Dodd-Frank makes future taxpayer bailouts more likely

But it gets worse. One of Dodd-Frank’s key provisions prohibits the Federal Reserve from using its funds to bail out individual financial firms, as it did in rescuing AIG. Most members of Congress have probably been telling voters during the current campaign that Dodd-Frank put a stop to that. Not so. The act permits the FSOC to designate any financial institution that is engaged in clearing, settlement or payments activities — that is, almost every bank of any size — as eligible for a Federal Reserve bailout if its financial condition might prevent it from performing these functions. So with one hand the act took away bailout authority, but quietly, elsewhere in the act, this authority was fully restored.

In the first debate, Mitt Romney remarked that the Dodd-Frank Act is a “big kiss” for the big Wall Street banks, because it designates all of them as too big to fail. That is bad enough, because it provides them with lower cost funding than their smaller competitors. But by providing specific authority for Federal Reserve bailouts in the future, Dodd-Frank reneges on its most basic promise to American taxpayers.

Peter J. Wallison is the Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute. His book on Dodd-Frank, “Bad History, Worse Policy: How a False Narrative About the Financial Crisis Gave us the Dodd-Frank Act,” is forthcoming in January.