Purpose Statement The economic policy I have decided to research is The Dodd-Frank Wall Street Reform and Consumer Protection Act, more commonly referred to as The Dodd-Frank Act. This particular economic policy interests me because of the reasons that lead to the Great Financial Crisis in 2008 and the massive financial impact that was felt not just by one particular group of individuals but by everyone across the country. The Dodd-Frank Act is a compendium of federal regulations, primarily affecting financial institutions and their customers, in an attempt to prevent the recurrence of events that caused the 2008 financial crisis (Investopedia, 2010) The Dodd-Frank Act, which comprises …show more content…
of over 2,300 pages, was signed into law by President Obama on July 21, 2010 affecting almost every aspect of the United States financial services industry (Sweet, 2010) The events that lead to the financial crisis consist of banks creating too much money, too quickly, then using it to push up house prices and speculate on the financial markets. The reaction to the abundant amount of money being inserted into the property market was that it caused increased prices of homes, which then escalated individual’s debt at alarming rates eventually prompting many homeowners to file bankruptcy. The financial crisis represented our failure to restrain the financial system and its capacity to create private credit, thus making The Dodd-Frank Act vital in constructing proactive policies to avert a repeat of the financial crisis.
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Market Failure The market failure intended to be rectified by The Dodd-Frank Act occurred within the United States financial sector.
There were several factors that contributed to the market failure that can be observed as far back as the repeal of The Glass-Steagall legislation in 1998. Banks became involved with precarious investments, asset managers began dealing in high-yield mortgage-backed securities, and credit agencies such as Moody’s, S&P and Fitch presented AAA ratings on the junk securities all of which was just the start of the breakdown in the market. Then in 2006, there was a strong drive for short-term profits in which 84% of sub-prime mortgages were issued by private lending firms to low and moderate income borrowers (Swift, 2011). The lack of regulation allowed companies to write trillions of dollars in derivatives all while not reserving any dollars against future claims. Additionally, with combination of the majority of the sub-prime lenders not being obligated to the standard mortgage laws and regulations, the use of nonbank underwriters, and exempt status from federal regulations lead to the financial crisis of …show more content…
2008.
Policy Provisions The Dodd-Frank Act has become one of the most substantial financial reform legislation passed since the Great Depression, providing a comprehensive scope for significant modifications to the structure of federal financial regulation requirements that pertain to a broad range of market participants, including public companies that are not financial institutions.
The act established a number of new government agencies tasked with overseeing various components of the act which include The Financial Stability Oversight Council and Orderly Liquidation Authority, The Consumer Financial Protection Bureau, The Volcker Rule, and the SEC Office of Credit Ratings (Fontinelle, 2013). The Financial Stability Oversight Council observes potential risks that could affect the entire financial industry, regulates non-bank financial firms, and makes recommendations to the Federal Reserve to supervise any company that gets too big, thus preventing the too-big-to-fail. The Orderly Liquidation Authority provides for orderly liquidations or restructurings if any firm becomes too weak and prevents tax dollars from being used to prop up such firms (Fontinelle, 2013). The Consumer Financial Protection Bureau supervises credit reporting agencies, as well as payday and consumer loans while regulating credit fees, which include credit, debit, mortgage underwriting and bank fees. Due to the banks misuse of depositors' money in hedge funds for own profit, The Volcker Rule was initiated to prohibit banks
from continuing this risky practice. The over-rating of derivatives and mortgage-backed securities mislead investors that were uninformed of the potential that the debt was susceptible of not being repaid, therefore the SEC Office of Credit Ratings requires agencies to submit their methodologies for review, and can deregister an agency that gives faulty ratings (Amadeo, 2016). The Dodd-Frank Act contains numerous provisions, signified over two thousand pages; that are scheduled to be executed over an extent of several years and are intended to protect consumers from many of the exploitations that contributed to the crisis while simultaneously reducing the myriad of risks in the Unites States financial system.