Regulators All Talk

The problem when someone is given authority to regulate something really complicated, where the agents under regulation have vastly more knowledge of the product landscape than they do, is that the regulators know they don’t know what they are talking about. For all Warren has studied credit cards and mortgages, I bet she still doesn’t know what the expected charge-off rate is on 550-600 FICO credit cards off the top of her head. The participants know this stuff inside and out.

Thus if they create a stupid law making X illegal, all the industry does is create a slight modification and generates the same result, or a different industry takes up the slack with more onerous terms. Worse, like the Carter credit controls (which caused a GDP tailspin in 1980:Q2), it can totally shut down a market, highlighting their ham-handedness. Thus, regulators rarely do anything that might have a conspicuous effect (eg, they passed a health care overhaul that will be rolled out in such a fashion people will never agree as to the effects)

Smarmy Warren’s initial big idea was to simplify and standardize contracts. Thus, instead of having a mortgage contract with tens of pages in 10-point font, requiring 10+ initialings, you have one page with simple terms a regular person can understand. Unfortunately, simplification comes with a cost. It groups many contingencies under one big tent, and so specifics can not be spelled out. When someone gets screwed by some specific clause and did not foresee it, they have historically argued to courts this was unfair, which created the lengthy documentation. The many pages and initials are meant to capture these cases, and now must be inferred.

So, pick your poison: a simple general statement that hopes people can figure out the special cases, or list all the special cases, making the general statement more obscure. I’m all for it, but the banks will reasonably demand indemnification for such simplicity, and the Trial Lawyers will fight it. She’s going to be shocked when her push-back comes from her side of the aisle.

In the meantime, the new agency is guaranteed funding from the Federal Reserve, so it will be part of the government forever. Its main objectives are enumerated thusly:

  1. Research
  2. Community Affairs
  3. Complaint Tracking and Collection
  4. Office of Fair Lending and Equal Opportunity – ensuring equitable access to credit
  5. Office of Financial Literacy – promoting financial literacy among consumers

These objectives are covered independently by tens if not hundreds of other agencies that produce lots of stuff no one cares about. Highlighting the regulators continued cluelessness, they raise the ‘equal access to credit’ as a right as opposed to the signature problem that led to the mortgage bubble. Discriminating on ability and/or willingness to pay invariably hits certain demographics differently, so this is a classic efficiency/equity trade-off, and we know where the government stands. The implications, however, are not obvious, as many still think this had absolutely nothing to do with the mortgage meltdown.

I’m sure Warren is happy as a pig in poop creating her new fiefdom with all the status it implies. As the first director, surely several conference rooms, pavilions, if not entire building will have her name on them after she leaves. As to actually helping the consumer, say by proposing specific data that would increase transparency, that would take greater understanding of the product landscape than she and her ilk have. For example, why not make it easy for investors to see the track record of investment advisers and hedge funds? Currently, getting that data is not merely difficult, but often illegal! Why not take over the rating agencies production of ‘default studies’ with your own, independent validation, so that we can see how AAA and BB ratings do for various categories without the tendentious reporting?

Instead hey will busy themselves having meetings, creating task-forces, showing they listen, and maybe some pointless regulations that merely add fixed costs to the business (eg, the Security Exchange Acts of 1934 and 40 are good examples).

Here’s the UN Global Climate committe describing their latest meeting

The United Nations Climate Change Conference took place in Cancun, Mexico, from 29 November to 10 December 2010. It encompassed the sixteenth Conference of the Parties (COP) and the sixth Conference of the Parties serving as the Meeting of the Parties to the Kyoto Protocol (CMP), as well as the thirty-third sessions of both the Subsidiary Body for Implementation (SBI) and the Subsidiary Body for Scientific and Technological Advice (SBSTA), and the fifteenth session of the AWG-KP and thirteenth session of the AWG-LCA.

This blurb underneath a picture of them all applauding themselves! How wonderful that they all care enough to make time for Cancun in December to talk about global warming.

What has come from all these meetings? Well, they all agree that ‘something should be done’, and voted for the rich countries to give money to the more numerous poor countries. Needless to say, this has no impact on anything, because bureaucrats can’t unilaterally budget such expenditures. That’s top-down politics. To think that Hollywood created a big production to pass the law creating this agency. That’s classic naivité about how government works.

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About Eric Falkenstein 136 Articles

Eric Falkenstein is an economist who specializes in quantitative issues in finance: risk management, long/short equity investing, default modeling, etc.

Eric received his Ph.D. in Economics from Northwestern University , 1994 and his B.A. in Economics from Washington University in St. Louis, 1987

He is the author of the 2009 book Finding Alpha.

Visit: Eric Falkenstein's Website

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