Posts Tagged ‘regulation’

Credit Cards – Regulation for Regulation’s Sake

April 23, 2009

Today, President Obama is meeting with the CEOs of credit card companies, in an effort to protect consumers from rising rates and high fees.  Both the House and Senate are currently working on versions of such a bill.

I agree that a simple law, stating that credit card companies have to inform you when your rate increases and a chart showing the fees you could incur if you missed a payment or went over your limit, should be welcomed by consumers.  Right now, all you get is a little “average daily rate” table but it doesn’t tell you if your rate went up or down.  

However, the need for the government to enact laws to “protect” us are insane, and another example of the government meddling too much in private affairs.

Really, who’s fault was it that we ran up so much credit card debt?  Part of the blame has to fall on the card companies for giving cards with high limits to just about everyone.  The problem was that they were able to securitize their loans and sell them on Wall Street.  So the card companies were just intermediaries between the consumer and Wall Street.  They bore almost no risk.

A large portion of the blame has to fall on the Federal Reserve as well because their easy money policies allowed the card companies to just keep giving away money.  To stave off a recession after 9/11, the Fed kept rates too low for too long, pumping up a huge spending/debt fueled bubble.

However, to act like consumers were just taken advantage of is absolute nonsense.   Even the most uneducated person knows what credit cards are and how they operate.   The card companies did not take advantage of them and did not force them to spend.  Consumers wanted instant gratification and put items on their credit cards they could not afford, with the intent to pay it off later.  Rather than saving, they took out a loan for all sorts of purchases.

Instead of putting regulations on the credit card companies for the sake of regulation, the government should put simple laws in place to inform consumers, and then back away.  By placing all of these restrictions on the companies, we are not solving the problem, which was too many unqualified people having high limit credit cards.  

Obama needs to let the markets work, and let the companies set limits and interest rates in line with the risk of lending people the money.  Until the government stops propping up the securitized credit card debt and meddling in the credit markets, no one will have a clear picture of who should be able to lend and borrow.  The longer the government distorts the markets and meddles in private business, the longer the recession will last.

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Why Does Our Financial System Need Reform?

March 28, 2009

Treasury Secretary Tim Geithner and the Obama Administration are pushing for powers to regulate all aspects of the financial system.  These areas include hedge funds, private firms, and derivatives.  They also want the power to intervene with any company to make sure their collapse will not bring down the financial system.

While these ideas sound great, especially in the middle of the crisis we’re in, they are misguided attempts to intervene, when intervention is the last thing we need.  The perfect example of the need to get involved when it was not necessary was the Sarbanes-Oxley Act after the Enron case.  Everyone wanted regulation, so we strapped every publicly traded company with the huge burden of archiving every piece of data for 7 years.  However, the executives that were in charge of Enron were found guilty of fraud, and the company was bankrupted and dissolved.  The system for weeding out Enron worked, but our government felt the need to act, so they did.

In the current crisis, if we did not bail everyone out, would we need to regulate hedge funds, private equity firms, and derivatives?  Those were fringe investments to begin with, but since the Federal Reserve made credit cheap and easy to obtain, they became too large.  Warren Buffet even called the derivatives market the “financial weapons of mass destruction.”  If we let them fail and liquidate their assets, they would go back to being fringe investments only for specialty firms or the super rich people of the country.

By propping them up, we now have the need to regulate them.  By regulating them, we are acknowledging their existence as a major part of the financial system, when they should only be bit players.  Our system needs to be cleansed of these bad investment vehicles and instead we are implementing rules to legitimize them.

Also, the power to intervene with any company by the Treasury Department is setting a dangerous precedent for the future.  They want the power to take over a company and sell off assets before the company collapses.  Looking at how well the bailouts and toxic assets plans have gone, I question whether they really know what is best for our system to begin with.  Why not just let the companies go bankrupt and liquidate their assets letting the market set the prices?

Also, I question whether these reforms and protections will really help.  We all knew the derivatives market was a problem waiting to happen, and all of the financial geniuses who are now calling for regulation just sat back and watched.  The SEC had rules to prevent things like Enron from happening, but it still happened.  Madoff kept a ponzi scheme going for decades and the SEC couldn’t figure it out.  How can we expect our government to regulate when they have failed us so far?  If another bank does commit fraud or crooked accounting and it slips through the cracks, can we sue the government for their lack of oversight?

These broad government regulations just give us a false sense of security because we think the government is looking out for us.  That gives us the impression that they are watching what funds are doing, and they know that their investments are legitimate.  We fail to do our own due diligence because we think the government already has for us.  Then we will again be burned when the government fails to regulate like they promised.

We need to let the market liquidate the bad investments and let the companies that made these decisions fail.  Once that happens, we can see how widespread the problem was and if there is a need for sweeping regulations.  If anything, we need to regulate the Federal Reserve to make sure that our boom-bust economic policy comes to an end.  We can treat the symptoms (hedge funds, private equity and derivatives) only after we treat the cause of the cancer, which is the Federal Reserve.

Why More Regulation Will Not Help

March 25, 2009

Treasury Secretary Tim Geithner wants to have the authority to intervene in any hedge fund or other company that is big enough to bring the banking system down.  The goal is to create oversight and regulation that will help protect us from another recession like we’re in now.

However, we are already supposed to have government agencies looking out for us, and the Supreme Court just ruled that even if they are in place, they are not responsible.

The case I am referring to is one where the Court ruled that even if there is an FDA approved label on a drug, the drug maker and patient are responsible in case something goes wrong.  I can’t remember the specifics right now, but the drug was causing potentially fatal side effects, and the Court just threw it back in the face of drugmakers.

They just passed the buck back to the drugmakers, doctors and patients.  Why then, does the FDA exist in the first place?  If they are supposed to be monitoring drugs that go out to make sure they are safe, why can they shed any sort of responsibility?

I’m sure the same thing would happen if a lawsuit was ever brought against the SEC.  The onus would end up falling on the investor and mangers to do their own due diligence.  Look at all the fraud that had to occur to create the real estate bubble.  Have they brought charges against anyone?

Why then, do we continue to believe that a regulating body will help at all?  Has government regulation proven to be effective?  And even if it works, when something goes wrong, they don’t have to bear any responsibility.

What we need is some good, old-fashioned tough medicine.  Let these banks fail.  Show them that you will not be there to stop their collapse.  If banks knew that they did not have the government as a backstop, they would make wiser decisions.  The moral hazard we have created is going to lead us to our demise as a nation.

We do not need more government regulating bodies, especially ones that have all the authority, but ultimately no responsibility.  The only proven regulator has been the free market.  Let’s let it work.