Dodd-Frank: The Good, The Bad, and The Ugly

The 2008 financial crisis left many people with no homes, jobs, or way of life.  It affected the economy more significantly than any crisis since the Great Depression.  Dodd-Frank was created in response to this catastrophe to assure that it would never happen again.  The law imposes regulation in nearly every aspect of the financial industry, covering investment and commercial banks, insurance companies, rating agencies, hedge funds, and many others.  With the implementation of Dodd-Frank, we must consider the costs and benefits of such a bill.  If there is too much regulation on  banks, for example, they will be less likely to lend, decreasing liquidity in our economy and leading to a lack of economic growth or even a recession. Continue reading

Using Practical Wisdom

I chose to watch psychologist Barry Schwartz’s TED talk entitled Using our practical wisdom.  The talk stressed that to solve the majority of problems in our society, excessive rules and laws are not the answer, nor are incentives to perform a particular action.  Schwartz talks about how practical wisdom, having the will to do the right thing and the skill to determine what is the right thing.  He mentions that rules, no matter how detailed, can be dodged and he gives the comparison of bankers to water in finding the cracks in rules (4:43).  In the case of incentives, Schwartz argues that if an incentive is given, people will only care about the incentive and not the underlying action.  Thus, people are more inclined to cut corners to achieve the maximum reward for their behavior.  Schwartz uses the example of incentivizing doctors to have more or less patients, which incentivizes doctors to increase or decrease their number of patients without addressing the quality of care.

Practical wisdom, Schwartz argues, is necessary to solve the problems of how our institutions are run.  He says that wise people know when to bend the rules in order to do the right thing and that people with practical wisdom have both the will and skill to do the right thing (8:11).

While I agree that people with practical wisdom would be the best way to create a more functional society, Schwartz does not offer any practical solution as to how this ideology would be implemented.  He mentions the notion of canny outlaws, who go around the rules to do the right thing, and system changers, who attempt to change the way society is run (15:16).  While these people are noble, there are others who, without rules or incentives, will promote only their own agendas despite allowance to do the right thing.  Schwartz does not address a way to help these people find practical wisdom and virtue, but rather says that legislators should listen more to psychologists than economists.  While I believe that practical wisdom is a good way for people to focus on the morality of their practices, there is no way to implement such an idea without rules or incentives to motivate those who are merely concerned with furthering their own self-interests.