It’s the Over-Regulation, Stupid!

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Consider one of the points made by the editor of a major publication of the Left (The Nation) recently writing in a major publication of the Right (the Wall Street Journal Editorial page, November 5: An Undeserved Win for the GOP) analyzing the Republican victory in the November 2010 mid-term election:

“By rescuing the big banks and failing to place demands on them, the White House economic team, led by Larry Summers and Tim Geithner, ceded populist energy to the tea party.”

Katrina vanden Heuvel is correct that many voters are opposed to the notion, begun under the Bush administration, of ‘too big to fail’ which leads to bailouts for the biggest established firms at the expense of everyone else (including smaller, more dynamic and innovative companies that might deliver better overall value to the public). But what does she mean by ‘failing to place demands on them’? Is she blind to the fact that the government has been increasingly (and inappropriately) over-regulating banks for decades now?

The Community Reinvestment Act of 1977 gave the federal government an unprecedented foothold in micromanaging the business practices of lenders, telling them to whom they should lend, how much and on what terms. In the 1990’s the power of this act were amplified, with banks having to establish racial and ethnic quotas, both in their lending and in their hiring practices, and ask permission before merging or opening new branches. In 1993 the Department of Housing and Urban Development (HUD) began suing banks over race-based statistical disparities. Banks were damned if they did (‘predatory lending’) and if they didn’t (‘redlining’, ‘disparate impact’). Above all, they were encouraged, as a Mafioso understands that term, to discard centuries of prudent lending standards and due diligence in favor of ‘affordable housing’ – a.k.a. sub-prime mortgages, ‘liar loans’ and flipping the risk to Fannie Mae, Fredie Mac and by extension, you and me the taxpayers.

All of this doesn’t qualify as ‘placing no demands’, and in fact contributed mightily to the mortgage market meltdown.

What demands would Ms. vanden Heuvel make on the banks? She answers that a few paragraphs later:

“If, as University of Massachusetts economist Robert Pollin and others argue, the single most important reason for the failure of economic recovery is that private credit markets are locked up, especially for small businesses, then the federal government could help by expanding existing federal loan guarantees by $300 billion. Meanwhile, excess cash reserves held by banks—now estimated at an unprecedented $1.1 trillion in Federal Reserve accounts—should be taxed an initial 1%-2%. Mr. Pollin estimates that this combination could generate about three million new jobs if it succeeds in pumping about $300 billion into productive investments. This plan should get bipartisan support.”

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  • jbtrevor

    Excellent analysis…

  • Lance Winslow

    Yes, the reality is that over regulation is the real problem, academics don't get it because they've never run a business – those who can't teach syndrome. Further, why would a small business want to go into more debt right now to expand considering the health care law rules, and all the uncertainties of what ridiculous regulation these bureaucrats might come up with next.

  • Dan

    From all that's happened over the decades, I believe there needs to be a 4th Monkey. Traditionally, we've had the the See No Evil, Hear No Evil, and Speak No Evil monkeys. The 4th should be one that holds a wrench in his hands sitting next to a set of gears. Fast forward to the 4th monkey inserting the wrench and then crying, "Foul".

  • USMCSniper

    Yaron Brook: “Most people believe the Great Depression was caused by an ‘excessively’ free market–and they regard the massive expansion of government intervention under FDR as its cure. But as many economists have demonstrated, it was government intervention that caused and exacerbated the Depression–from the massive tariffs of Smoot-Hawley to a series of disastrous interest rate hikes by the Federal Reserve to antibusiness measures such as the National Recovery Act. “Few acknowledged this at the time, however. The Great Depression–a failure of government intervention–was called a failure of capitalism, and was used to justify even more government intervention. We are seeing this same process repeat itself today. “There is overwhelming evidence that our current crisis is the result primarily of government intervention in the economy, from the Fed’s inflationary policy of keeping interest rates artificially low to the creation and regulatory coddling of Freddie Mac and Fannie Mae to the government’s quasi-official policy of bailing out large financial institutions deemed too big to fail. But despite such evidence, this crisis is once again being blamed on too little government regulation and control of markets.

  • Patrick Henry

    For some time I used to give the benefit of the doubt to the left, deciding that they're misinformed, or simply stupid. Today, I'm convinced that they know exactly what they're doing. Destroying capitalism from within and eventually replacing it with some form of facism or socialism as their objective – always has been, always will.

    Its the equivelant of learning that your neighbor really did try to shoot you, it wasn't the gun accidently going off for the third time. The importance of this understanding has to do with my actions going forward. I can't resign myself to hoping that none of this will effect me or my family. I must take full responsibility for my situation.

    The question for defenders of liberty is, 'How do we educate more people, more quickly?' and 'How do we fight back more forcefully against people who would enslave us, without getting ourselves arrested or causing a backlash and hastening the end?'

  • Jim

    If we had regulation the bogus bond rip would never gotten as far as it did.

    A means of shedding some light on the dark economy was proposed by the head of the FCTC. She was ignored and disparaged by the banking industry . They claimed shedding light on the hidden trading would bring about economic collapse.
    This rejection occured during the Clinton administration.

  • Doug

    The CRA zombie lie again. So tiresome.