Fighting complex problems with complex solutions — Hint: It doesn't work

The Simplicity Solution

By JOE NOCERA, NYT

Time to fess up: With the two-year anniversary of the passage of the Dodd-Frank financial reform law approaching, I’m still not sure what to think about the darn thing.

Will the law prevent another bank bailout if we have a repeat of September 2008? Will it bring transparency to the trading of derivatives? Will the Volcker Rule truly eliminate the ability of banks to make risky trades for their own account? Are all the new regulations burying small and medium-size banks in excessive costs? Or are they ensuring their safety and soundness? No one can say for sure.

The crucial difference between the Glass-Steagall Act, the landmark banking reform law that was passed during the Great Depression, and Dodd-Frank, is that the former had an appealing simplicity that Dodd-Frank lacks. Glass-Steagall did one basic thing. It forced banks to get rid of their investment banking arms. Dodd-Frank, by contrast, accepts the complexity of modern banking — and then adds to that complexity with its thousands of pages of regulations. That complexity is something to worry about.

That is why I wrote a recent column about a persuasive paper by Karen Petrou, a banking expert, in which she argued that Dodd-Frank was creating a new kind of risk that she labeled “complexity risk.” And it is why, last week, I found myself drawn to an article in the June issue of The Harvard Business Review that argued for a handful of simpler ways to restrain banking behavior.

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