Carlos Einrich, D., (17th February 2011) “ Banks find loopholes in capital rule”, Wall street Journal available from http://online.wsj.com/article/SB10001424052748704657704576150443241518166.html Elwell, Craig K Koba, M, (11th May 2012) “ CNBC explains the Dodd Franck Act” available from http://www.cnbc.com/id/47075854 Monsarrat, A., (8th July 2010) “Global economic impact of Dodd Frank financial reform bill” Atlantic Council NYU Stern. “Risk Analysis Overview - United States Financials Total SRISK (US$ billion). Last updated April, 2013. http://vlab.stern.nyu.edu/welcome/risk/ Timone, A., (22nd September 2012) “Banks find comfort in Dodd Frank Loopholes” Available from http://www.forexlive.com/blog/2012/09/22/banks-find-comfort-in-dodd-frank-loopholes/ Appendix: Graph 2: United States Financials Total SRISK, 2007-2013 (NYU Stern, 2013).