The Nature of Public and Private Dealings - Essay Example

Policy Paper TA Discussion Section Contents 2 of the Policy 3 Rational for Public Policy 4 Analysis of Policy’s Efficiency 8 Implementation 11 Evaluation 12 Recommendations 14 References 16 Appendix 17 Description of the Policy The major economies of the contemporary world follow mixed economic principles. The role and power of both public and private enterprises in such economies are considerable. Since 1990, after the emergence of globalization and liberalization, the degree of power of private corporations has significantly increased in these economies. However, there are several situations where the private sector economy fails in the market. It is a duty of the public authorities in a nation to ensure that situations, involving unfair or antitrust practices or market failures, are resolved within least time. This is why policies undertaken by the government, nowadays, are highly valuable for economies. This report will throw light on Dodd Frank Wall Street Reform and Consumers Protection Act or the Dodd Frank Act. The Federal government primarily passed it in order to sustain atrocities of the financial crisis (2007 onwards). The context of the paper will encompass the rationale, efficiency, implementation, evaluation and recommendations regarding the law. The information and analysis of the paper will help to understand the nature of public-private dealings, taking place in the current era and its implicit value to the economy (BIS, 2005, p. 1-391). The Dodd Frank Wall Street Reform and Consumers Protection Act introduced by the Federal government was claimed to bring about a remarkable change in the history of financial services legislation in U.S. The Federal government had decided to introduce this law or policy, just after occurrence of the financial crisis in U.S. in 2007. The Act was passed for reforming traumatic monetary market conditions in U.S., since the incidence of financial crisis. Nonetheless, after its implementation, it could be said that the law was less beneficial to the U.S. economy than that expected during implementation (Stinson Leonard Street, 2013). Along with numerous sets of provisions, several implementation timeline was settled, under the regime of this law. The context of the paper tends to state that after implementation, the Dodd Frank Act still comprised certain deficiencies. At present, in 2013, President Obama has declared to conduct a special meeting with the regulators regarding this very Act. The President claimed that the Dodd Frank Act, which aimed to bring about ambitious financial reforms in U.S., was not effective in several ways. Obama stated that progress of the Act must be accelerated with renewed efforts made for bringing about productive housing and general financial reforms. The Financial Stability Oversight Council (FSOC) was supposed to meet once annually in order to check the progress of Wall Street Reform and Consumers Protection Legislation; however, it is noted that since its implementation in 22nd July, 2010, FSOC members have met for more than 30 times. In the last meeting of FSOC in July 2013, the members had decided to make regulations on non-banking financial institutions (GE Capital, AIG’s and Prudential’s) stricter. Even so, members of the committee stated that there are still several provisions in the Dodd Frank Act, which are still not checked thoroughly. The numbers of reviews on the Act since its implementation, in the last three years, are less than adequate. Davis Polk and Wardwell, two members of a U.S. law firm, had claimed that approximately 62% of the deadlines of the Act are missing. Out of 398 rules, under the Act, 32% are still not implemented in U.S. In reality, the Federal government has given more value to the laws and reforms relating to healthcare, immigration and gun laws; and on the other hand, had given little value to matters relating to financial reforms (Stinson Leonard Street, 2013). Rational for Public Policy The monetary sector of an economy is the pivotal economic segment, which substantially influences all other sections’ performances in a nation. It was highly rational to introduce a public policy relating to financial sector reform and consumer’s protection in U.S., after the economy faced severe atrocities due to the financial crisis in 2007. The financial crisis of 2007 in U.S. had first begun in the housing market segment. Since then, the crisis had spread in other sectors of the nation and dispersed in many other economies of the world. The negativities of the crisis had become even worse in 2008, when a series of banking and non-banking financial institutions in U.S., like, Lehman Brothers and AIG, collapsed. The causes of collapse of these institutions were primarily low supply of money and credit crunch in the U.S. economy, which prevailed since 2006. Researches claimed that there were a series of housing or property market exuberances in U.S., which had ultimately generated the financial crisis in its economy. The house prices in economy of the country were found to rise since 1990s due to certain ‘animal spirits’ or irrationalities in the market. These irrationalities were: Money illusion The real estate trades in U.S. took place, at that point of time, for the purpose of speculative transactions. Individuals or companies were purchasing houses for resale at much higher prices. Natural resource depletion The house constructions require raw materials, like, limestone, quartz and gypsum. Since these natural resources were depleting, their prices in the markets were also rising. This increased prices of the houses. Poor investor’s confidence The investors lacked proper confidence regarding the real estate projects funded by them and many of them could not sustain the high costs of construction projects. Corruption The level of corruption in the housing market was high and expensive fees of the intermediaries enhanced cost prices of each housing deals in U.S. Less elastic supply of house The overall supply of houses became less elastic in the market, when the cost price of construction projects started to rise. Extensive regulation The numbers of regulations imposed by the government of the country in the housing sector were also large in number, which was a significant reason for strict prices of houses in the nation. Generous lending operations The U.S. banking and non-banking financial sector offered credit on construction projects at low interest rates and offered loans to investors with unproductive projects. This increased the number of failed projects in the construction sector. Thus, due to the above causes, the U.S. housing sector had to experience price bubble; and rise in the number of failed constriction projects triggered severe financial complexities in the nation. Moreover, the banking and non-banking financial institutions, like, AIG and Lehman Brothers, had also crashed due to large number of bad debts in their total lending operations. The severe negativities of the monetary sector of the nation soon seeped into the real economic segment. The government of the country had to finance or offer implicit bailouts to a large number of failed construction projects. Due to such costly expenses, overall fiscal deficit of the nation significantly increased, during this point of time (Akerlof & Shiller, 2005, p. 222). Figure 1 in the Appendix shows the Fiscal Debt Structure in U.S. from 1993 to 2013. Since the government suffered severe deficits and the scope as well as scale of private investments in the nation had fallen, overall productivity in the economy declined, thereby directly lowering aggregate employment opportunities as well. Figure two in the Appendix shows the fall in employment opportunities in U.S., over time. The fall in employment opportunities in the nation lowered the per person income level and hence, GDP growth rate of the country. The graph shown in figure 3 in the Appendix portrays the fall in GDP growth rate in U.S., 2005 onwards. However, its level started to increase after 2007, but was way below the required average. Therefore, the series of above events, that had taken place in the economy of U.S. since the financial crisis, had carved the necessity for a strict Federal regulatory action. The Dodd Frank Act was one of such remarkable legislative measures, which introduced public regulatory authorities in the country for recuperating the traumatised financial and investment segments of the nation, since crisis. The Federal government had introduced the law as post-crisis, the financial as well as non-financial markets and government sector in U.S. had failed. Analysis of Policy’s Efficiency The above section had described the rationality of imposing the Dodd Frank Act in the U.S. market. The following section will analyze efficiency of this Act in U.S. In short, this section will elaborate the set of benefits, which were to be addressed through the Dodd Frank Law. The law was extensively efficient as it comprised several categorical rules that could enhance financial and non-financial sector of the economy. There were about 16 titles in the Act. The primary mission and vision of the Act was to ensure higher financial stability in U.S. The law also exacted that it would enhance transparency and accountability of the financial sector of the nation. It also aimed to protect the interests of American taxpayers and consumers, which could be achieved by lowering the number of bailouts in its financial segment. The Act had substantially succeeded to accomplish its desired goals and objectives. The primary benefits that the nation had experienced through implementation of the Act were: The entire regulatory process of the nation was streamlined. Augmentation of forecasting capabilities (about upcoming systematic risks in business) of certain financial institutions. Made certain productive changes in the Federal Reserve Act. Promoted overall transparency and accountability of the U.S. financial sector. Many other productive changes. During the recessionary trails in U.S. market, after 2007, the burden on U.S. taxpayers were significantly increased by the government so as to finance large number of expensive bailouts in its housing market. The Dodd Frank Act rectified such unfair practices in the market of U.S. and enhanced protection over American consumers, business entrepreneurs and investors. The Act had also introduced several specific rules in the segment of corporate governance and executive compensations in the economy. It also estimated primary deficiencies, which had generated crisis in the economy in 2007. All public agencies’ existing and future goals were revised as well as scrutinized, under the regime of this law. The Federal government had also introduced several new agencies in U.S., under the regime of the Dodd Frank Law. Some of these prominent agencies were FSOC, Office of Financial Reserve and Bureau of Consumer Financial Protection (Shiller, 2008, p. 198). After implementation of the Dodd Frank Act, financial investors in U.S. did not require any registration activities under the SEC, provided they had at least 15 customers in last one year (from date of registration); and did not participate in any sort of investment advising activity on the public forum. Under guidance of the Dodd Frank Act, U.S. experienced notable rise in the number of investment advisers in its economy and hedged funds availability with the banks in the country was seen to increase. The private companies, which tapped money from the economy though issue of equity shares, had to follow a newly revised set of regulations. Innumerable regulations were inflicted by the Federal regulatory authorities on non-banking financial institutions in the country. Even so, Federal authorities did not guide the Office of Thrift Supervision of U.S. There were several titles in the Act and each title explained a specific set of duties that the law addressed. Financial Stability Methodical Liquidation Authority Concentration of several powers in the hands of Fed, FDIC and Comptroller of the country. Increased fund hedging activities. Enhancing status of the insurance sector. Improvement in the overall Federal regulation. Enhancement of transparency and accountability of the Wall Street. Greater supervisions in financial settlement, clearing and payment. Enhanced protections for inventors in the market and greater regulations on securities trading activities. Augmenting consumers’ protection of the nation through the new agency of Bureau of Consumer Financial Protection. Introducing new Federal Reserve System requirements. Enhancing access to mainstream financial institutions. Introduction of the Pay it Back Act. Inclusion of several other miscellanies provisions. Inclusion of the 1256 contacts of the section. Therefore, the above context explains that the Dodd Frank Act was highly efficient in the market of U.S. Efficiency of the law could recover much of the distortions created in the economy of the country, after the financial crisis. However, Senator of U.S., Chris Dodd, claimed that the legislation was “sweeping, bold, comprehensive and long overdue” (Woodford, 2003, p. 202). The law had several problems and loopholes in strategies, despite large number of substantial benefits (Mayer, 1993, p. 156). Implementation The implementation process of the Dodd Frank Act in U.S. involved several steps and procedures, which are usual for any Federal Law. The law making process relating to the Dodd Frank Act was initiated from the proposal of an initial bill. A bill is a proposal to create a new law in a nation or revise an existing law related to a certain matter. The Wall Street Reform and Consumers Protection Bill was the name of the bill, relating to the Dodd Frank Act. Since the bill’s purpose constituted matters relating to public policy, it was proposed in the U.S. Parliament. The enactment of the legislation had taken place, during implementation of the Emergency Economic Stabilization Act (EESA). Besides that, the time of enactment of the law also overlapped with that of the Troubled Asset Relief Program (TRAP). Under the regime of Obama Administration, the law passed was a complete regulatory reform in the nation. However, both the Congress houses settled among their own proposals for the purpose of administering and enforcing the concerned law in the U.S. financial market. The two political parties in the U.S. House of Representatives proposed several financial legislative bills. Finally, in the end of 2009, December, the House session H.R. 4173 had passed the Wall Street Reform and Consumers Protection Act (Stinson Leonard Street, 2013). The acceptance of the Act in the market took place after several sessions of discussions, conducted among members of the Conference Committee. Finally, the House of Representatives in U.S. consented to the finalized report of the Conference Committee in June 30. The members of U.S. Senate, then, had considered the tax and budgetary impact of the legislation. The Senate, in 15th of July, accepted the Conference Report. In July 21, 2010, President Barak Obama ultimately signed the Dodd Frank Act (the name assigned to Wall Street Reform and Consumers Protection Act, after parliamentary regulations was completed). A large number of requirements were introduced in the financial market of U.S., since the very next day (22 July 2010) (Stinson Leonard Street, 2013). Evaluation The impact and reaction, after implementation of the Dodd Frank Act in the American market, was diverse. Researchers claimed that raising productive capital in the market of U.S. had become more expensive, after this implementation. Therefore, due to expensive fund appropriation possibilities, job generation capacity also fell significantly. On the other hand, another group of market analysts claimed that the degree of fraud and corrupt practices in U.S. financial market had significantly fallen, after enforcement of the law (Mankiw & Taylor, 2006, 188). These researchers also suggested that the number of job losses in the nation had reduced, since inception of this law, due to increased reporting of activities of criminal violations in corporate companies. Contradicting this view, few scholars advocated that new jobs would only be created in the U.S. market through application of several strict unemployment eradication activities in the nation. Several agencies have evaluated viability of the law through specific cost benefit analysis. The monetized result of such analysis indicated that benefit of the policy was worthier than its costs. The bar graph, in figure 4 in the Appendix, shows the slow and steady implementation of the Dodd Frank Act in U.S. Many research agencies claimed that progress of the Dodd Frank Law in the economy of U.S. has been slow and unfaltering. In 2011, out of the 398 rules under the law, only 5.4% was finalized. Nevertheless, it was estimated that in 2013, about 40.2% of the rules was finalized. From the above analysis, it can be deduced that the Dodd Frank Law was not completely ineffective in U.S. The progress of policy implementation of Dodd Frank Act across separate sectors is shown in figure 5 in the Appendix. Furthermore, it can be stated that most of the rules of the Law are to be introduced in derivatives market of the nation. If the matters finalized were considered, then it would be correct to say that U.S. has imposed more conservative regulations in its derivative market. Even so, a large number of regulations that are supposed to be imposed in the U.S. banking sector are still not finalized. Most of the asset backed security rules in the nation are also not imposed by the U.S. government (Bernanke, Gertler & Gilchrist, 1996, p. 1-15). There are both advantages and disadvantages of the Dodd Frank Act. Advantages Protected commoners from abusive practices in the market. Augmented and refined the derivative trading. Facilitated increase in market competition and promoted better pricing policies. Higher transparency on the hedged fund trading. Created affordable insurances for low income group of individuals. Degree of reliance on the credit ratings of corporate companies was reduced. Disadvantages Fund raising activities had become more complex and expensive. Increased regulations in the financial market, besides augmenting overall uncertainty in the sector. High costs incurred to employ more individuals in the financial sector; such costs could be utilized in enhancing customer services. Extensive regulatory burden on small banks lowered their competitiveness with respect to other financial authorities. The costs of operations of non-financial companies were also increased due to extensive regulations. Recommendations As of 12 July 2012, the Competitive Enterprise Institute allied with the State Nation Bank of Spring in Texas and 60 Plus Association claimed that the Dodd Frank Act had bestowed excessive powers in the hands of the Federal government (Moore, 2013). Realizing such claims made against the law, the Federal government had revised some parts of the Law on 20 September, 2012. In August, 2013, president of the country has claimed to accelerate progress of the reform Act, as per the requirements. However, after analyzing the previous context, a set of recommendations can be suggested, regarding the Dodd Frank Act. They are as follows: The Federal government should try to introduce and finalize more rules in the banking sector of the nation, under the regime of the Act. At this juncture, a slow and steady progress of the Dodd Frank Act is no longer acceptable in the country. All set of rules and policies that were given in the Act must be introduced at a much faster pace. Specific credit appraisal tools must be introduced by the banking sector of the nation so as to ensure that cost of borrowing funds for productive investment projects is not too high and time-consuming (Tucker, 2010, p. 132). The private corporate sector must be assured with a greater growth opportunity because only such an action can remarkably enhance employments in the nation. The future policy makers should introduce new laws, which can help lenders in U.S. to easily segregate productive and unproductive investment projects (Brown, 2010). References Akerlof, G. A. & Shiller, R. J. (2005). Animal Spirits. Princeton: Princeton University Press. Bernanke, B., Gertler, M. & Gilchrist, S. (1996). The Financial Accelerator and the Flight to Quality. The Review of Economics and Statistics, 78(1), 1–15. BIS. (2005). Real Estate Indicators and Financial Stability. Monetary and Economic Development, pp. 1-394. Brown, M. (2010). Understanding the New Financial Reform Legislation: The Dodd-Frank Wall Street Reform and Consumer Protection Act. LEC. Retrieved from http://www.mayerbrown.com/files/Publication/1ec275f4-5618-4a63-9d38-3129010c06db/Presentation/PublicationAttachment/ef42ecce-49ff-44b2-b37a-72b81d87fb79/Final-FSRE-Outlinev2.pdf. Mankiw, G. N. & Taylor, M. P. (2006). Microeconomics. Connecticut: Cengage Learning EMEA. Mayer, T. (1993). The Political Economy of American Monetary Policy. Cambridge: Cambridge University Press. Moore, H. (2013, August 19). Business US economy Obama to meet with regulators over stalled Dodd-Frank reform act. The Guardian. Shiller, R. J. (2008). The Subprime Solution: How Todays Global Financial Crisis Happened, And What To Do About It. Princeton: Princeton University Press. Stinson Leonard Street. (2013). Dodd-Frank. Retrieved from http://dodd-frank.com/about/. Tucker, I. B. (2010). Macroeconomics for Today. Connecticut: Cengage Learning. USA Today. (2013). The Dodd Frank Act. Retrieved from http://www.usatoday.com/search/Dodd%20Frank%20Act%20/. Woodford, M. (2003). Interest and Prices: Foundations of a Theory of Monetary Policy. New Jersey: Princeton University Press. World Bank. (2014). The Data Bank. Retrieved from http://databank.worldbank.org/data/views/reports/tableview.aspx. Appendix Figure 1: Fiscal Debt Structure in U.S (1993-2013) (Source: World Bank, 2014) Figure 2: Fall in Employments in U.S. (Source: World Bank, 2014) Figure 3: GDP Growth Rate U.S. (Source: World Bank, 2014) Figure 4: The Slow and Steady Progress of the Law (Source: USA Today, 2013) Figure 5: Progress in Terms of Selected Categories (Source: USA Today, 2013) Read More