Senators Harry Reid (D-NV) and Chris Dodd (D-CT) celebrate the passage of the financial reform legislation on Capitol Hill yesterday.

The Dodd-Frank Wall Street Reform and Consumer Protection Act–also known as the “financial overhaul bill,” or as Gary Becker put it a “complex, disorderly, politically motivated, and not-well-thought-out reaction to the financial crisis”–has passed the Senate. It’s now ready for the President to sign it into law.  Economists across the board have offered opinions on the new legislation, including Gary Becker, who, as you can probably tell from the aforementioned quote, had a rather negative view of the legislation.

While I do not always see eye-to-eye with Becker politically, I give him due deference and respect as he is a giant in Economics, a Nobel Laurette, and (frankly) also one of my personal heroes. But I think he was way off the mark in his (rather scathing) critique of the Dodd-Frank Act.

Becker makes excellent arguments. I would, for example, agree in his criticism of the bill’s failure to address Fannie Mae and Freddie Mac.  But on the whole, I have a different take.

First let’s talk about some specifics. I am impressed with the bill’s Financial Stability Oversight Counsel, which will consolidate oversight of consumer products and alert regulators to emerging threats.  The bill also sets up a system of regulating derivatives forcing some to be traded on exchanges, which will minimize the risk of a domino effect of failures if one dealer defaults.  Finally one provision gives authorities the power and guidelines to seize any financial company whose failure threatens the system, and to quickly pay off debtors.

But here’s where I think the bill really shines–and this is where Becker really missed the mark.  This bill takes significant steps toward improving transparency and information in finance.  And that is critical to improving our current market system and preventing another crisis.

First, there is the consumer financial protection bureau, which will be housed at the Fed, and will regulate mortgage lending, credit and debit cards and other consumer loans.  Becker argues that this is not necessary as “it is not clear that many consumers were victimized during the financial boom.”  I believe this is too narrow a view on victimization.  Victimization can be outright–explicit–but it can also be deprivation of information.  Many mortgages and credit card contracts are written specifically to confuse consumers, hiding details of fees and penalties.

Information, full and free, is one of the basic tenants of Economics.  Almost all of our models ride on the assumption that people make rational decisions based on full information.  That cannot happen when consumers do not understand what they are buying.  By facilitating flows of information, we are improving minimizing risk to consumers, and strengthening capitalism.

That brings me to my last provision.  The Energy Security Through Transparency (ESTT) amendment, which Becker would perhaps argue had “little…to do with the crisis,” since it deals with extractive industries, and not sub-prime mortgages.  But lest we forget, this bill is an attempt to reform a vast realm of financial markets and, in some cases, lay groundwork for future improvements.

The ESTT will require companies listed on the U.S. stock exchange to disclose payments to governments for oil, gas, and mining.  They will provide this information in their SEC filings and it will be publicly available.  This is an important provision for many reasons, but since we’re already talking about it, let’s focus on transparency and risk-abatement.

This provision will provide increased transparency in how extractive industry companies spend their money (i.e. by disclosing payments made to host governments) and therefore will increase predictability and investors’ ability to calculate risks associated with investing in certain companies.

As Raymond Baker, director of Global Financial Integrity, put it: “This is…good for business.  The more informed an investor is on the business practices of a company operating in high-risk areas, the more equipped they are to assess the risks and strengths of their investment choices.  Given the fact that nearly all internationally competitive oil, gas, and mining companies are registered with the SEC this new legislation will have a global impact on investment decisions.”

If this is even just a first step toward the ideal of and county-by-country reporting and financial transparency, then I applaud it.  Is this bill perfect?  Certainly not.  But if for no other reason then because it represents a step toward better capitalism, I say this bill is a success.

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