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Financial Regulation: Necessary Evil or Evil Necessarily?

Written by: Sean Hyman

Article Overview: The article discusses the issues with newly proposed regulation for financial markets. It lists the possible implications of mistakes regarding new regulation, and cites past instances that support its claims.

Financial Regulation: Necessary Evil or Evil Necessarily?

• Investing

"The Best Laid Plans of Mice and Men Often Go Awry". - Robert Burns

I guess I feel the need to wax poetic as I'm looking over the details of the Obama plan for re-vamped financial regulation and can't help but think that more harm than good is going to come out of this. Let's face it, there were a TON of mistakes that were made in the not-so distant past and much of this proposed action is being brought forth by the same people who were guilty of contributing to the problem.

Now I realize that Obama himself has done absolutely NOTHING but listen to those around him who were involved in this mess (as were many others who are either still or no longer in office- not giving Bush a pass here) but at some point we have to ask ourselves if we want to live in a society where the rule-benders get to set the rules!

The problem with this regulation is three-fold:

It is backward-looking, not forward! We all know about the problems with CMBS and CDS and with banks overleveraging their balance sheets. Do we really need legislation telling them not to do that again? Or has the market already done it for them? Part of the problem is that these guys live in a consequence-free environment of government bailouts and guaranteed bonuses which reward bad behavior. New regulation doesn't change this, it just changes the way they go about it.

It doesn't address the root of the problem! The problem isn't that we didn't have enough regulation, but rather that we didn't have the ability to enforce it. Creating more agencies with more overlap is only going to open up more loopholes to be exploited! By the time the next financial disaster comes and goes it will be too late. And that's what's become of American Ingenuity. We are no longer defined by our innovation, but rather our ability to circumvent the rules!

Call me silly, by why is nobody speaking of a return to a pre-Glass Steagall Act repeal environment? Allowing banks to use grandma's savings account to gamble with CDS is reckless any way you slice it. The problem isn't the rules of the game, it is with who was allowed to play. So call me a playa hater, as in "Don't hate the game, hate the playa!"

It fosters unintended consequences! One of the reasons this was allowed to go on so long was because of the massive tax revenues it generated. Let's face, you won't find a politician in this country who doesn't like tax revenues. But if the game collapses on its own, and you attempt to regulate the players in other areas- like hedge fund regulation- they'll just take their toys and go home. This is NOT the time to be scaring away potential tax revenue with all the massive deficits we are accumulating. I have heard of at least one sizable NYC hedge fund moving their base of ops overseas, and I'd be shocked if between this and the potential tax hikes coming down the pike (we're not that naïve, are we?) more hedge funds don't follow suit.

So who ends up getting hurt in the end? The little guy of course, who these regulations are intended to protect and not the rich. Higher costs, more taxes, and decreased services will be coming in order to pay for these massive deficits. If history has taught us anything, it's that little guy always loses in the end. And this time it will be no different, regardless of what the politicians say.

Which brings me back to poetry:

"The evil that is in the world almost always comes of ignorance, and good intentions may do as much harm as malevolence if they lack understanding."- Albert Camus

So be careful what you wish for!

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Article Tags: american ingenuity, bad behavior, balance sheets, banks, best laid plans, best laid plans of mice and men, bush, cmbs, consequence, financial disaster, free environment, glass steagall act, innovation, legislation, loopholes, mice and men, robert burns



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