The common narrative over the financial crisis several years ago has been that greedy companies, through no regulation or supervision, ran roughshod over the global financial system…and made short-sided and poor decisions that nearly brought down the world as we know it. Without strict new regulatory guidelines from the government, it is claimed such a problem would happen again. In fact, defenders of this narrative go even further to make the unsubstantiated claim that if bailouts for “too big to fail” companies weren’t done as they were, the system would have been torn asunder with no hope of recovery. It is indeed a powerful belief…one that has given birth to such regulatory behemoths like the Dodd-Frank law which has set thousands upon thousands of regulatory guidelines (many still being understood as I’m typing this post) upon the nation’s financial institutions. Unfortunately, all that this belief has done is perpetuate the same issues that brought the financial crisis upon us in the first place, and have in fact rewarded the greedy/too big to fail companies that they were supposed to contain. How could that be?
Laws like Dodd-Frank seem good intended on the surface, but in fact do the quite opposite of what they purport to do. Complying with thousands upon thousands of ever-encompassing regulations is daunting for many industries due to a simple reason…it costs a whole lot of money, management, and resources to understand and follow them. Therefore, much time is spent away from doing the actual jobs and operations that such businesses are tasked with doing…which can involve hiring labor among other things. Not to mention that there is an advantage that these rules and regulations offer to a particular group…the big businesses. After all, they are the companies with the money, management, and resources to be able to handle such a laundry list of regulations…something that companies like your typical “mom-and-pop” store or other medium-sized businesses won’t be able to. Such companies are also more likely to have a handle in the crafting of said laws and regulations and therefore will be better equipped to lobby government officials about such laws
than others. Such laws are an undue burden on economic livelihood and therefore are not worth the thousands of tree pulp they are written on.
Not to mention that it was this kind of government intervention in managing the economic decisions of companies that played a big part in why we got into the mess. Laws like the Community Re-investment Act of 1977 and the Housing and Community Development Act of 1992 encouraged and promoted companies and organizations to offer housing deals and financial programs to borrowers and customers that were of a loser investment grade than was traditionally acceptable. Companies involved within this plan were the much maligned Fannie Mae and Freddie Mac. Ultimately, despite many reports and warnings of what such concepts were leading to, the market became saturated with what came to be known as “subprime” mortgages which were plans that had no hope of being repaid if the bottom fell out of the market, which it eventually did. Couple that with financial regulatory burdens and mark-to-market accounting rules, and ultimately the situation ballooned into the greatest economic downturn since the Great Depression which hasn’t completely left us.
Perhaps this demonstrates that further overbearing intervention within the economic and financial system will do more harm than good. In fact, despite conventional belief of there having been no “sufficient” regulation, regulatory agencies such as the Securities and Exchanges Commission exist to put a lid on the very things that led to the crisis. Despite all talk of their importance, they all failed to do so. If anything, the steps our leaders have done over the years show that we are far from a true market/capitalist system, instead being a full-on mixed economy. If we are to approach such a system, instead what should be done is to look at the regulation we already have on the books. We might well find that much of it is unnecessary. What should only exist are those regulations that specifically punish those companies and
individuals that intend or do commit fraud. Also, what should be removed is the concept of intervening through the implementation of bailouts. Capitalism at it’s core involves risk/reward. Those individuals and companies that succeed will indeed go far, but those that fail should be allowed to suffer from their bad decisions and business models, and go through traditional bankruptcy methods as every business would do once in that situation. To interject and mess with such a system invites cronyism and protectionist policies that will only serve to protect one group of actors against others…unless we are to seriously consider bailing everyone out who has potentially suffered or will suffer, which is impossible. Indeed great hardship would arise from such a step, but the failing of bad companies would allow other sectors and segments of the economy, or smaller businesses within the same sector as those failing companies, to grow and attain greater market share than they did before, which would offer new avenues from which the greater economy could grow out of the doldrums of recession. Contrary to the popular narrative, despite all the hardships that we have endured over our existence, human ingenuity always has a knack for bouncing back. All we have to do is get out of it’s way.