Representative Mark Amodei (R-NV2) was pleased to vote for the so-called “Choice Act,” which rolls back some of the reforms enacted in the wake of the Wall Street casino debacle and subsequent recession as the Great Wall Street Derivative Monster collapsed like an air dancer in a Nevada wind. The theory behind this ridiculousness is that regulations restrict commerce, and a restriction of commerce diminishes wealth, therefore diminished wealth impacts investment, ergo diminished investment equates to a limit on economic growth. Not. So. Fast.
Yes, regulations restrict “commerce,” but only some kinds of “commerce,” generally the fraudulent variety. I am free to issue shares of stock in my corporation — however, I am not free to issue shares of stock in the Reese River Steamboat Company. Some sharp soul offered shares of this highly dubious company during one of the mining booms, and assuredly some investors were cheated by this obviously fraudulent sale. We have regulations to prevent this. We have laws and related regulations to prevent insider trading, to prevent “blue sky” stocks, and to reduce the possibility investors are cheated by financial products which promise high returns with little or no risk. Sometimes the adage, “If it looks too good to be true, it probably is,” isn’t quite enough to prevent mismanagement of other people’s money.
Recently, Wells Fargo was found guilty of violating regulations and laws relating to the creation of phony accounts, the fine totaled a massive $185 million and some 5,300 individuals were fired. [NYT] The situation was all the more egregious because the bank was ripping off its own customers. $100 million of that fine was the highest penalty the CFPB ever levied against a financial institution. This is precisely the agency the so-called “Choice Act” wants to ham-string.
The “Choice Act” would eliminate the regulation regime which was intended to prevent the collapse of banking institutions. Just for the record, let’s look at the list of US institutions that either disappeared or were acquired during the Great Recession: New Century, American Home Mortgage, Netbank, Bear Stearns, Countrywide Financial, Merrill Lynch, American International Group, Washington Mutual, Lehman Brothers, Wachovia, Sovereign Bank, National City Bank, CommerceBancorp, Downey Savings and Loan, IndyMac Federal Bank, HSBC Finance Corporation, Colonial Bank, Guaranty Bank, First Federal Bank of California, Ambac, MFGlobal, PMI Group, and FGIC.
If we extrapolate the “let the market sort it out” argument to its conclusion — it’s acceptable to allow banking institutions to over-extend themselves to such an extent that they will ultimately collapse; that’s just the market “at work.” Fine, if the impact of such deregulation solely impinges on the banking institutions themselves, but that’s not what happens in the real world. In the real world such supposedly safe havens (money market accounts) were in peril:
“A little over a year ago the collapse of Lehman Brothers sparked heavy redemptions from the dozen or so money market funds that held Lehman debt securities. The hit was particularly hard at The Reserve Fund, a money market fund that had a $785 million position in Lehman commercial paper. Soon The Reserve saw a run on its Primary Fund, spreading to other Reserve funds. Reserve tried to furiously sell its portfolio securities to satisfy redemptions, but this only depressed their values.
Despite its best efforts, The Reserve Primary Fund couldn’t find enough buyers and on Sept. 16 the unthinkable happened. The Primary Fund “broke the buck,” meaning that the net asset value of the fund, $1, fell to $0.97 a share. It was only the second time a money market fund, which are commonly thought of as guaranteed, broke the buck in 30 years.”
Meanwhile in Nevada, unemployment soared to 14+%, the state endured being listed among the states with the highest levels of foreclosures, and it took until 2016 for the state to recover almost all the wealth and jobs lost in the aftermath of the deregulated Wall Street casino debacle. [LVRJ]
Deregulation may sound fine when discussed in theoretical, ethereal, terms, it obviously didn’t work in the real world in which Bear Stearns, Lehman Brothers, WaMu, and IndyMac collapsed, and where the Reserve Primary Fund “broke the buck.”
The questions someone should ask of Representative Amodei, and other “deregulators,” are:
(1) Do you favor a return to the regulatory environment in which investment banks were allowed to over-extend and engage in risk taking far beyond their capacity to remain solvent?
(2) Do you favor a regulatory environment in which those being regulated are allowed permission to “self regulate,” without oversight from governmental agencies and institutions?
The second question is particularly important because it addresses the question of trust in commercial relationships.
The most basic of all commercial relationships is the simple act of buying and selling. I have something to sell, and there is a potential customer for my goods or services. This is another point at which deregulation can easily become part of the problem. If I am selling food, there are self-evident reasons for regulating the conditions under which that food is prepared and served to the general public. Deregulation invites disasters of the public health variety. We trust that the food offered for sale by restaurants and groceries is safe for consumption.
If I am selling financial products does the buyer (consumer) have the expectation that my product is what it purports to be? That it is backed by sufficient funds for ‘redemption?’ That it conforms to the standards of acceptable practices? And, if it doesn’t, are there avenues of redress such that the consumer can be compensated? In short, can the customer be assured that he or she can trust the product?
If I am selling a manufactured product, can the consumer trust that the item was produced in a safe way, that the product will perform as advertised, that the product will not create a hazard in my home or office? There are voices on the fringe of Free Market thought calling for the abolition or at least the restriction of the Consumer Product Safety Commivoicssion, who would love to see the return of Caveat Emptor, but most reasonable people agree that regulations pertaining to product safety are conducive to commerce, NOT restrictive. A vehicle which meets or exceeds safety standards is more likely to be my choice than a vehicle which does not. A vehicle which meets or exceeds fuel consumption standards is more like to be my choice than one which does not. In short, regulatory standards benefit the best products (and their producers) while those who do not meet the standards have a more difficult time at the point of sale. Now, the question becomes — do we want a regulatory environment which benefits the marginal, the inadequate, or perhaps even the corrupt producers?
Unfortunately, the deregulatory voices are answering this question in the affirmative.
Is this really the answer Representative Amodei and his cohorts want to give to constituents in the Second District? In the US? To our customers around the world?