The Regulation Trap

In answer to a question about why we didn't avoid the recession by regulating sooner (or more, or better)...

I don't think it is as simple as adding more regulation. Both the left and the right claim (with videos to prove it) that at some point in time they asked for more regulation (of Fannie May, Freddie Mac, the banks, insurance companies , Federal Reserve, and so on) but were rebuffed by the evil people on the other side.

We had a well known bubble that ended around 2000 and was largely pinned on the “irrational exuberance” (Alan Greenspan's term) around the growth of the Internet. There was a slowdown, a lot of people got laid off (like me) and the Internet survived and eventually took on a more suitable growth rate (with far fewer IPOs ever since).

But there was another bubble that was just getting started that didn't get so much attention at first. I clock it back to when the Justice Department decided to “make and example of” Chevy Chase Bank in the Washington DC area. They got them for “red lining” which meant engaging in racial discrimination by disqualifying loans for people who currently lived in certain neighborhoods.

Ironically, Chevy Chase was a true community bank and if you went into a branch in a black neighborhood you were probably going to see almost exclusively black employees. The apocryphal cases of fine upstanding black families being denied loans were in many cases later proved false. But not before Chevy Chase settled out of court to avoid further bad publicity and adopted a new policy of granting loans to almost everyone. Other institutions followed suit and all with a nod and a wink from a government who needed to start a new bubble to replace the one that was about to burst.

A few years later... I had no idea what my townhouse was worth at the time because I had no plans to sell it. I do know that I started getting all sorts of offers to either refinance my house, or buy it outright, no fees, no inspection, quick and easy money. I later found out that the average time between a house being put on the market and sold in my area was 2-days, and the sky was the limit on price.

I was “fortunate” to be making TWO mortgage payments with the Internet bubble burst. I was also fortunate that the housing bubble still had quite a ways to go.

A friend here at the condo put his unit up for sale. I was puzzled as to why, since he seemed to be fairly well off (retired Sears exec of 35 years etc.) I asked him why not hang onto it since the prices were still going up seemingly without end. He said nope, that we were at an all-time high that would certainly not be matched in his remaining lifetime and he'd rather have the cash to leave his children rather than something they'd have to fight over and would be of (in his opinion) declining value.

He was wrong though, he sold his unit (within a few weeks, for top-dollar) about a year sooner than he needed to. In fact prices here went up a bit more during that next year. But his analysis was mostly right. I decided, partially based on his hunch (and my lack of income), to sell my first house instead of my second, and use the proceeds to pay off the other one. The two-day turnaround for sales back in Virginia had turned into a nail-biting two months for me.

I'm quite sure that my condo, and the townhouse I sold are now worth half of what they were then, if that. I'm sure you have read about all the Credit Default Swaps and other derivative mechanisms that held this house of cards up for so long. This all happened quite visibly under the regulators nose and under the nose of congress and there are ample hours of C-Span video showing all the right questions being asked, but still nothing being done about it.

I think the best reason for them not addressing the problem (and in fact they still have not addressed the problem really) is that it was not in the interest of any of the entrenched politicians to have the bubble burst , particularly without a fallback bubble (as this one was to the Internet bubble) to rely on. Both Clinton and Bush and many congress critters bragged about the availability of housing opportunities for all in America. And who wanted to be impolite and asked how someone with no job, no assets and no money down could buy a new home and then fail to make payments without SOMEBODY getting the shaft? It's all magic right? Much better than watching all those thousand unit tenements be blown up right? (Rich people made back-room tax-payer money on those deals too).

Finally, regarding regulation... and not just of the banking industry. Mega businesses LOVE regulation and they even love taxation, although they, like everyone I know, do as much as possible to avoid paying more than they have to. The doctors, the lawyers, the dentist and many other of “the rich” will do just fine under an oppressive government because they are already an integral part of the system and nothing is likely to change that.

Regulation and taxes and fines and fees for service and inspection fees and filing fees and ... they keep the riff raff like us in place while our betters in congress, and the state legislatures, and the town councils work the back-room deals that make them ever better off than they were when they were trying to run a business on the up and up.

Rather than more regulation, I'd like to see a scaling back of institutions (both private and public) that are “too big to fail”. Let the ones that do dumb things fail and be bought up by the ones who don't do dumb things. GM should have gone through a normal bankruptcy proceeding (which I suspect will be their eventual fate anyway). Most real government services happen at the local and state level, and some states and localities are setting good examples of how it should be done, while others continue living like a kid in their parents basement, never growing up, and counting on their own eventual bail-out from a Federal Government growing less able to bail anything out with each passing election.

Carley Fiorina got this right back when the “recession” was first admitted to. On a panel show while representatives from big states, and Google and congressmen were all spouting off “bail-outs” that would further line their own pockets, Carley said we need to revitalize small business which employs (something like) 95% of Americans. We need to take the ever increasing burden of regulation off their backs so they can start hiring people (other than accountants) again. I know small business people who are in this predicament, spending most of their time chasing their own tails and filling out forms instead of building new opportunities for themselves. Meanwhile the bureaucrats don't have to worry about actually DOING anything.... that's someone else's problem. The Microsofts, the GEs and many others have whole departments to take care of the minutia that drag small companies to their graves.

The problem with regulation is this: in the end, who is going to regulate the regulators?