The Perils of Regulation - 1

Government pushing businesses around causes corruption.

We always get a lot of talk from liberals about how the government has to step in and regulate everything in order to "protect the people."  The Dodd-Frank bill cutting the fees banks were permitted charge merchants whenever people used debit cards is only the most recent example of consumer "protection" in action.  This was supposed to help customers.
As one would expect, merchants simply pocketed the fees without cutting prices.  The law transferred billions of dollars from banks to merchants, which benefited consumers not at all.

However, the end result wasn't a wash for the consumer; it actually made things much worse.  Taking billions from banks led them to increase fees on all kinds of services we'd been getting for free.  Free checking accounts are going away because the banks have to get money from somewhere.

The bottom line?  Government interference "to help consumers" actually raised costs for everyone.  The savings that were supposed to go to customers simply went into the pocket of the merchants; then, banks raised other fees to make up for the fees that were forcibly cut.  We the consumers are poorer than before the government "helped" us.

Not all the new bank fees are being accepted; the Bank of America tried to impose a $5/month fee on debit cards but backed down.  This sounds like a good thing for consumers, and it is - but because of the loss of revenue, B of A is laying off 30,000 employees because they can't afford to pay them anymore.

So much for protecting the people from those evil, greedy bankers.  Those billions the banks used to get from merchants have to come from somewhere, and we customers are the only ones whom they can tap.

Occasionally newspapers talk about the cost of complying with government regulations.  These costs are always passed on to customers, of course, unless the business goes broke - in that case, the ex-employees and stockholders pay the cost.

It’s difficult to estimate the total cost of complying with all the government rules and regulations.  As of 2002, the Office of Management and Budget estimated the cost as between $520 and $620 billion, though other estimates went as high as $843 billion annually.  This is broadly consistent with the Wall Street Journal estimate that regulatory costs had grown to $1.75 trillion in 2008.

When government takes too much out of the economy, society collapses, but nobody worries much about that until it happens.

Although cost gets some discussion, very few organizations discuss the other down-side of regulation - the many opportunities for corruption.

Regulation Drives Corruption

The more complicated and costly regulations get, the more opportunities for regulators or elected officials to profit by doing favors.  This is particularly true of bank regulations which deal directly with money.

Banking and investment are so important to commerce and offer so many opportunities to gain wealth or damage the economy that governments always regulate these industries closely.  The stated purpose of financial regulation is to reduce fraud and to avoid the “boom and bust” cycles which seem to occur every 20 to 30 years no matter what we do.

The United States suffered a “Savings and Loan” crisis in the late 1980’s and early 1990’s during which 747 banks failed in spite of the regulations that were in place at the time.  Many banks had made high-risk loans which were backed by deposits in government-insured savings accounts.

When customers discovered they could earn higher interest than the banks were permitted to pay, savers took their money out of the banks and invested it elsewhere.  This sudden disappearance of their capital put the banks at risk of failing.  Many banks engaged in questionable practices to attract money to support their loan portfolios.

Lincoln Savings and Loan collapsed in 1989.  The federal government had to pay about $3 billion to cover savers whose accounts had been federally insured.  Charles Keating, who had been president of the bank, was accused of fraud.  During the investigation, it turned out that he had donated $1.3 million to five senators who became known as the “Keating Five.”

Lincoln Savings had been under investigation by the Federal Home Bank Loan Board (FHBLB), one of many government agencies who share overlapping responsibility for bank oversight.  The FHBLB believed that Lincoln Savings had made more “high risk” loans than were permitted by its regulations.  This turned out to be true when the books were examined after the collapse.

Unfortunately for the taxpayers, the FHBLB ended the investigation without taking any action against the bank, shortly after Mr. Keating’s “donations” to the five senators.

In talking to reporters, Keating said, “One question, among many raised in recent weeks, had to do with whether my financial support in any way influenced several political figures to take up my cause.  I want to say in the most forceful way I can: I certainly hope so.”

Despite months of investigation, Mr. Keating’s statements about the purpose of his donations, and the head of the FHBLB testifying that the senators had “subverted the regulatory process,” not one of the Keating Five was found to have broken any laws.  They all claimed to have performed ordinary “constituent services.”  Sen. McCain said, “I have done this sort of thing many times.”

The people who write our laws take care not to forbid their lucrative practice of selling favors in return for campaign contributions or jobs given to relatives or friends.  They claim to see nothing wrong in being paid to help favored constituents deal with the bureaucratic tangles they’ve created by the laws they pass.

We see political favors in the many Obamacare waivers which the Administration has granted to well-connected companies, unions, and other organizations, including the State of Maine.  Although this isn’t technically illegal because the 1,200 page law explicitly permits the government to grant waivers, the administration’s practice of allowing favored organizations to ignore the law makes a mockery of the concept of equal justice.

Questionable government behavior flows down to all levels of society.  Lack of virtue is visible everywhere and leads citizens to assume that government is irredeemably and fundamentally corrupt.  Senators who accept campaign contributions in return for letting banks take huge risks give police officers who fix traffic tickets the justification of thinking, “Everybody’s doing it, why not me?”

Corruption Through Complexity

At 1,200 pages, the Obamacare is long for a single law, but it's nothing compared to the many volumes of bank regulations.  The verbiage controlling banks is nothing, of course, compared to our overall tax code.

The more complex the law, the easier it is for regulators and politicians to do favors.  Our federal tax code is the most complex law imaginable, of course, so it offers even more opportunities for crooked dealing.

We saw that politicians cover for each other when not one of the Keating Five were found to have violated any laws.  It took huge amounts of public indignation to persuade the Democrat-controlled House of Representatives to try Rep. Rangel, former chairman of the committee that writes tax legislation, and Rep. Maxine Waters, who leads the Congressional Black Caucus, on charges of misbehavior which could result in their being expelled from the House.  Both of them asserted their innocence vigorously without the slightest sign of contrition.

Rep. Wrangel not only didn't pay income taxes on part of his income, he also extorted contributions to his favorite charity from businesses for whom he wrote favorable tax legislation.  The accusations that Rep. Waters had persuaded regulators to give money to bank in which her husband held stock were swept under the rug.  Rep. Wrangel was forced to apologize for his misdeeds, but that was all that happened.  Neither lost their seat much less spent any time behind bars.

Regulations which forbid profitable behavior offer rich opportunities for corruption.  Charles Keating knew that his bank would fail if he were forced to unwind his risky deals, so he bribed his way out of the investigation.

This article discussed regulations which tried to prevent risky behavior by banks, and why they can't work.  The next article discusses even worse risks imposed by the opposite type of regulation - rules which require banks to do deals which they'd rather not do.

Will Offensicht is a staff writer for and an internationally published author by a different name.  Read other articles by Will Offensicht or other articles on Business.
Reader Comments

So many of our problems could be corrected by taking away the ability of congressmen/women to do favors for their chosen few. It starts with an overhaul of the tax code. Anyone who has ever read any of my posts know that I fervently endorse the Fair Tax act. We would go from over 71,000 pages of tax code (read favors and exceptions for the well connected) to less than 140 pages. As for the banking regulations, no more bailouts, period. Let the free market do what it will do. No federally insured accounts. Let the banks buy their own insurance for their depositors, the insurance company would keep them more honest than a government employee ever could. The bankers would overwhelmingly make good loans. We only have to take a look at how bright government is in making loans to people with no or little income. Result? Our housing market is a shambles. No government intervention in commerce equals a vibrant economy.

November 14, 2011 9:39 PM

@ bassboat:

Quite right. The solution to corruption is not to take money from politics and thus limit the freedoms of the people. The proper solution is to take away the power of Congress to legislate on any such matters. The politician may thank the voter for his vote and contribution but must caution the voter that he is, indeed, entirely powerless to act on his behalf in any meaningful way.

I can go one better than the FairTax, though, and that is to abolish just about every federal agency not in existence before 1913 and ask the states to contribute 10% of their operating budgets to the federal government. The individual's relationship with the federal government drops to zero, and there is an immediate downward force on the amount of money that the states wish to contribute, since they're accustomed to getting money *from* D.C., not giving money to it. Citizens can then vote with their feet, putting more downward pressure on state and local taxes. States are thus free to do stupid things within their own borers, i.e. cheap, taxpayer subsidized tuition to illegal aliens, cradle-to-grave handouts, etc; but at the end of the day, when they go bankrupt, they've no one to blame but themselves, they've attracted a state full of ne'er do wells, and no other state is on the hook to bail them out. Result: restored freedoms, immediate recovery, and as close to permanent prosperity as is possible to achieve on this or any other planet in the known universe.

November 14, 2011 10:32 PM

NY Times talks about the fees, and they even hinted at WHY the banks need the money.

Even as Bank of America and other major lenders back away from charging customers to use their debit cards, many banks have been quietly imposing other new fees.


“Banks tried the in-your-face fee with debit cards, and consumers said enough,” said Alex Matjanec, a co-founder of “What most people don’t realize is that they have been adding new charges or taking fees that have always existed and increased them, or are making them harder to avoid.”

Banks can still earn a profit on most checking accounts. But they are under intense pressure to make up an estimated $12 billion a year of income that vanished with the passage of rules curbing lucrative overdraft charges and lowering debit card swipe fees. In addition, with lending at anemic levels and interest rates close to zero, banks are struggling to find attractive places to lend or invest all the deposits they hold. That poses another $8 billion drag.

Put another way, banks would need to recoup, on average, between $15 and $20 a month from each depositor just to earn what they did in the past, according to an analysis of the interest rate and regulatory changes on checking accounts by Oliver Wyman, a financial consulting firm.

For consumers, the result is a quiet creep of new charges and higher fees for everything from cash withdrawals at ATMs to wire payments, paper statements and in some cases, even the overdraft charges that lawmakers hoped to ratchet down. What is more, banks are raising minimum account balances and adding other new requirements so that it is harder for customers to qualify for fee waivers.

November 15, 2011 7:40 AM

I think we need to ask why banks "NEED" to make so much profit. What real function do they perform that deserves such reward. They serve no real direct function in society they do not make products they do not provide tangible services and yet suddenly they have a "RIGHT" to increase fees make up for a loss of abusive charging... why because they feel entitled to make double digit profit percentages for providing what is effectively a commodity service.

While all other industries have had to come to terms with the commoditization of there industries Bankers and especially wall street feel they should be exempted.

With new technology and the elimination of bank workers the banks have made it extremely cheap to operate so why cannot those saving be passed on to normal consumers, why should consumers have to pay so much for account services.

With regard to the law making process, The Fact is that each time a law is proposed it is usually to curb the excesses of industry be it pollution, product safety or Financial scams. The problem is that via the process of the passage of that law the lobbying efforts morf the law into something else all together, that is, a new way for those same people to scam more money out of people.

Don't get me wrong I'm all for removing laws but lets start with the removal of the proliferation of victimless crime laws that are constantly added to raise new taxes. How about law makers focus on removing those laws first.

How about lawmakers are required to prove that a law will measurably improve conditions for regular folks and that it will pay for itself with saving before they are allowed to put it on the statutes.

Finally, how about bankers come to terms with the fact that there "rolls Royce" lifestyles need to come to an end as they no longer provide a service that is anything more than a commodity in this modern world a commodity that is deserving of slim margins, just like the rest of us who work our tails off just to barely make the rent each week.

Also I think we need to stop with the non-sense that the government is suddenly the problem, it has been the problem since at least EisenHower warned us of it. What has changed recently is that the latest crop of "activitist" judges have been trying drive political funding even further in the wrong direction.

December 2, 2011 2:12 PM

Mark, think about what you're saying here:

"I think we need to ask why banks "NEED" to make so much profit."

Why is it your business, or anyone else's, how much profit anyone NEEDS to make? Every company and every individual has an absolute right to make as much profit as they possibly can, WITHIN THE LAW.

The real problem is that the perfectly legitimate and easily understandable antimonopoly laws that we've had for at least a hundred years are simply not being enforced. Any bank has a perfect right to charge whatever fees it wants - and you the victim have a perfect right to close your account and move it elsewhere. If competition were not artificially restrained, there would be other banks eager to earn your business by offering lower fees.

Unfortunately, the big banks have ganged together to misuse the unjust power of government so as to prevent this. Wal-Mart has long wanted to operate a bank out of their stores, and we can only imagine that it would be dirt cheap like everything else Wal-Mart does. Alas, the existing banks fought tooth and nail to use government power to prevent this, and thus far they have won.

WM is still trying though, more luck to them!

The only reason bankers are making so much profit is because the wrongful regulatory power of government has been used to artificially limit competition, by making the banking regulations so Byzantine that only the very largest and most well-connected firms can hope to gain the "necessary" regulatory approvals. In short, the problem isn't too little regulation, it's too much - and, of course, the "solution" we're offered is yet more of what created the problem in the first place.

December 2, 2011 3:26 PM


You are trying to get the government to regulate what you think is fairness. If the banks charge too much they will lose business or another alternative means will pop up, it's called the free market.

Allow me to draw a parallel. Let's say you open a lemonade stand and you are selling lemonade drinks for $4 a glass. Someone complains that you are charging too much for selling a commodity that only contains basic foods, sugar, lemons, and water. The government agrees with the complainer because he is a powerful person and has a lot of people that he has influence with on how to vote. The government decrees that $2 is enough profit for you to make and the law is passed. How do you feel about that? It is a micro example but one that should send a shiver up your spine to think that government can do that. Petrarch's example of WalMart is spot on with the government getting involved in the free market on the other end of your argument. Whatever government does with the markets it usually hurts someone.

If you think that banks charge too much don't do business with them. If you have to have them, search the market place for the best deal and construct your loan or checking account where it best benefits you. Then start a blog telling everyone how crummy some banks are and why, just make sure that you have your facts straight or your efforts will go for naught. The internet is a powerful place and can do a lot of good. Let this be your crusade but don't ever ask for government help. You will regret it.

December 2, 2011 4:13 PM
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