Beware politicians whose legislation bears a grandiose title. You can be certain their schemes will accomplish the opposite of their purported intent. Such is the case with the Wall Street Reform and Consumer Protection Act signed into law one year ago today. The massive 2,300-page tome - commonly known as Dodd-Frank - promised to fix the financial system, streamline regulation and end bailouts. Like so much of President Obama’s legislative achievements, this bill promised much, delivered little and cost a great deal.
By the Government Accountability Office’s reckoning, implementation will require $1.25 billion in new spending. It’s not cheap marshaling an army of 2,800 newly minted federal bureaucrats wielding fresh power over the private sector. Over the next decade, businesses will shell out $27 billion in fees, assessments and tithes to their new regulatory masters, according to Congressional Budget Office estimates.
The enterprise was a knee-jerk reaction to the financial crisis of 2008, where the feds had just bailed out the investment bankers at Bear Stearns and elsewhere. Rep. Barney Frank, Massachusetts Democrat, and then-Sen. Christopher J. Dodd, Connecticut Democrat, insisted creation of agencies like the Financial Stability Oversight Council and the Bureau of Consumer Financial Protection would crack down on Wall Street and end the ingrained idea that some firms are “too big to fail.”
The actual result has been a mountain of red tape. At least 400 new federal rules will be layered on top of existing regulations. New bureaucracies will have overlapping jurisdiction with existing regulatory bodies...
Far from getting rid of bailouts, Dodd-Frank institutionalized them. Title II empowered the Federal Deposit Insurance Corporation with “orderly liquidation” authority, giving the agency discretion to intervene between a financial institution and its creditors in any way it sees fit... That means the “too big too fail” ethic still applies.
Dodd-Frank has largely severed the relationship between risk and return, which is the necessary discipline imposed by a free market. Now, the big banks get to keep the rewards, but American taxpayers bear the risk...
Dodd-Frank has been an expensive exercise in command and control by the federal government. It encourages crony capitalism while undermining free markets and limiting competition. A year later, the folly of this legislation has only grown more apparent.
Thursday, July 21, 2011
The Crony-Capitalist Triumph
Thursday, May 26, 2011
Myth of a Free Market
One of the more pervasive myths, perpetuated – either ignorantly or maliciously – by the mainstream media, is that the market tumult witnessed over the past few years is somehow a result of the free market having “run wild.”
The argument, as you are surely familiar with it, goes something like this…
Until recent and heroic intervention by the Feds, the world had been aimlessly bobbing about on a sea of unregulated, laissez-faire capitalism. Adrift in the cold, harsh, dog-eat-dog seascape, where rules were callously discarded and government vigilance eschewed, we clueless individuals simply made our way as best we could. Of course, it wasn’t long before we lost sight of the horizon. Then, the clouds of capitalist deceit obscured our view of the stars, by which we had previously been navigating our way across the perilous oceans. Sensing our vulnerability, the greedy capitalists stealthily moved in under the cover of “free market anarchism” to rock the markets and capsize our tiny, unguarded vessel.
What followed – around 2007-08 – was the painful aftermath of a great era of free market irresponsibility. Lessons were to be learned. Regulators, it was said, had failed to protect us (mostly from ourselves). The markets had been allowed to “run wild,” fleecing all and sundry of their earthly wares. The whole system was in danger of collapsing under the weight of its own free reigns and pundits from every corner of the boat were soon crying out for some form of central guidance, some direction, some calm. This, we were told, and not without a wag of the finger, is what happens to modern, mixed-market economies when they become adulterated by the blinding whims of free market capitalism.
And it would be a nice story, with a presumably easy remedy…if only it were true. Alas…
Wednesday, January 19, 2011
No Self Service in New Jersey or Oregon
Unless you live in New Jersey or Oregon, notes The Wall Street Journal, where it's still illegal to pump your own gas. According to Bikram Gill, a businessman who bought up 26 gas stations in New Jersey, "Any idiot can do it." We know for a fact that there are idiots in all 50 states, and in 48 of them, those idiots are free to handle the somewhat volatile fuel themselves.
In 1951, though, the Supreme Court of New Jersey decided it was too dangerous to allow just anyone to pump gas, suggesting that the process of refueling is best left to the professionals.
Predictably, there have been attempts to change the law. In 1988, a judge issued a ruling that it was unconstitutional to disallow Americans the right to pump their own gas, but it was later overturned by a court of appeals. And again in 2006, governor John Corzine attempted to put self-service stations along the Turnpike, but the voting public said 'No Thanks.'And so it remains illegal to pump your own gas in Jersey. Of course, the next time it's raining or snowing or sleeting and you need to fill up, something tells us you'll understand...
source
Saturday, August 28, 2010
We Can't Afford This Government
First came word that new jobless claims last week jumped above half a million, a number so large that one economist said "it looks like the economy ran into a wall." Second came a Congressional Budget Office estimate that this year's federal deficit will be well above $1.3 trillion for a second straight year and remain above $1 trillion next year as well - causing as much debt in three years as government built up in the previous 219.
Third came the announcement by Americans for Tax Reform (ATR) that yesterday was the 2010 "Cost of Government Day," which is "the day on which the average American has earned enough gross income to pay off his or her share of the spending and regulatory burdens imposed by government at the federal, state and local levels." Just two years ago, Cost of Government Day fell an astonishing 34 days earlier. This year, the average American worked 231 days just to support government, which consumes 63.41 percent of national income.
If anything, ATR underestimates the problem. Of those 231 days, 74 are taken up by regulatory costs. But that includes only the direct costs of new equipment and labor time required by government red tape. "Not counted are ... hidden costs" (such as discouraging new business investment), according to ATR, that "may be as large as the direct compliance costs of regulation. Economists at Washington University in St. Louis, leaders in the study of regulation, estimated these costs to be over $1.5 trillion per year in 2009."
Taxpayers foot the bill for an increasing number of government workers at outrageously growing wages. ATR reports that federal employment has increased by 230,000, or nearly 5 percent, in just the past year. USA Today reported Aug. 10 that federal pay and benefits per employee now average more than twice that of private workers: $123,049 compared to $61,051. Federal salaries outpaced inflation in the past decade by 33 percent.
Such government extravagance is unsustainable, and all this doesn't even take into account the $115.8 trillion of unfunded liabilities in Social Security and Medicare, as calculated by Michael D. Tanner of the Cato Institute.
The United States is headed toward financial collapse unless these trends are reversed. The radical change needed is not a government takeover, but a significant downsizing of government's intrusion into our economy and daily lives.
Wednesday, August 18, 2010
Thursday, August 5, 2010
Are More Regulations the Answer?
Prospects are not looking too peachy for Democrats this election season. President Barack Obama (left) and Democrats in Congress are getting tarred by the nation's entrenched unemployment and the cost of efforts to reverse the damage. I can understand the malaise that afflicts a nation with close to 15 million people unemployed and millions more underemployed. But the blame is being put in the wrong place. The next election should be a contest over which economic worldview — laissez-faire or Keynesian — turned out to be the better one, and, on that score, the Democrats should win.
Deregulation got America into this mess — decades of it — the kind of laissez-faire economics enacted by the Chamber of Commerce, former Federal Reserve Board Chairman Alan Greenspan and Republican leaders. America barely survived life under their tie-regulators'-hands approach to markets. Wall Street sucked up the wealth in this country, hollowing out our productive sectors, while bankers got drunk on risk. It was only after $17 trillion in American household wealth was wiped out in 18 months that Greenspan acknowledged how bankrupt his views were.
– Pocono Record, Robyn Blumner
Free-Market Analysis: This opinion piece appearing in the American Pocono Record is a great representation of a certain kind of elite dominant social theme: "The marketplace is flawed and government regulatory authority is a necessary corrective, in ever-larger doses if necessary."...
Deregulation did not create the mess that America is in...
The combination of the mercantilist Federal Reserve with its debt-based money and the graduated income tax passed at the same time inflicted grievous wounds on the US Republic. Money went from gold and silver to inflatable paper currency. And what wasn't to be inflated away was eventually taxed at ever-higher rates. People went from self-sufficiency to something else. Dependent on central-bank initiated economic surges, people, even the middle and lower-middle classes, began to look for government help during the significant busts that occurred in between. In this sense, mercantilist fractional banking (essentially fiat banking) was the precursor of the welfare state.
Couple this with the Supreme Court's view that corporations are persons and various eviscerations of the Constitution that gave the federal government enormously increased powers and supported more direct voter participation and the American exception gradually subsided. America had been born a republic, but during the 20th century it in many ways began to resemble the European system that its founders had detested. What was lacking of course was a full-scale regulatory state of the kind that Germany had begun to assemble in the 19th century, aped by Britain. This lacunae began to be addressed in the 20th century as the federal congress became more and more active.
Today, of course, the United States is synonymous with regulatory enterprise and has in fact plumbed its lower depths considerably...
Much has changed in the United States. But to maintain that America needs to reregulate to regain a sound financial footing is to ignore the basis for America's initial industrial success, which was firmly rooted in the free-market. While it is true that fiat-money (regular floods of paper money) can stimulate economies inordinately, the downside of such a system lies in its inevitable economic distortion...
Every few years another boom tempts people away from solid, useful employment into something much less certain. The system encourages speculation and professional rootlessness. The system also crashes regularly, giving rise to claims that private enterprise is flawed and must be regulated. In fact, there is a symbiotic relationship between central banking and the regulatory state, with one supporting the other. It is no coincidence that regulation became far more pervasive in the 20th century, which was also an era of increased central banking.
More and more people have little idea of what it was like to live in an unregulated environment...
The idea that the US Congress, and to a lesser extent other political entities throughout the West could have taken regulatory action to ameliorate the current economic crisis is a kind of elite promotion in our view. Regulation can make things worse but we have a hard time understanding how such governmental action can make life better.
Wednesday, July 28, 2010
Business and Self-Regulation
Case in point: The announcement last week by four oil companies - Chevron, ConocoPhillips, ExxonMobil and Shell - that they are setting up a $1 billion joint venture to design, build and operate a rapid-response system to contain spills as deep as and deeper than BP’s Deepwater Horizon disaster.
Their goal is a system that can start mobilizing within 24 hours of an oil spill. They hope to have it up and running within 18 months.
I suppose one might ask why oil companies didn’t do this before. But it seems a vivid contrast with the apparently hapless performance of the Minerals Management Service, recently renamed the Bureau of Ocean Energy Management, Regulation and Enforcement, which seems to have sat on out-of-date response plans for years and which was not able to call in equipment and personnel to respond to the April 20 BP spill for weeks or months...
Consider Underwriters Laboratories, founded in 1894, whose UL stickers come attached to regulator products. Or the Society of Automotive Engineers, founded in 1905, which sets standards for the automobile and other industries.
Government hasn’t had to step in because UL and SAE work well without them. Federal regulators couldn’t plug the BP well. The oil companies’ joint venture promises to be able to do so.
Another case in point, which is different and more diffuse: the “capital strike.” In the wake of the uncertainty raised by the Obama Democrats’ huge increase in regulations and pending increases in taxes, businesses are sitting on cash and not hiring, banks are buying Treasury bonds and not lending, investors are not investing and consumers aren’t buying. The economy languishes...
Two lessons seem apparent here. One is that private firms can do things government regulators can’t do. The other is that if you choke the golden goose enough, it stops producing eggs - and you have to get your hands off its neck.
Monday, June 28, 2010
Saturday, March 6, 2010
Sunday, January 31, 2010
Wednesday, December 30, 2009
Monday, August 3, 2009
Saturday, August 1, 2009
Saturday, May 23, 2009
Thursday, May 14, 2009
Friday, October 24, 2008
Government Regulation to Blame
When government distorts incentives, the invisible hand can become a fist. Many observers, including most politicians, have blamed the ongoing financial crisis on the "free-market greed" supposedly unleashed by the "reckless deregulation" of the financial system. Such arguments are rhetorically powerful, but they don't stand up to scrutiny. If they go unchallenged, however, they could hasten a "solution" that's worse than the problem. That's why it's so important to examine the record. What it shows is that government regulations and other interventions – not greed – are the major cause of our current problems...
Firms are profit seekers, but they will seek it where the institutional incentives signal profit is available. In a free market, firms profit by satisfying their customers, investing wisely, and making prudent loans. Regulations, policies, and political rhetoric can change those incentives...
To call the housing and credit crisis a failure of the free market or the product of unregulated greed is to overlook the myriad government regulations, policies, and political pronouncements that have both reduced the freedom of this market and led self-interested actors to produce disastrous consequences, often unintentionally...
Fueling this speculative fire was the Federal Reserve, also a government-sponsored organization. The Fed moved interest rates to extraordinarily low levels beginning in 2001. The additional credit it provided artificially lowered the cost of mortgages and dramatically accelerated the housing boom begun in the 1990s. Did people suddenly get greedy in their pursuit of McMansions, second homes, and flipping homes for easy profit? Yes, but only because abnormally low interest rates made it foolish not to be. This was hardly a failure of free markets or greed. It was the predictable consequence of government distorting the interest rate...
Good intentions are not enough in designing public policy. Regulations designed with the best of intentions are likely to lead to more crises if they distort incentives and thereby cause individual "greed" to undermine economic growth and harm millions. History is full of examples of politicians adopting short-run solutions without seeing the harmful long-run consequences. Today, the calls to "do something" are loud. Yet amid the cacophony, there are a few voices urging not more, but less; not faster, but slower; not short term, but long term; not intent, but outcomes. Those are the voices we should heed, because if we had listened to them 15 or 20 years ago, we might not be where we are today.
Steven Horwitz is a professor of economics at St. Lawrence University.
source
Friday, October 3, 2008
The Pretense of Regulatory Knowledge
Advocates of the free market are sometimes parodied for their seemingly all-purpose answer to any problem: Let the market handle it. What may sound like a simplistic answer, however, is actually the most complex prescription imaginable. In the modern world, the workings of any particular market are so complicated, they are beyond the grasp of mere mortals. Moment by moment, day by day, so many subtly interrelated decisions are made by so many people worldwide that no individual or group could possibly understand the big picture in any detailed way. So there is nothing simplistic about proposing the market as a solution to an economic problem. It’s short way of saying: let the multitude of knowledgeable people seeking profit, risking their own money, and responding to incentives find a solution based on persuasion not force. Translated that way, it sounds like a promising approach.
Ironically, those who don’t appreciate markets are in fact the ones who offer a simplistic, even empty alleged solution to economic problems: government regulation. That phrase is uttered like an incantation, the magical answer to all doubts about how, in the absence of fully free markets, problems would be solved. The irony is that while “let the market handle it” can be unpacked and made specific, “regulation” cannot. It can only be interpreted this way: Appoint a czar or a committee to somehow watch over things, and all will be well...
But chanting “regulation” and “oversight” is not a solution to anything. It raises more questions than it answers. Even if we assume the regulatory body would be populated by honest, disinterested people (a wild assumption, we should realize by now), how would they know what to do? As noted, markets are complex beyond imagination. One may have a great deal of knowledge about one’s own sliver of a given market, but that would count for nothing were one called on to regulate the whole thing. Sure, the committee could collect data. But to what avail? Data are history. By the time it is collected, it is old...
In opposing government regulation, no free-market advocate believes the public should be left to the mercy of reckless speculators, short-sellers, and the like, whose activities have the potential to harm bystanders. The public does indeed need protection. What the free-market advocate understands, however, is that regulation is not protection but merely a shoddy, deceptive substitute for the only real protection available: market discipline.
read the entire essay
Tuesday, September 30, 2008
Monday, September 22, 2008
End of Investment Banks
The move allows Goldman and Morgan to scoop up retail banks and to streamline their borrowing from the Federal Reserve. The shift also is aimed at removing them as targets of nervous investors and customers, who brought down their former rivals Bear Stearns, Lehman Brothers and Merrill Lynch this year.
But it also puts Goldman and Morgan under the Fed's supervision, increasing the agency's regulatory oversight and possibly forcing them to raise additional capital. As banks, Morgan and Goldman will be forced to take less risk, which will mean fewer profits.
And it brings to a close the era of the Wall Street investment bank, a storied institution that traded stocks and bonds, advised mergers and showered lavish bonuses on its executives.
read the CNN story