While on the surface it appeared that new financial regulations were needed to avoid a recurrence of what is now being called the “Great Recession”, the bill (Dodd-Frank financial reform) just passed by Congress may create more problems than it fixes and doesn’t address one of the most obvious causes of the “Great Recession”, the lack of regulation of Fannie Mae and Freddie Mac.

Although the new law addresses many areas where consumers could use additional protection, what worries us is the shear magnitude and uncertainty of the legislation. Similar to the new healthcare plan, the new finance law is massive - over 2000 pages!

According to a Wall Street Journal editorial titled “The Uncertainty Principle” (Wednesday, July 14, 2010), the new law will require over 240 new federal rules to be defined. The article noted: “In a recent note to clients, the law firm of Davis Polk & Wardwell needed more than 150 pages merely to summarize the bureaucratic ecosystem created by Dodd-Frank.”

The article went on to say: “The SEC alone, whose regulatory failures did so much to contribute to the panic, will write 95 new rules.” The fact that over 200 rules must be written attests to the fact that the real impact of the law won’t be known for some time. This adds more uncertainty to an already uncertain economy. Many businesses that were already afraid to make investment decisions will be even more hesitant now.

Certainly, more government employees will be needed to fashion, implement and enforce the new rules. Many of the rules will be impacted by lobbyists who will hound the rule makers to minimize the impact on big business and maximize the benefits to big business. The interests of small businesses that can’t afford lobbyists will likely be ignored.

As financial advisors, we are regulated by the State of Michigan’s Office of Finance and Insurance Regulation. Since we do not sell investment products, we have fewer regulations to contend with than those who do. Yet at times, even for us, we feel the burden of complying with the regulations. We feel the state does a good job of regulating the financial industry in Michigan. Yet it is clear they could use more people to be more effective. Now they will have an even bigger burden to carry. Will they be able to do a better job?

In summary, we worry that the new law will slow economic growth and stifle lending. It will likely increase the size and cost of government, which will lead to even higher taxes. And with the added maze of regulations, more complicated than what was already on the books, can we really have any confidence that the regulations can effectively be enforced? Do we really think the new law will prevent another financial crisis?