What Happens When You Build a Financial System Around a Government Regulation

Here's the tragic tale of what happens when you build an entire economy around an artificial monopoly created by government regulations.

Ride-hailing apps such as Uber and Lyft have been so disruptive to New York City's taxi industry, they are causing lenders to fail.

Three New York-based credit unions that specialized in loaning money against taxi cab medallions, the hard-to-get licenses that allow the city's traditional cab fleet to operate, have been placed into conservatorship as the value of those medallions has plummeted.

Just three years ago, cab owners and investors were paying as much as $1.3 million for a medallion. Now they are worth less than half that, and some medallion owners owe more on their loans than the medallions are worth.

"You've got borrowers who are under water. This is just like the subprime loan crisis," said Keith Leggett, a credit union analyst and former senior economist at the American Bankers Association.

Just in reverse.

The taxi medallions were an artificial government monopoly. Their prices soared because the government limited the number of taxis and consumers had no other ride hailing option. When Uber, Lyft and similar services offered cheaper and better options, the monopoly plummeted. And the credit unions that had been set up to finance the artificial monopoly began going with it.

Blaming the free market for the collapse of a corrupt niche economy that existed to drain anyone who wanted to take a taxi is perverse.

Should the public be forced to endure a monopoly? That's the question being put forward in these wars. The hotel industry is fighting to destroy Airbnb in New York. The motives are the same. Government regulators and industries ally to create monopolies. Industries cash in and governments get control. Airbnb and Uber are so scary because they take apart the hybrid alliance of these niche economies.