I think most people, even conservatives, fall into the trap of “proper” government regulation versus “liberal” government regulation. I hope that my ideas are clear and maybe I can persuade you that these ideas make sense and are correct.
While I am not an economist, I have worked in financial services for over a decade and I have, I think, a modicum of common sense that I try to infuse into the arguments economists make.
I realize that this may be an unrealistic idea in today’s political climate, but it seems to me that while regulation enforcing transparency and disclosure in the financial markets are VITAL to a vibrant and open market, any regulation that regulates actual financial instruments hurts consumers and inventiveness in the market.
Here is my over-riding principle (dare I say “generalization” J )for any and all government policies. The only governing factor in any economy that works every time is self-preservation.
Here is an example. Many often use Canada as an example of a country which has weathered our economic storm due to their rules and regulation regarding banks lending in mortgage loans. Some of these rules include the inability for individuals to purchase homes without putting any money down. Of course the implication is America should have the same sort of regulations. I whole-heartedly disagree with that conclusion. While it is true Canada seems to be doing better right now, there is a significant price for this sort of government interference that shouldn’t be overlooked.
By “protecting” consumers and home values, Canada has also stymied entrepreneurship and new inventiveness in a dynamic market. Let’s say a private bank (or individual) discovers that people with an 800 credit score and $200,000 in a bank will pay back home loans 99.9995% of the time, even if the borrower puts no money down. Shouldn’t this entrepreneur have the option to start a business offering zero down loans to people with 800 credit scores and $200,000 in the bank? Under Canada’s system he would not be allowed to start such a business.
Now, let us assume that this person is wrong. It turns out that people with an 800 credit score and $200,000 in a bank only pay back their loans 30% of the time. Ouch! What happens? This company declares bankruptcy and each of those loans are sold to another company at a major discount who is willing to take the risk of collecting on these loans. The next time a bank or company wants to start a new “no money down” loan, they can look at this example and tweak it to make it less risky, or decide not to do it at all. The market worked naturally without some law or rule or government official making a draconian regulation.
Of course this only works in an environment where everyone is free to fail. Destructive capitalism is the key to ALL growth! Which brings me to the other side of the coin (which is rarely talked about). This downturn CAN have a major upside that can set the stage for another 20 years of economic growth. Despite the “help” from our Federal Government, the tide of the market is driving home prices lower and lower. If we were talking about oil, we would be SO happy about this, while oil companies made less and less money. But because we have an economic horse in this race (i.e. our home) we scream to the heavens (or our local representative) to DO SOMETHING to artificially keep home prices inflated. This has, in effect, caused more foreclosures and slowed any sort of recovery to zero! Why? Because it has not solved the real problem of putting these loans into hands of individuals who can more effectively and efficiently service these loans. Until natural prices come down to a point that smart individuals are willing to take that risk, no recovery can happen. It would be like moving the moon to control the tides.
I use terms like “tides” purposefully. I believe that most people believe that the economy is like a computer and if we just punch in the right code or have the right programmer, we can fix any mess we find ourselves in. I think this idea is both wrong and limiting. If one thinks that an economy is like a computer, then the conclusion that a central figure (a-la the President or Alan Greenspan) can “fix” the economy or we can experience continued growth forever. The economy isn’t broken even as the tide isn’t broken when it heads out to sea. Our problem is we are arrogant enough to think we can keep the economic tide from going out through regulation, but eventually this great power will overcome all these restraints and a tsunami will hit because we didn’t allow the natural and gentle ebbs and flows occur. The idea of the economy as a computer is limiting because it also assumes that an economy can only grow within the controlled environment of humans. I think economies are more like nature. As powerful as a volcano or the tides. We cannot control these great powers, but if we can understand them we can use natural law to harness them.
So my question is this. Are customers better served with an “iron fist” (no matter how soft the velvet covering it is) holding back the “invisible hand” of individual entrepreneurship and free markets? Obviously, I don’t think so and this is the Trojan Horse of the government. Once government can convince the majority of people (which they have) that they can “fix” the tides of the economy they are in our lives forever. Hence the Road to Serfdom has begun.
-Think men, think!
While I am not an economist, I have worked in financial services for over a decade and I have, I think, a modicum of common sense that I try to infuse into the arguments economists make.
I realize that this may be an unrealistic idea in today’s political climate, but it seems to me that while regulation enforcing transparency and disclosure in the financial markets are VITAL to a vibrant and open market, any regulation that regulates actual financial instruments hurts consumers and inventiveness in the market.
Here is my over-riding principle (dare I say “generalization” J )for any and all government policies. The only governing factor in any economy that works every time is self-preservation.
Here is an example. Many often use Canada as an example of a country which has weathered our economic storm due to their rules and regulation regarding banks lending in mortgage loans. Some of these rules include the inability for individuals to purchase homes without putting any money down. Of course the implication is America should have the same sort of regulations. I whole-heartedly disagree with that conclusion. While it is true Canada seems to be doing better right now, there is a significant price for this sort of government interference that shouldn’t be overlooked.
By “protecting” consumers and home values, Canada has also stymied entrepreneurship and new inventiveness in a dynamic market. Let’s say a private bank (or individual) discovers that people with an 800 credit score and $200,000 in a bank will pay back home loans 99.9995% of the time, even if the borrower puts no money down. Shouldn’t this entrepreneur have the option to start a business offering zero down loans to people with 800 credit scores and $200,000 in the bank? Under Canada’s system he would not be allowed to start such a business.
Now, let us assume that this person is wrong. It turns out that people with an 800 credit score and $200,000 in a bank only pay back their loans 30% of the time. Ouch! What happens? This company declares bankruptcy and each of those loans are sold to another company at a major discount who is willing to take the risk of collecting on these loans. The next time a bank or company wants to start a new “no money down” loan, they can look at this example and tweak it to make it less risky, or decide not to do it at all. The market worked naturally without some law or rule or government official making a draconian regulation.
Of course this only works in an environment where everyone is free to fail. Destructive capitalism is the key to ALL growth! Which brings me to the other side of the coin (which is rarely talked about). This downturn CAN have a major upside that can set the stage for another 20 years of economic growth. Despite the “help” from our Federal Government, the tide of the market is driving home prices lower and lower. If we were talking about oil, we would be SO happy about this, while oil companies made less and less money. But because we have an economic horse in this race (i.e. our home) we scream to the heavens (or our local representative) to DO SOMETHING to artificially keep home prices inflated. This has, in effect, caused more foreclosures and slowed any sort of recovery to zero! Why? Because it has not solved the real problem of putting these loans into hands of individuals who can more effectively and efficiently service these loans. Until natural prices come down to a point that smart individuals are willing to take that risk, no recovery can happen. It would be like moving the moon to control the tides.
I use terms like “tides” purposefully. I believe that most people believe that the economy is like a computer and if we just punch in the right code or have the right programmer, we can fix any mess we find ourselves in. I think this idea is both wrong and limiting. If one thinks that an economy is like a computer, then the conclusion that a central figure (a-la the President or Alan Greenspan) can “fix” the economy or we can experience continued growth forever. The economy isn’t broken even as the tide isn’t broken when it heads out to sea. Our problem is we are arrogant enough to think we can keep the economic tide from going out through regulation, but eventually this great power will overcome all these restraints and a tsunami will hit because we didn’t allow the natural and gentle ebbs and flows occur. The idea of the economy as a computer is limiting because it also assumes that an economy can only grow within the controlled environment of humans. I think economies are more like nature. As powerful as a volcano or the tides. We cannot control these great powers, but if we can understand them we can use natural law to harness them.
So my question is this. Are customers better served with an “iron fist” (no matter how soft the velvet covering it is) holding back the “invisible hand” of individual entrepreneurship and free markets? Obviously, I don’t think so and this is the Trojan Horse of the government. Once government can convince the majority of people (which they have) that they can “fix” the tides of the economy they are in our lives forever. Hence the Road to Serfdom has begun.
-Think men, think!
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