Thank you very much, Mr. Chairman, Ranking Member Shelby, and Members of the Committee, for inviting me to appear today at your hearing. It is an honor and privilege for me to provide information for your deliberations on Dodd-Frank and the SEC.
I come before you today not only as a former Commissioner of the Securities and Exchange Commission and member of the former Congressional Oversight Panel for the TARP, but also as a visiting scholar at the American Enterprise Institute for Public Policy Research. AEI has a long history of focus on the economic and psychological fundamentals of entrepreneurism, economic development, and the political economy. It is a privilege for me to be able to participate in the public discussion about the issues of the day in the context of my years of work in the public and private sector.
"[Dodd-Frank] is a calamity-2,319 pages are aggravating uncertainty and undermining the climate necessary for economic growth."
The news of this past week has highlighted the disappointing state of affairs in our economy. The data released by the Bureau of Labor Statistics show the unemployment rate increasing to 9.2 percent, while the labor force itself shrank by more than a quarter of a million people. Basically, unemployment has risen as the supply of available workers has shrunk. More than 14 million Americans are out of work-and almost half of those have been out of work for more than six months.
In a productive economy, jobs are normally created by people with entrepreneurial spirit-whether small businesses or large corporations. Starting with an idea for a product or service and the risk appetite to make it a reality, the entrepreneur will need to engage the help of others to make it a reality. To hire people and develop their product, entrepreneurs of course need money. The money has to come from somewhere, and with efficient financial markets, an entrepreneur should be able to borrow the money or find others willing to invest in the idea-risk their own capital for an interest in the potential profits.
We have a great debate in this country as to whether there is a shortage of credit supply or demand. Last year, as a member of the Congressional Oversight Panel, I had the privilege of testifying before the House Financial Services Committee regarding small business lending initiatives. The debate was then, as it is now, whether the issuance of credit is constrained because of a lack of demand or a shortage of supply. Regardless of the cause, in the current regulatory climate it is difficult for lenders to increase their small business lending. Small businesses produce most of the new jobs in the country. From my work on the Congressional Oversight Panel, we heard many anecdotal reports from our field hearings and elsewhere that bank examiners have become more conservative and have required increasing levels of capital since the advent of the financial crisis. The balance between sufficient regulation and over-regulation is often a fine one. We have to remember that it is the investors who pay for regulation-effective or otherwise-through higher prices, diminished returns, or restricted choices.
Why do I go through this description of how jobs are created? Because confidence and certainty are crucial to fostering a business climate that creates jobs. It is my belief that a major cause of the uncertainty handcuffing our economy today is in fact government policy, particularly the sweeping new financial law enacted last year ostensibly for the sake of market stability and investor confidence. Because many of the provisions were not directly related to the underpinnings of the financial crisis, investors ultimately will pay for the increased costs associated with the mandates without receiving commensurate benefits.
That is the single tragedy of Dodd-Frank. It is a calamity-2,319 pages are aggravating uncertainty and undermining the climate necessary for economic growth. Yet considering its length and scope, the Dodd-Frank Act was passed with relatively few hearings and no real debate about provisions that now threaten economic growth. In contrast, following the market crash of 1929, Congress attempted comprehensive reform over a period of a decade, involving extensive hearings and public debate. Dodd-Frank calls for the creation of anywhere between 243 and 533 new rules, depending on how you count them, and 84 rules by 3 new agencies alone-the Consumer Financial Protection Bureau (CFPB), the Office of Financial Reporting (OFR), and the Financial Stability Oversight Council (FSOC). Each of these new agencies has far-reaching powers, and we will not know for years how they will develop. Legal challenges are inevitable, not just as to the technicalities of the rules and whether they have been properly promulgated, but also as to basic questions of jurisdiction and constitutionality.
As the past year has shown, Dodd-Frank also mandates very tight deadlines for federal agencies to draft and implement these rules. In this quarter alone, Dodd-Frank mandates more than 100 rules to be finalized. As some experts have noted previously, this rate of rulemaking required by Dodd-Frank far outpaces the agencies' respective historical workloads. From 2005-2006 the SEC annually averaged 9.5 new substantive rules, while the CFTC averaged 5.5. Post-Dodd-Frank those numbers have soared to an average of 59 new rules for the SEC and 37 for the CFTC. Members of this committee have previously expressed concern that federal agencies are sacrificing quality for speed as they neglect to properly weigh the costs and benefits to the economy of their proposed rules. In these circumstances, something has to give, and so far we have seen very little in the way of cost benefit analysis (some agencies' inspectors general are investigating whether this lack of analysis may have violated the Administrative Procedure Act and other mandates), contracted timelines for the public to comment on proposed rulemakings (most comment periods are about 20 days shorter than usual), missed deadlines (right before the statutory effective date, registration requirements under Title IV had to be delayed by eight months because the rules were finalized so late), and proposed rulemaking that is vague or overly broad. Taken together, the ability of stakeholders to provide input on matters directly impacting their business is severely impaired.
An example on the latter point can be found with the Financial Stability Oversight Council (FSOC), a new agency created by Title I to identify threats to the financial stability of the U.S. While this seemed like an attractive idea to officials who wish never to relive the anxiety of the "Too Big to Fail" era, the realities and impracticalities of such a Council have already started to reveal themselves.
The principal new authority assigned to FSOC is to identify systemically important financial institutions. FSOC's proposed rulemaking in January 2011 regarding this process was roundly criticized by the public and bipartisan members of Congress for merely parroting the broad statutory language. This lack of transparency-magnified by leaks to the media about the staff's methodology under consideration-has only compounded market uncertainty. FSOC recently announced plans to provide further guidance of this most important authority of the new systemic risk regulatory regime-although the form and extent of that guidance remains to be seen.
The activities of the Financial Stability Oversight Council (including OFR) and the Bureau of Consumer Financial Protection have received much scrutiny over the past year, and for good reason. They comprise just two of the Act's sixteen Titles, however, and so I welcome today's hearing on the subject of the investor protection provisions. As I intend to make clear today, many of these provisions impose sweeping changes, yet received relatively little attention during consideration of last year's Dodd-Frank Act, which naturally raises the likelihood of unintended consequences.
Paul S. Atkins is a visiting scholar at AEI.