As a graduate lecturer in Economics I will go you one step further and say unequivocally that it was the OVER-regulation of our financial industry that precipitated our current depression and probable economic collapse. In this case, government is the problem; not the solution. So it terrifies me that 85% of those polled think we don't have enough financial regulation.
It's fascinating that somehow China can rule 1.5 billion people with an iron fist for only $300 billion a year while the USA spends over $6.5 TRILLION a year to govern 300 million supposedly free people ... something just doesn't add up!
As a graduate lecturer in Economics I will go you one step further and say unequivocally that it was the OVER-regulation of our financial industry that precipitated our current depression and probable economic collapse. ...
Jerry, the situation you described was the result of regulation that incentivized the mortgage industry to make high-risk loans to people who could not pay them back. That was one of the major components of the whole Fannie-Freddie scandal. The government decided that it was unfair that people had to qualify for loans, so they provided financial incentives to lenders who loaned money to un- and under-qualified borrowers. They also provided incentives to lend on properties that were imprudent investments in the name of preventing "red-lining" of areas with falling property values.
When the government gets into the business of social engineering through regulation it always spells disaster. The saying "a fool and his money are soon parted" goes back to the 16th century. In a truly free society, we must allow fools and their money to be parted. Foolish lenders and foolish borrowers alike should go broke, with no government agency stepping in to protect either one from the other ... or most of all, from themselves.
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Idgpangeo, you may have noticed that I used the term "incentivized"; not forced. The feds strongly incentivized imprudent loan practices, but they did not force any lenders to do so. Instead, greed did the rest. Under these programs, greedy individuals borrowed money they knew they could not repay from greedy lenders who would never have loaned to them under normal market conditions. The lenders who took advantage of these programs grew rapidly, attracting more Wall Street capital, while the lenders who did not do so, just plodded along and watched their capital markets dry up. Anyone could see it was a house of cards just waiting to tumble, but these were government loan programs backed by "the full faith and credit of the U.S. government". It wasn't long before it was considered imprudent not to participate in these programs. Directors and CEOs who did not found themselves out of lucrative jobs in the lending industry ...
Now, it's easy to say that lenders who participated in these programs were "evil and greedy" for doing so. But it was really the equivalent of taking a tax credit for insulating your attic or buying a CFC-free refrigerator. All the "experts" were tellling them they were fools not to. The government dangled the carrot because they wanted the lenders to take it. And they would have dangled bigger and bigger carrots until they got what they wanted.
And, yes, everyone bleeds in a recession -- whether it is cause by market corrections or government manipulation. I also teach graduate finance and if there was a way to avoid collateral damage from market corrections I would tell you. There isn't. The best you can do is diversify your investments. But life is a risk. Only death is perfectly safe.
Naturally, there should be laws against criminally negligent behavior, whether by individuals or banks. Two issues are involved in that: (1) who should have jurisdiction? (2) where is the line to be drawn between "criminal" and "legal" behavior?
Using your analogy of speed limits, do we want the FBI, CIA, NSA, and 27 other federal agencies all policing our streets looking for speeders, or should that be a matter for state or local jurisdictions? And secondly, how closely do we regulate the undesired behavior? Do we simply make it illegal to exceed a certain speed in a given area, based upon potential exposure to accidents? Or should we regulate the angle at which the driver's seat is positioned, where the driver's hands are positioned on the steering wheel, how often and how many degrees should the driver swivel his/her head scanning for possible accident risks, how loud the radio can be playing in the car, whether other passengers can be talking while the vehicle is in motion, the maximum PSI at which the accelerator can be depressed, etc., etc.?
We've essentially done the latter to almost every industry in this country and wonder why our economy collapsed.
I remember being indoctrinated in school that "laissez-faire" was wrong and that "caveat emptor" exposed me to exploitation by evil, greedy businesses. Now with the benefit of 40 years work experience, a doctorate, and 12 years of genealogical research I'm pretty much convinced they were lying to me. The American economy, and personal wealth in particular, has been in steady decline since 1970 -- oddly enough, the same time that America began its shift from the Industrial Era to the Bureaucratic Era.
You asked what happened after the S&L collapse and I also seem to recall that the government cherry-picked a few CEOs as scapegoats and jailed them. Then, as now, it's Congress that belongs behind bars ... oh, but wait, they voted themselves immunity from prosecution, didn't they?
Good question! A lot depends on the type of business. I think there has to be a compelling need for any regulation of a business. And when there is a need, is that need local, regional, or national in nature. Going back to the speed limit. The need is local -- the safety of people exposed to hazardous driving. So the ordinances and their enforcement should be at the local level. Taking that analogy to a business ... what about a hardware store would need regulation? If it sells dynamite, then maybe something to do with safely handling, displaying, and storing dynmate -- i.e., local. If the local citizens want to impose a sign ordinance, so the hardware store doesn't raise a 2-acre neon sign that keeps the whole town awake all night, fine -- because the local store owner gets an equal vote with all his neighbors in local matters, and they are ultimately his customers, so he's got an incentive to keep them happy anyway.
Now let's look at a lender, since that's what started this discussion. What needs to be regulated about a lender? Interest rates? If they are too high, no one will do business with them. If they are too low, they'll go broke. No regulation needed there. Who they loan to? What if they won't lend to minorities? They discriminate! If the minority customers will pay profitable rates and are reliable, won't somebody come to town and make a nice living lending them money? I will! So is regulation really needed, even to prevent discrimination? Maybe not. Financial stability? What if the lender over-leverages? They'll go broke. Problem solved. New, smarter lender will come to town if there's a market.
Ah, but what if the lender grows so big that its failure could damage the entire local, state, or national economy? In a free market, competition prevents that from happening, doesn't it? If there's that much profit to be made, many more competitiors will enter the field and prevent any one lender from becoming that large. It's only when the government steps in and eliminates choices -- by establishing minimum or maximum lending rates, entry restrictions, etc. -- that we have to worry about a company getting so big it can topple an economy.
As you can see, I'm clearly not in favor of very much regulation. I want to be free to make both good and bad decisions and live with the consequences of each. And I think that the majority of regulation of every kind should revolve around public safety, rather than protecting stupid people. As an economist, I have trouble justifying the concept of punishing the 84% of people who are reasonably smart in order to protect the 16% who are stupid. The cost-benefit simply isn't there.
I am willing to live with economic reality of a free market -- and that reality is that 3% of the populace will become fabulously wealthy, 13% will be upper-middle class and live well above the average, 68% will live modestly, 13% will be working poor, and 3% will be charity cases ... but all (except those very few with diminished capacity due to birth defect, injury, disease, or trauma) will end up where they end up by their own choice. And I recognize that not everyone would agree with me.
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