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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.
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?”
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.