You Are About To See The Meaning Of Unintended Consequences

In Congress usual fashion, in their attempt to fix a serious problem, financial regulation, they screwed it up by inserting politics in ways that will cause the opposite effect they intended, and will cause harm. While everyone agrees there were serious lapses of good judgment and regulatory oversight in the period up to the crisis, and that there are some very good things in the bill, there are some parts that will cause real damage, and which will take a lot of effort to try to fix. Start with the consumer protection agency. This will have very bad impacts on the availability of credit, and, as a result, bad affects on economic growth. While there is no question many unscrupulous mortgage brokers, Wall St bankers and others did things that are purely stupid and totally driven by foolish short term greed, the fix is not to have Washington bureaucrats now making rules which will go over board the other way. If Elizabeth Warren is chosen, as the Democrats want, to run the agency, then it will be a real disaster. She is a left leaning zealot who has never held a real job. Listening to her in several TV interviews, is to listen to someone who thinks all of us in finance are crooks and that making a profit is immoral. Giving her that job will just imbue her ego with unlimited levels of arrogance which will lead her to want to show how she is in charge, and she is going to fix the world. It will be a disaster. She will make it extremely difficult and very expensive to provide credit to most consumers who are at the lower end of the economic spectrum. This will inhibit the economy and it will consign that strata of workers to permanently lesser opportunity to build their own economic well being. While I am not in favor of all the things that we saw with subprime and conduit lending, there is a needed balance which is very hard to find. Elizabeth Warren is so unbalanced that the outcome of the new regs will be terrible.

The other pending disaster is the well publicized derivatives laws forcing commercial companies to put up margin for everyday hedges. Our boy Barney slipped that back into the bill at around 2 AM when nobody was awake enough to notice. Barney also never held a real job, but despite almost everyone saying this would be very bad for the economy, Barney did it anyway. Now due to the way Congressional rules work, they will not fix this as they think it is too much trouble to do so. The trouble the rules will create are vastly worse.

This is two prime examples of why the economy is stalling and nobody wants to hire. The uncertainty of these two things is just one more prime example of why companies are afraid to hire, to expand and to do the things that rebuild economic strength. This is the sort of thing I was  referring to last week in my blog. Many say it is lack of credit for small business that is slowing recovery. My view is not that the banks don’t want to lend, it is that the lenders and the borrowers are so afraid of what Washington will do next to harm them, that they are strongly risk averse. If you are a lender with this regulatory bill about to hit you with higher costs, many more rules, and constant threats from the administration, various state AG’s and the media to pound you, why would you expose yourself and make new loans.

While there is likely to be economic growth, it could be much better if Congress and the administration would be much more centrist in their rule making and fix the egregious things, but encourage bankers to be bankers, not people who now have to check with their lawyers every morning to see what new things they cannot do.