Oil fields in Iraqi Kurdistan

According to sources in the city, supermajor ExxonMobil is establishing a presence in Arbil, the capital of the Kurdistan Autonomous Region.

This is a major development because in November 2011, ExxonMobil signed an oil exploration deal with the Kurdistan Regional Government despite the fact that the different political factions in Iraq had not agreed on a law to distribute oil revenues between the provinces and the central government in Baghdad. The central government maintains that the KRG/ExxonMobil deal is illegal and threatened to nullify Exxon’s other contracts for oilfields in southern Iraq. Exxon announced that it would review the deal but appears to be going forward with implementing it.

ExxonMobil was the first supermajor to ink a contract with the KRG and rumors abound that other supermajors will finalize deals of their own soon. An industry source said that Total, ConocoPhillips, Chevron, Eni and Lukoil are all interested in working with the KRG. Kurdistan has an estimated forty-five billion barrels of proven reserves, compared to at least one hundred billion barrels of oil in southern Iraq. However, Kurdistan has proven to be a more attractive target for investors because its security situation and economy are markedly better than the rest of Iraq.

Analysis

ExxonMobil has moved forward with the KRG deal for several reasons. First and most importantly, it saw no credible threat that the Iraqi government would cancel its contracts in the southern oilfields as retaliation for an exploration deal with uncertain returns. The architects of the deal believed that because Baghdad is so dependent on oil revenues, threats to disrupt production in the south by severing ExxonMobil’s contracts there (in the largest oilfield in Iraq, no less) amounted to nothing more than bluffs. After witnessing oil minister Hussain Shahristani’s feeble response to the ExxonMobil deal, other oil companies are more likely to call this bluff as well by pursuing deals with Kurdistan.

Second, the American withdrawal has created substantial uncertainty in the security and regulatory environment of non-Kurdish Iraq and investment there will remain a risky prospect for some time. The dispute between Baghdad and the provinces cuts to the heart of the nature of the post-2011 Iraqi state and it has flared up in the wake of US withdrawal. Salah ad Din and Diyala provinces have formally requested autonomy from the central government, prompting a crackdown by Prime Minister Nouri al-Maliki’s security forces. Until these disputes are resolved and the character and powers of Iraq’s governing bodies are clarified, investors will rightly be hesistant to commit themselves to such a volatile region.

Finally, it is important to remember that this is just an oil exploration deal, not a production contract. Should oil be discovered in significant quantities, it is quite possible that Maliki’s government will not be so tolerant of ExxonMobil operating in Kurdistan without contributing revenues to Baghdad’s coffers.

The distribution of oil revenues is part of a larger ongoing conflict between Iraq’s provinces the central government in Baghdad. The dispute touches on a number of fundamental questions and factional insecurities about the nature of the Iraqi state itself. The Kurds, a stateless people who endured centuries of persecution from governments across the region, have been largely successful since 2003 in achieving their goals of sovereignty, security and economic prosperity with an eye toward eventual independence. Although Kurdistan’s accomplishments have not trickled down to the rest of Iraq, the KRG does provide an appealing model that other Iraqi provinces may seek to emulate.

Both Sunnis in the west and Shiites in the south have expressed interest in local self government with only nominal ties to Baghdad—in other words, Iraqi federalism. This is because Iraq’s national government has largely been deadlocked and unable to effectively distribute resources and services outside of Baghdad. Furthermore, there is great uncertainty as to whether the government will be representative, responsive and free of sectarian influence.

This trend toward federalism poses a problem for Baghdad because most of Iraq’s oil is located in Kurdistan and southern Iraq. If those regions were to become functionally independent without sharing oil revenues with Baghdad, the central government would collapse into bankruptcy (oil accounts for about 75 percent of GDP and 90 percent of government revenues). This basic impasse explains why a national oil law has been stalled since 2005.

Wikistrat Bottom Lines

A cow under Dutch skies, June 17, 2007 (Willem Heerbaart)

Russia on Tuesday threatened a ban of Western European beef and livestock imports after a virus that was previously known to affect goats and sheep was also discovered in cattle this week.

The Schmallenberg virus, named after the German town where it was first diagnosed last year, has been found in newborn Belgian, Dutch and German calves, lambs and kids. The disease is transmitted by means of insect vectors and has been detected in fourteen Belgian, fifty-two Dutch and twenty German farms.

Mexico and Russia banned imports of sheep and goat meat as well as live animals from the three countries last week. Russia says it could ban cattle imports too if it isn’t satisfied that the virus will be contained. It is also considering a pan-European import ban which the European Commission insists is unnecessary because livestock in other countries isn’t known to have been infected.

It is the second time in less than a year that a trade ban pits the Russians against the EU. Last summer, Moscow prohibited European vegetable imports after a deadly outbreak of E. coli in France and Germany. The Dutch at the time managed to negotiate an exemption for their agricultural sales.

Russian beef imports from the European Union more than doubled last year as the euro weakened against the ruble while currencies in South America, where Argentina and Brazil are major exporters, strengthened. Russia is the largest meat importer in the world.

Hong Kong, China, June 15, 2010 (Wilson Lee)

Almost three years after the bricks of Wall Street crumbled, projections for growth in 2012 are more pessimistic than ever, as noted by the recently published Global Economic Prospects 2012 of the World Bank.

The effects of Europe’s spiraling debt crisis are felt across the developed and the developing world, countering the perception that emerging economies could be the motor of a global recovery. The imminent change of leadership in many countries, including China, France, Mexico and the United States, will make the foreseeable future a highly unstable one. In the upcoming months there will be an increase in populist policies and rising fiscal deficits. Governments may pay more attention to their constituencies which have been suffering the ongoing negative economic panorama.

As a result, protectionism could gain weight in the upcoming months and while it may be vilified by conventional wisdom which rightfully points out the benefits of free trade, there is a “human face” which legitimizes it.

Supporters of protectionism tend to justify their demands through what they regard as the direct negative effects of trade with other countries. Some of these effects are caused by the “unfair” practices of governments as China’s. Others are due to the abundance of cheap labor in countries as Mexico.

Whatever the reason, according to protectionists unchecked trade liberalization causes unemployment and income inequality. America’s disturbing trade deficit with China is one of the favorite arguments of trade critics in the United States. These opinions have a considerable impact in various segments of the population. The 2008 financial crisis only helped enforce the notion that Americans industry ought to be protected from unfair competition overseas.

According to theory, trade liberalization benefits an economy by expanding its production capabilities and diversifying the goods it can consume. Trade dynamics promoted by international competition lead to a decrease in prices, benefiting consumers and producers alike.

It also expands the labor pool, thereby reducing costs. Trade leads to specialization. Every country has a comparative advantage in producing certain type of goods due to its factor endowment. An economy will specialize in the production of goods which uses intensively its relative abundant factor. Thus, Germany, which is relatively abundant in high skill labor, specializes in the production of high end goods (computers, pharmaceuticals, etc.), while Vietnam, which is relatively abundant in low skill labor, specializes in the production of basic goods (agricultural products, clothes).

Through specialization, countries are able to increase their respective national income because they produce what they are more efficient in producing and trade it to the world. But then, what happens to those industries in which a nation is inefficient? Herein lays the main dilemma of trade which can fuel protectionism—specialization leads to the disappearance of inefficient industries. Theoretically, this should not be a problem, since workers in these industries will gravitate to other industries which are succeeding. Reality is more complex.

Skill biased technological change has made it very difficult for job displacement to occur. All types of jobs have modified their requirements in line with technological chance. A laid off worker will struggle to find another job because he doesn’t have the required set of skills. Retraining could take years. The protectionists argue that this is exactly why the state must design and implement policies to offset those effects of liberalization.

It’s easy for Americans to blame the Chinese for their trade deficit, to propose to punish China by turning its currency manipulation into an illegal subsidy and disregard recommendations to change domestic consumption patterns which, in fact, makes American society the main actor responsible for their current situation.

A more effective way to enable economic growth than either raise or reduce trade tariffs may be the implementation of an industrial policy. This refers to measures introduced by governments to channel resources into sectors which they view as critical to future economic growth. It implies benefiting some by hurting others (the financial resources have to come from somewhere else). Consequently, industrial policy should only be deployed to counter market failures and externalities which prevent the industries in which a country has comparative advantage from naturally becoming as efficient as they should be.

The successful examples of Japan, South Korea and the Southeast Asian “tiger” economies encourage governments around the world to intervene in their industries through subsidies, tariffs, taxes, etc. so as to increase their profitability. The idea is to benefit those sectors that the state believes have a comparative advantage over those of other countries and create national champions

There are problems with this analysis. Japan and South Korea both had the overt support of the United States which, due to Cold War dynamics, prevented their experiments from failing. For their part, the tigers, except Hong Kong, had authoritarian governments that facilitated the implementation of policies and they, too, enjoyed American support.

There are examples that demonstrate both successes and failures but, to be fair, the outcomes were contingent upon other variables which require closer analysis. China’s is the most recent case of an industrial policy, and, so far, it seems it has been successful.

This has caused alarm in the United States where China’s success is increasingly perceived as coming at the expense of American workers. The politicization of industrial policy that aims to “correct” market imbalances unfortunately often leads democratic governments to privilege certain interest groups, whether they’re corporations or unions, at the expense of their economy’s competitiveness as a whole. Perhaps, in this sense, China’s comparative advantage is its very authoritarianism?

Both supporters and detractors of protectionism tend to frame their arguments so as to cause the largest possible impact on public opinion. This is because protectionism has a “human face” embedded within it. For many sectors within society, protectionist policies are regarded as a solution to their grievances. With little regard for theory and the long term negative effects of poorly planned protectionist policies, they suffer from what political analysts call “shortsightedness.”

Governments should always bear in mind how to increase efficiency and productivity when intervening and implementing protectionist policies. Industrial policy demonstrates that this is very difficult and that many other variables are at play. By politicizing trade, protectionism becomes the vilified entity that economists so hate—short term solutions with long term negative consequences.

This article would not have been possible without the insights received when attending Georgetown University’s course imparted by Professor Theodore H. Moran, “Globalization: Challenge for Developed Countries.”

Port facilities near Rio de Janeiro, Brazil, March 2, 2008 (Jim Skea)

Growing demand for oil and other natural resources in Asia is fueling an export boom in Latin America where even Venezuela, otherwise hostile to freer trade, is witnessing economic expansion thanks to globalization.

The region’s foremost oil exporter has averaged 4.6 percent economic growth since 2005 compared to 4 percent in Chile, the world’s leader in copper and economically the freest nation in South America.

Even in Argentina, where business confidence is fading and enterprise increasingly squeezed between regulations and populist spending measures, growth averaged 7 percent during the same period as record soy and other farm exports helped offset Buenos Aires’ inflationary monetary policy and persecution of international energy companies and investors.

Commodity demand will likely slacken in 2012 as a result of economic woes elsewhere, meaning countries as Chile, Colombia, Peru and Uruguay, which are generally open to foreign business and investment, will do better than Venezuela and even Brazil which is struggling to escape the legacy of decades of corruption and nepotism.

The overall pace of Brazil’s regulatory reform has slowed but President Dilma Rousseff is leading an effort to root out corruption at great political peril to her ruling Workers’ Party. In her battle for transparency, political allies have abandoned Rousseff’s administration and her aloof leadership style threatens to alienate local machines and left wing voters.

2012 may be Rousseff’s test year. If she manages to ramrod her transparency agenda through Congress and continues the free trade policies of her predecessor, Brazil could eventually outperform the region in economic growth.

In the long term, the largest and most powerful country in South America is well positioned for a future of enduring prosperity. Commodity exports, despite their expected downturn this year, are critical to Brazil’s success.

Asian demand for corn is expected to increase by roughly 25 percent this decade which will be a huge boon to exporters in the Americas, including Argentina, Brazil and the United States which between them constitute almost a third of global corn production.

International beef, pork and soybean trade will probably expand by similar factors, again benefiting Latin American producers. Brazil currently provides 40 percent of global beef and 15 percent of pork exports and it dominates the sugar market, accounting for 60 percent of the market. With the elimination of sugar tariffs in the United States earlier this year, which were designed to protect the ethanol industry there, Brazil will be able to export north as well.

The country’s ability to turn this export advantage into a broader economic success that sees industries and services flourish hinges on Rousseff’s willingness to reform.

Brazil has seen some progress but starting or closing a business remains costly and time consuming while organizing new investment is inhibited by regulations that make it especially difficult for foreign companies to compete. Tariffs and antidumping measures are barriers to trade and excessive labor laws stifle employment and expansion. There’s a risk of “Dutch disease” if growth is taken for granted and politicians refuse to challenge vested interests to improve market conditions. The president appears committed to the task but is her party?

A merchant ship sails off the starboard side of the amphibious assault ship USS Kearsarge while transiting the Straits of Hormuz, July 5, 2004

As Iran has threatened to shut the Persian Gulf from international oil trade, it’s worth considering what alternatives there are to the Strait of Hormuz.

This narrow waterway, through which passes roughly 40 percent of the world’s seaborn oil transports along with large quantities of liquefied natural gas from Qatar, could be subject to a blockade if the Iranians follow up on their threats.

There are analysts who point out that Iran itself relies heavily on free shipping in the Gulf and will therefore not dare menace it. Oil and petrochemicals account for 85 percent of Iranian exports. China, with a 16 percent share, and India, with 13, are its main costumers. Japan and South Korea also import oil from Iran but have been under pressure from the United States to suspend their trade.

The United States Navy, which has some thirty ships patrolling the Persian Gulf and nearby waters, should be able to break an Iranian blockade but not before oil prices and insurance rates have skyrocketed worldwide.

Rather than trying to prevent ships from transiting the Strait of Hormuz altogether, Iran would more likely harass unfriendly oil tankers with diesel submarines and shore batteries and thus make it nigh impossible for the fourteen supertankers that traverse the strait on average every day to deliver their oil and gas transports to East Asia and the West.

There are a number of oil pipelines running across Saudi Arabia that are no longer in use but may be reactivated in the event of a prolonged naval skirmish in the Strait of Hormuz.

One runs from Basra in the south of Iraq to the port city of Yanbu’ al Bahr in western Saudi Arabia. This IPSA pipeline was deactivated after the Iraqi invasion of Kuwait in 1990. West of Riyadh, it runs parallel to a couple of oil and gas pipelines that cross the entire width of the Arabian peninsula.

Also mothballed is the Trans-Arabian Pipeline or Tapline which used to deliver oil from the Saudi fields across Jordan to Lebanon.

IPSA and Tapline could carry the equivalent of up to two million barrels of oil per day to ports on the Red Sea and Mediterranean coast. Additional oil could be pumped north via the Iraq-Turkey pipeline which terminates in the city of Ceyhan in the Levant but it isn’t linked up to the southern Iraqi oil fields.

According to the US Energy Information Administration, oil tankers transport roughly seventeen million barrels of oil through the Strait of Hormuz every day. Reactivation of the pipelines would thus compensate for little more than 10 percent of shipping capacity.

The United Arab Emirates are building another alternative and could soon start pumping the equivalent of two and half million barrels of oil per day via the Abu Dhabi Crude Oil Pipeline from the Habshan onshore oil and gas field to Fujairah outside the Straits and on the Gulf of Oman. That would more than double the alternative transport capacity but still leave the developed world deprived of some 75 percent of Gulf oil imports.

Business district in Paris, France, June 24 (Philipp Klinger)

Eurozone leaders are expected to agree Wednesday night to inject more than €100 billion in the continent’s banking sector to help it cope with an imminent Greek default.

Such a “recapitalization” of Europe’s financial industry was championed by the International Monetary Fund and the United States and is welcomed by countries whose banks are excessively opposed to Greek debt, notably France. It is why President Nicolas Sarkozy likes to enable banks to tap into the European Financial Stability Facility that was set up last year to help countries, not companies, in financial distress so his fiscal challenges won’t be aggravated. German Chancellor Angela Merkel would rather banks raise capital from their own governments before raiding the bailout fund.

Whatever method is chosen (probably both), it will provide temporary relief to Europe’s sovereign debt crises before making it worse.

Europe’s leaders agree that Greek debt levels have reached unsustainable heights. Its public debt is now worth 50 percent more than its entire economy and projected to growth further in the coming years as Athens struggles to rein in spending substantially. Greek debt will be “restructured,” which means that probably 60 percent won’t be paid back. European banks which have loaned to Greece could be in trouble. Even if they aren’t, other banks and investors might worry that they are so the market tanks. “Recapitalization” is designed to prevent that from happening.

In the short term, it will but several weeks from now, markets will likely start wondering whether pumping billions of euros in a financial system that’s bloated with debt is really an intelligent strategy.

Western banks have been hesitant to loan money, to each other and to businesses, since the 2008 financial panic when the investment bank Lehman Brothers collapsed. American and European central banks lowered interest rates in response, allowing banks to borrow cheaply in the absence of private sector confidence.

The European Central Bank has been more prudent than its American counterpart, the Federal Reserve, and didn’t buy sovereign bonds, from Italy and Spain, until this summer. The Fed, by contrast, has been financing American deficit spending by printing trillions of dollars for more than two years. Both have supported banks in the expectation that they would continue to extend business loans and mortgages.

They haven’t really—not enough to stir an economic recovery anyway because they realize that the market is still full of dislocations and excesses.

If there weren’t central banks or if they hadn’t intervened, those dislocations and excesses, build up in an era of “cheap money” when financial institutions knew that they were “too big to fail,” would have been cleared out in 2008 when Lehman collapsed and threatened to sink half of Wall Street with it. Prices that did not reflect real demand, especially in housing, where government policy had encouraged people without sufficient income to apply for mortgages, would have deflated—considerably.

Default and deflation however, along with potentially huge losses in personal savings, are politically unacceptable. So instead of failing, the institutions that created the crisis are now on life support while the housing market in many Western countries, and construction with it, is stuck. Homeowners aren’t willing to lower their expectations while buyers aren’t able to purchase at the prices they charge.

Recapitalizing banks after they bought worthless Greek bonds when they should have known better isn’t just wrong; it’s not going to work. If writeoffs are also expected for Portugal and maybe Italy and Spain, investors will realize that no matter how big the EFSF is made to be, the solvent countries in the north of Europe can’t afford to compensate them for their losses indefinitely. If the ECB also turns on the printing presses (which it doesn’t want to), that will be the clarion call for investors to get out. Interest rates on peripheral bonds will skyrocket.

The political willingness to reform structurally rather than cut several billions of euros in annual spending is virtually nil in Greece and Italy. These states are already bankrupt and waiting for Germany to pull the plug. It is king in the land of the blind (or broke actually) but doesn’t have the cash on hand to bail out half of Europe. Some countries just won’t change until they’ve hit bottom. The sooner the better for the longer banks have to wait for the inevitable, they longer they won’t invest in enterprise nor loan to other banks because they don’t know which will survive the reckoning and which won’t. Recapitalization will thus make the problem worse by providing a false sense of security that cannot last.

A revised version of this article appeared at The Cobden Centre, November 1, 2011.

A branch of Dexia bank, Belgium (EPA)

The Franco-German rescue of investment bank Dexia adds to mounting concern about Belgium’s creditworthiness. The dire state of Belgian public finances is compounded by a yearlong political gridlock that has left the country without a proper government since elections last summer.

The nationalization of part of the Dexia bank will cost Belgian taxpayers €4 billion immediately. This adds to the country’s national debt which is almost the size of Belgium’s entire gross domestic product. As such, it’s the third most heavily indebted nation in the eurozone, after Greece and Italy.

On top of the €4 billion, Belgium has pledged guarantees worth up to €54 billion for the remainder of Dexia which has been separated into a nationalized consumer bank and a market investment bank by the governments of Belgium, France and Luxembourg.

The three major American credit rating agencies have warned that the lack of political consensus in Belgium and the expensive Dexia bailout could prompt them to lower Belgium’s credit rating. Belgian credit is rated AA+ by Fitch and Standard & Poor’s with a negative outlook. Moody’s maintains an AA1 rating and changed its outlook to negative on Friday.

Since last year’s parliamentary elections, Dutch and French speaking political parties in Belgium haven’t managed to form a federal government. The major parties—Flemish nationalist and Walloon socialists—have found very little common ground. The Flemish north, which accounts for roughly 60 percent of Belgian GDP, wants more autonomy from the poorer south where Walloons tend to vote overwhelmingly socialist.

Government spending in Belgium is almost 50 percent of GDP so its ability to borrow cheaply is crucial. The country was able to recover from the global downturn with modest growth rates last year but stimulus measures and subsidies have taken a heavy toll on public finances. Corporate and income taxes in Belgium are high and labor codes are stringent. A national government composed of conservative separatists and socialists is unlikely to address these long term impediments.

Barroso insisted that it was only fair that the financial industry “make a contribution back to society” after European governments had bailed out banks with guarantees amounting to €4.6 trillion in the wake of the 2008 financial crisis. “If our farmers, if our workers, if all the sectors of the economy from industry to agriculture to services, if they all pay a contribution to society, also the banking sector should pay a contribution to society,” according to the president. Besides, he wondered, where else should the money come from?

Are we going to tax labour more? Are we going to tax consumption more? I think it is fair to tax financial activities that in some of our member states do not pay the proportionate contribution to society.

Whatever is the “proportionate” contribution to society, Barroso wouldn’t say. What he also wouldn’t say is that banks, like all businesses, pay their fair amount in corporate taxes although rates differ between European states. Instead, he suggested that the banking sector isn’t paying a “contribution to society” at all which is nonsense.

The financial transaction tax that Barroso proposed, and hopes to introduce in 2014, would enforce a 0.1 percent tax on the exchange of shares and bonds and a 0.01 percent tax on derivative contracts. Some 85 percent of transactions between financial institutions would thus be taxed.

The rates may seem modest but an average trader might oversee thousands of transactions per day. For companies, it adds up. A special banking tax would likely prompt them to move their trades out of the European Union to Hong Kong, New York or Singapore. London would be hit hardest because it is by far the largest financial market in Europe. The British financial services industry account for roughly 10 percent of the nation’s economic output, 11 percent of its total income tax and 15 percent of corporate tax revenue. To pretend that The City doesn’t pay its “fair share” is therefore preposterous. It pays its fair share more than 50 percent over!

When Sweden tried a financial transaction tax in the 1980s, share prices fell rapidly and half of Swedish equity trading moved to England. The volume of bond trades fell by 85 percent and futures trades by 98 percent. The options trading market virtually disappeared overnight.

Brazil similarly failed to raise much revenue with its transaction tax in the 1990s. Both Brazil and Sweden have since abolished the tax and for good reason. It doesn’t work because it is immoral. Governments shouldn’t single out any industry for special taxation even if they chose to use trillions of euros in taxpayers’ money to stop the market from punishing these companies for the poor business decisions they made.

Speaking at a National Clean Energy Summit in Las Vegas, Nevada, Steven Chu admitted that entrepreneurs invented the airplane but claimed that government was responsible for its success. Had Congress not “allowed” private companies to deliver mail for the United States Postal Service, he said the technology could never have taken off.

Chu added that wartime necessity helped airplane development further—again, government activism.

It’s a curious argument—weakening a government monopoly; allowing the private sector to deliver mail amounted to public “support” for entrepreneurs while wars were a “stimulus” for aviation technology, even if they had a disastrous impact on nondefense industries.

Did Chu argue that the United States needed to wage more wars for the benefit of the defense industry? Of course not. Did he make the case for less government control in order to free the private sector from taxes and restraints and allow it to innovate and expand? Of course not.

The energy secretary cited the example of government involvement in aviation technology as an argument for not less interference from Washington but more—in order to create “green” jobs for people building solar panels and fuel efficient cars even if not enough Americans want to buy these products to make them profitable.

No matter the fate of similar public initiatives in countries as Denmark and Spain, where “green” policies destroyed more traditional jobs than they created new ones, the Obama Administration is determined to “win the future” with an agenda of state activism that is rooted in historical distortion.

(Researchers at Madrid’s King Juan Carlos University found that for every renewable energy job that Spain financed, 2.2 jobs were lost. In other words, nine jobs were lost in the broader economy for every four “green” jobs created there.)

It is hardly surprising given that this comes from the same man who advocated a ban on incandescent light bulbs because it took away “a choice that continue[d] to let people waste their own money.”

Chu’s rhetoric is emblematic of the government knows best mentality that defines the administration’s economic policy. Instead of letting the market place allocate resources according to the combined needs and wishes of every consumer and producer in the country, President Obama and his cabinet believe that “experts” in Washington DC can make better choices, whether it’s in health care, financial products or alternative energy.

It’s a notion that has been proven wrong time and again however yet it is probably responsible, to a considerable extent, for holding the recovery of the American economy back.

Senator Richard Shelby on The Willis Report, Fox Business, July 21

This month marks a year since the Dodd-Frank financial reform bill was enacted by the United States Congress. Republicans in the Senate are attempting to stall its implementation though by refusing to appoint a director to the consumer protection bureau that was created under the legislation.

Last summer, lawmakers in the United States hammered out a financial reform bill that, according to one of its main sponsors, could have prevented the 2008 financial crisis if it had been in place earlier—even though the law changed nothing about the semi-government mortgage giants Fannie Mae and Freddie Mac which were at the heart of the housing bubble.

The sprawling legislation did provide the government with new tools that it can now use to liquidate failing firms and enabled Washington to charge fees to large banks and hedge funds in an attempt to raise up to $19 billion over the next five years to pay for the program.

Banks were restricted in proprietary trading activities and forced to renounce their swaps desks to become separately capitalized operations although the largest part of their derivatives business was left untouched. Dodd-Frank did not therefore end the problem of “too big to fail.” Rather, it exacerbated it by imposing capital charges that make it more difficult for new financial institutions to enter the market. As one former Treasury Department official quoted by Newsweek put it, “they’ve created six new GSEs,” or government-sponsored entities just like Fannie and Freddie.

The reform bill also erected a new consumer protection regulator that is supposed to protect consumers from “unfair, deceptive and abusive” business practices—without defining what that means. The Durbin Amendment to the reform law also enabled the Federal Reserve to regulate the fees that banks may charge for processing debit card purchases. The amendment prescribes that such fees must be “reasonable” and “proportional” but sets no standards. Yet the bureau will be authorized to regulate mortgages, credit card policies and consumer loans with a budget of its own, separate from the congressional appropriations process.

Republicans in the Senate are fighting this new agency by refusing to confirm the appointment of its chief regulator. According to Richard Shelby of Alabama, the ranking member on the upper house’s banking committee, Dodd-Frank is nothing short of “a horror movie for the American economy.” He told the Fox Business Network’s The Willis Report, “We don’t need to create a consumer czar that is accountable to no one.”

Forty-three Republicans in the Senate are “not going to confirm anybody to that job unless there’s a change” in the law’s structure, said Shelby. He previously complained in Politico about Congress granting “expansive new authorities to unelected regulators—the very same regulators who failed to do their jobs before the crisis.”

They are now entrusted with writing more than three hundred new regulations. And given the complexity of the issues, the regulators are understandably struggling to meet the unrealistic statutory deadlines given them in the new Dodd-Frank law.

In their rush, “the regulators are not devoting the time and effort to determine the costs for businesses or the implications for economic growth and job creation,” according to the Alabama senator.

JPMorgan Chase’s Jamie Dimon expressed a similar concern last month when he asked Federal Reserve Chairman Ben Bernanke whether anyone had “bothered to study the cumulative effect of these things.” He wondered whether all the new rules weren’t responsible for the country’s lackluster recovery. The central bank president didn’t think so but admitted that no comprehensive study of Dodd-Frank’s impact on the financial industry had been attempted.