Regulations and Markets: Making a Bad Situation Worse 7 comments
-
Font Size:
-
Print
- TweetThis
Memo to Washington, DC: Don’t make a bad situation worse.
There has been a great deal of political rhetoric for a move toward greater regulation. Unfortunately, what I have seen so far in the debate and discussion about regulations has been disappointing. It is as if it is being presented as a binary decision: regulation good, or regulation bad.
But really, specifically what kinds of regulations are being put on the table?
This blind rhetoric of trying to find some sort of culprit to blame shows one of two things: either politicians think that us common folk can’t understand economic theory, or politicians themselves have no idea what is going on. My bet is both, but that is beside the point. There is a painful ignorance about how financial markets work.
Take, for instance, criticism of “de-regulating” banking with the abolition of the Glass-Steagall Act in 1999. Now that commercial banks can fill the roles of traditional investment banks and vice versa, the financial system was just bound to fall into chaos!
Really though, this allowed companies like Bank of America (BAC) to rescue Countrywide Financial (CFC), and let Wells Fargo (WFC) buy Wachovia (WB) (which had an investment banking division along with its commercial banking operations). If traditionally commercial banks were not allowed to rescue those institutions, the bill likely would have fallen at the feet of taxpayers. Moreover, in Europe, there was no such Glass-Steagall arbitrary distinction between investment and commercial banks, and Western Europe is not exactly seen as a model of runaway capitalism.
We need to step back a bit and take a deep breath. A knee-jerk reaction to revive regulations that had been long-buried for good reason is not going to solve anything. Should leverage have been allowed to be employed on the scale that it was? Clearly not. That is a specific issue that can be addressed.
Nothing of substance usually comes out of Congress in the months leading up to an election, because candidates need to play it safe. After the elections, Congress needs to deal in specifics, logic, and avoid binary thinking. The current rhetoric is not only unproductive but dangerous. If Congress truly believes that simply piling on additional layers of regulations and bureaucracy will cure our ills, I suggest they take a look at how well they have been running Amtrak—or for an even more recent example, a little company called Fannie Mae.
These are not even necessarily partisan issues. Under President Clinton, Glass-Steagall was abolished, and the capital gains tax was lowered. These were good moves for the markets. The current Democrats, however, seem to be opposed to both of them.
Will sound economic reasoning prevail over political squabbles? Let’s hope.
Our retirement depends on it.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
TraderMark
-
2
Don Dion
-
3
Cliff Wachtel
-
4
Mike Havrilla
-
5
James Quinn
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 7 comments:
I agree that we need balance policy and not pendulum swings from no regulation to over regulation but there are real lessons to be learned from recent events and many of them point to some basic regulation that protects companies and shareholders from themselves.
So my interpretation is... the government likes lingering recession rather than a normal purge or incopetent businesses and financials so we can get about normal business afterwards. Am I wrong?
'Should leverage have been allowed to be employed on the scale that it was? Clearly not. That is a specific issue that can be addressed.'
Clearly you understand the problem, yet you offer no solution other than to criticize an attempt to rein it in. Who's side are you on anyway?
Excessive leverage is always the problem. And it seems every time a speculative bubble gets close to its bursting point, common sense is thrown out the window.
Does it make sense to make a home loan to a borrower who has no proof of income and is permitted to buy a property with nothing down, which has just rapidly appreciated in value with an interest only 40 year term just to make the monthly payments affordable????
True, common sense varies with the situation and the times but it should be obvious when rational takes a holiday. Hence, there must be limit switches or circuit breakers in place to prevent an overload. Call them regulations if you will but there must be some and they must be enforced.
"It's always funny until someone gets hurt, then it's just hilarious".
The Late Great Bill Hicks
I disagree. First off, we don't have truly unregulated markets. Ever hear of OSHA, ADA, and a host of other alphabet agency restrictions? That's regulation. It limits the range of choices available to businesses and makes it more expensive to get started or continue operating.
The only way to maintain a so-called monopoly in a truly free market is to provide the absolute best possible service and pricing of any other company to the extent that every consumer voluntarily chooses to do business with you. The moment you try to raise prices, or cut quality, another business will take advantage and provide 'better' products/service and take away market share by providing what you don't.
Nearly every Wal-Mart, K-mart, Penny's, Target, etc. have jewelry counters, yet there are still local jewelers in the same towns. Why?
Because the big box stores can't provide "full service" in that line. If you buy a ring at one of these places and a stone falls out just try to get them to repair it. If you're lucky they will replace the whole ring for you, but if not, then you'll have to go find a real jeweler instead of a salesperson at a counter. You will find several jewelers to chose from as well. Some are discount priced with minimal services, some are full priced with complete services. They all manage to stay in business because customer's wants are diverse.
The market is varied to fill customer's wants and needs at a profit. Those that can't do so at a profit go under for want of customers.
The same should happen in the financial markets. The banks, insurers, funds, etc. that took huge risks and failed should go bankrupt. That will be the best way to ensure it probably won't happen again.
A prime expample or two will work a whole lot better than some new "rules and regulations" formulated and enforced by a bureaucrat in Washington, DC for the primary purpose of collecting money and only the secondary goal of ensuring a 'better' market.
Want to get a bureaucrat off your back? Send them the check they seek. Once they have your money they don't really care about dotting the i's and crossing the t's. I know, I help run a restaurant. I see it all the time.
Large companies LOVE regulation because it put a disproportionate burden on their smaller competitors. Big business LOVES big government because it gets too fat and lazy to compete honestly.