Regulations and Markets: Making a Bad Situation Worse

Includes: DIA, QQQ, SPY
by: Alex Cook

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 (NYSE:BAC) to rescue Countrywide Financial (CFC), and let Wells Fargo (NYSE:WFC) buy Wachovia (NASDAQ: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.