Repeal Dodd-Frank; Repeal Sarbanes-Oxley

One of the reasons we had the election we did was that people all over the United States are hurting economically. It doesn’t show up in broad government statistics. But, I have travelled all over the country and seen first hand. My wife and I have driven and spoken with people from upstate New York, northern Minnesota all the way down to New Orleans.

A big part of the reason that people are hurting is they have no access to capital. Why? The level of US government regulation has escalated exponentially since 2001. It’s killing people and choking off business. It’s killing GDP growth. John Cochrane and other freshwater economists have been writing about it as long as I have. The velocity of money has slowed to a drip, drip, drip. It never used to be that way in the US and it was never this persistent.

If we want to get the economy growing again, here are two ways to do it.

Part 1

There is a lot of talk about the repeal of Obamacare in the “first 100 days”. That should definitely be done because it’s not only toxic to growth, but toxic to our health. Repeal/Replace, Day 1. But, there is a lot more that needs to happen. I agree with John Cochrane, doing all of this in the first 100 days would be a disaster. There is too much to do, and it needs to be thoughtful. Repealing and replacing Obamacare in the first 100 days is the right start.

Next is Dodd-Frank.

One of the reasons I started blogging was Dodd-Frank. It was the worst form of response to the financial crisis. We are still suffering the after effects of the financial crisis. One of the reasons we are is we bailed out the banks, and another reason is Dodd-Frank.

The financial crisis was rooted in bad government policy to begin with. Yes, the banks, the agencies that rate the debt all screwed up royally. But, they wouldn’t have been able to execute on their ideas without the backing of federal government agencies and quasi federal government companies. The Federal Reserve really messed up when it came to stopping an asset bubble from forming. Yet, legislators gave the government more power over the financial system as a result.

Dodd-Frank severely limits competition in all financial markets. It makes it tougher for capital to turn over. It has rules in it that cause all kinds of risky behavior that previously would haven’t happened. For example, why do private clearinghouses have access to the Federal Reserve window? They didn’t need it in 2008. Do taxpayers want to be on the hook for all the private derivative transactions out there. I believe Warren Buffett called them, “financial weapons of mass destruction.”

Most people just think of Wall Street when it comes to Dodd-Frank. However, it affects insurance, re-insurance, clearing, financial reporting, tax reporting, disclosure and virtually anything that touches the financial system. Dodd-Frank is a behemoth jack boot on the neck of the nation’s financial system.

It’s heavy handedness has caused smaller banks that would normally fill niches to go under, or merge. The consumer financial protection contained in Dodd-Frank is redundant. It does nothing. The entire bill should be scrapped. We are no “safer” today than we were in 2008, unless you call sitting on your hands and doing nothing safer. Right now, safer gets us a depressed economy.

I understand the reasons that legislators felt they had to do something. But, the way they fixed it utilized a ton of government regulation. Five years ago, I would have never seen a “Reg Tech” startup company. Now, I am seeing them. There are plenty of ways to regulate banks using policy that encourages competition. Creative destruction is the path we ought to follow. Dodd-Frank cannot be fixed, it has to be repealed.

Part 2

Sarbanes-Oxley has been with us since 2002. It was a response the the bad accounting practices at two publicly traded firms. At the time, the internet bubble had also burst and a lot of investors lost a lot of money on .com’s. Venture capitalists call the time between 2001–2005 the “nuclear winter”.

Reading blogs from venture capital fund of funds, they say one of their big concerns is that capital goes out, but it doesn’t come back very fast. The holding period on investments has stretched out to ten years or more in many cases. Reading blogs from private equity fund of funds, we see similar things. This is unsettling to fund of funds because their limited partners are the huge public and private pension funds that need streams of capital to pay retirees. No cash coming back means they have to be a lot choosier and slower on putting cash out into the marketplace.

Sarbanes-Oxley has made it significantly harder to exit. It must be 100% repealed and redone.

Since 2001, the financial world has changed. Exchange transactions that were previously done by humans has gone electronic. There are many other changes as well from the way we make markets to the way trades are matched and cleared. I think with or without repeal, we are going to see a second wave of revolution in the financial industry. The average person won’t notice it. It’s going to be behind the scenes but it’s going to make things hyper-efficient.

As a country, if we want people to take risks and try and develop innovation, they must have a potential payday at the end of the rainbow. Sarbanes-Oxley puts that payday so far off in the distance the opportunity costs of starting a company and going through the brain damage of executing it isn’t worth it. Sarbox has to go.

Markets are the best allocators of resources known to mankind. Yes, they aren’t always 100% efficient all the time. But, government is almost never efficient. There are just too many nooks and crannies and niches that have to be filled.