Deregulation, a term which gained widespread currency in the period 1970-2000, can be seen as a process by which governments remove, reduce, or simplify restrictions on business and individuals with the intent of encouraging the efficient operation of (private) markets. A practice widely supported by businesses and many economics theorists, it is also heavily criticized by some individuals and groups (especially but not only in the left political spectrum and the anti-globalization
movement) who charge that the removal of regulations can lead to negative outcomes such as removed protections for workers and consumers, ecological damage and anti-competitive practices by large market players unrestrained by politics.
Joe Biden was on last night saying that the "environment of deregulation backed by John McCain" caused this financial meltdown. I, frankly, have no idea what that means but I do know it sounds good and carries an excellent populist message. I also know that I almost never hear any politician point a specific regulation that they think contributed to the crisis or furthermore how that regulation actually contributed to the crisis. A few politicians have isolated the 1999 bank deregulation bill, but most of those have no idea what it did, let alone how it contributed to or created the crisis. If we repeal this bill, your local bank will ONLY be your local bank. You won't be able to get a mutual fund through them or buy insurance through them. Furthermore, your investment advisor you won't be able to offer you a money market account, insurance, or a whole host of other products.
I, for one, am not against regulations en masse. It really depends on what regulations someone proposes. What really scares me about the current environment is that politicians are railing against the concept of deregulation, and yet, none will tell us specifically what regulations they'd like to implement. We'll only find that out later when it is entirely too late.
The irony is that there are few businesses more regulated than mortgages. Everyday folks feel the burden of mortgage regulations everyday. It's regulation, or should I say a plethora of regulation, that causes closing documents to be more than one hundred pages. In fact, ironically enough, it is the hyper pursuit of regulations that make it easier for an unscrupulous mortgage professional to rip off the borrower. That's because it is easier to hide the important document among a stack of one hundred useless ones.
I am not against all mortgage regulations. For instance, here in the state of Illinois we have one regulation that limits the amount a borrower can be charged by all parties to 5.5% of the total loan amount. This is sensible because the scum in my business would charge 25% if they could and there would be plenty of uneducated borrowers that would have no idea just how badly they would be ripped off. That said, this regulation can get dicey when it is coupled with an FHA loan. That's because the federal government sticks their own 1.5% fee on all FHA loans. As such, you are now immediately down to 4%. Now, imagine attempting to do an FHA loan for about 100k when normally closing costs are about $2500. The mortgage broker is now left with crumb after everyone else is through. I have good experience with this as I attempted to do a 70k FHA loan and made about $300 in the process. It's unlikely those that created this 5.5% law knew anything about the way FHA is structured, and they created a hornet's nest for any mortgage professional attempting to do one in Illinois.
That said, this crisis was perpetuated by new sophisticated financial tools like credit default swaps and extremely excessive leverage. Both of which could have been avoided by sensible regulations in both areas. Of course, the players in each field didn't understand the dangerous nature of their own actions, and yet, we are supposed to believe that government would have been in a position to recognize it. Furthermore, regulating swaps and leverage now is pointless. Swaps are nearly non existent and the market has long ago 'regulated" lower, much lower, leverage. In other words, banks don't allow other financial institutions to borrow at such low margin anymore on their own. Regulating is now overkill. The market has created its own regulation.
Finally, and most importantly, demonizing deregulation misses the point of this crisis entirely. The main problem wasn't a spirit of deregulation but rather a spirit of a lack of enforcement of the most basic regulation of all, FRAUD. The heart of the problem is that far too many of these underlying mortgages were done fraudulently. These so called stated loans, sometimes called liar loans, were almost entirely done through fraud. Incomes, assets, and rental incomes were lied about en masse. No new regulation needs to be added to prevent fraud. Fraud must be enforced. Regulations are useless if they aren't enforced. Had fraud been enforced with any sort of vigor we wouldn't have all these toxic loans since the loans were done illegally. They were done illegally so often because the government created an environment in which the fraud was almost entirely overlooked. Rather than a commitment to new regulations, I say let's make a commitment to proper regulations of the ones we already have.
Demonizing a concept during times of economic crisis is popular and it's also dangerous. It's easy to pick on deregulation now. Times are tough, the situation is complex, and so "deregulation" is an easy target. The flip side, in my opinion, is much worse. Regulations make it difficult to conduct business. A far too great zeal for regulations make it impossible to conduct business.
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