Is Dodd Ending Too Big to Fail?

The Fed itself apparently would have no say on CFPA rule-making, which is sort of like giving Elizabeth Warren her own wing at the central bank in order to make mischief. At a minimum, she'll need grown-up supervision. Many smaller community bankers and non-bank Main Street lenders -- such as stores with layaway plans, check-cashing companies, pay-day lenders and even car dealers -- could be put out of business by Elizabeth Warren. (Hat tip to Capitol Confidential of Andrew Breitbart's biggovernment.com.)

Another issue is the so-called "Volcker rule," set forth by the White House, which would limit proprietary trading for Wall Street banks, a big source of revenue and profits. Under the rule, it looks like the Federal Reserve or other regulators would supervise any trading limits, but not necessarily eliminate proprietary trading. I think "too big to fail" is terminated under the threat of a true bankruptcy-court liquidation. That's enough of a disincentive for excess risk-taking to obviate the need for a Volcker rule.

Ditto for the trading of derivatives and other counter-party activities such as credit-default swaps. These are useful hedging devices, although they should be fully collateralized, with clearly valued assets and cash behind them.

Back to the Dodd plan, it also stipulates that the U.S. president appoints the New York Fed president. That's another flaw. It politicizes the Fed big-time. Right now, reserve-bank presidents are chosen and appointed by their boards of directors.

And then there's a "proxy access" provision that would force public companies to list rival slates for election to their boards of directors. This goes way beyond "say on pay." And it would permit a bunch of liberal-left, union-type interest groups to spread their anti-business opinions.

However, with the Dodd plan, the possibility remains that a true bankruptcy process will replace government bailouts.

This is vital, since "too big to fail" and government bailouts are among the root causes of the banking crisis, where large financial companies have a moral hazard to take too much risk at taxpayer expense.

The devil will be in the details. And of course, Dodd's Senate bill will have to reconcile with Barney Frank's bill in the House. But Chris Dodd conceivably may have opened the door to ending "too big to fail" and bailout nation.

Maybe retirement is the key to good policymaking.