Friday, July 16, 2010

Like picking a one legged blind kid for your kickball team

The three stooges (Barney Frank, Nancy Pelosi, Christopher Dodd) celebrating another Pyrrhic victory

The Congress is on the verge of enacting a sweeping financial services “reform” bill and it is going to be a problem. Anytime you see these three jokers yukking it up, you better grab your pocketbook especially when you are dealing with Barney Frank who has never held a real job in the private sector as far as I can tell and whos only experience in complex financial transactions involved a homosexual prostitute that lived in his home and worked as an "aide". Clearly what we are seeing is once again proof that Democrats are badly misreading the mood of the electorate. Statements like this one are indicative of why Democrats are heading for an ugly election cycle in the fall:

Democrats say the bill will cut the odds of another crisis and better handle one when it arrives. They also contend it will restore confidence in U.S. financial markets, protect consumers and spur growth. White House officials said it will put an end to taxpayer-funded bailouts of banks, addressing the scars of the financial crisis of 2008.

We are supposed to believe that increasing the power of the Federal government over banking is supposed to make Americans more confident. I have worked for some of the biggest financial firms in the world and there are plenty of chuckleheads working for them but also some supremely smart and capable people who make tons of money by being talented. I also deal with government bureaucrats in the financial services business on a regular basis and have to deal with the laws and regulations they make up. If I have to trust one more than the other, the private financial services sector wins every time. Exhibit A are the government backed mortgages that created an artificial market for less than ideal loans. If I make a loan and keep it on my books and it goes bad, I have to eat the loss. That reality tempers my underwriting behavior. If on the other hand I can make a loan and then sell it to the government with no repercussions if it goes sour? That also impacts my underwriting, making it more likely that I will write riskier loans to people with substandard credit, with excessive debt or with a loan to value that is at 100%.

Here is what the government and most Americans don’t understand:

Business is all about risk and reward

Every business engages in risk every day. Hiring more people is a risk. Rolling out a new product is a risk. Extending credit to a customer is a risk. Buying a newer version of Microsoft Office is a risk. Every business owner needs to weigh the potential reward against the potential risk in every transaction. That risk/reward equation is how business functions. Take too much risk and eventually it will bite you. Take too little and someone else will pass you up. Businesses are phoenix-like in that businesses die and new businesses spring up. That cycle of renewal keeps the economy chugging along. That is until Uncle Same gets in the mix.

The government by nature governs. That is what it is supposed to do. Make laws and enforce them within narrow constraints spelled out in the Constitution. When the government starts to tinker around in the private sector, it messes everything up because a) the government has no motive to be efficient and profitable so it operates under entirely different assumptions than the private sector and b) it changes the risk/reward ratio and either causes behavior that normally wouldn’t be prudent or it quashes behavior that normally would be prudent.

I like what Senator Shelby said:

The bill "is a 2,300-page legislative monster…that expands the scope and the powers of ineffective bureaucracies," said Sen. Richard Shelby (R., Ala.).

We are giving additional power, resources, money, staff, etc. to the least efficient and effective possible entity, the monstrous Federal government. What is worse, it sounds like the bill is going to make it possible for government bureaucrats to create the actual regulations that will govern financial services and that is where the real danger lies. At this point, no one really knows what this bill is going to do and no one will for several years but once these regulations get in place, it will be nigh impossible to untangle them. The cost of these regulations will, surprise!, be passed on to consumers. Don’t think for a second that this monstrous bill is going to do anything but make it harder and more expensive to do business. Rather than reigning in “too big to fail”, we are seeing a contraction in banking and the big banks are getting bigger and more profitable. J.P. Morgan Chase announced profits of almost $5 billion yesterday. Be sure that as these regulation get written, banking lobbyists are going to be all over the regulators making sure they are protected. The CEO of Chase, Jamie Dimon, is a sharp guy, perhaps one of the brightest guys in corporate America, and you can be sure that Chase and other big banks are going to weather this quite nicely. The small community bank in your town? Maybe not.

There are clearly dangers in the free market but the market has mechanisms to deal with companies that take too many risks. Rather than being bailed out, they go out of business via bankruptcy, closure or being acquired. In propping them up with bailouts we rewarded risky behavior that should have resulted in failure at enormous taxpayer expense and perpetuated the dependent behavior of poorly run companies who run to the Federal trough when they get in trouble. This bill is bad news, if for no other reason than it tries to do something far beyond the scope of the Federal government to understand or handle.

Giving even more power to the Federal government which has already proven unable and unwilling to regulate financial services is like picking a one legged blind kid for your kickball team. The problem is that when this team loses, we all have to pay.
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