How Regulators Destroy Markets

Was reading a book by John Allison “The Financial Crisis and the Free Market Cure”.  In it, he talks about the state of US markets and capitalism.   People are confused these days because they think we have actual capitalism in America when we really don’t.  We have crony and regulated capitalism.

The increasingly complex and broad regulations that government has passed and enforced on the citizenry is lowering our standards of living.

His book is great.  Here is a paraphrased excerpt.

When he was CEO of BB&T bank, they had made a loan to a hotel operator that catered to business travelers.  When the financial crisis hit, the business went south.  Revenue wasn’t enough to cover expenses, nor was it enough to cover the loan.  The operator sold off personal assets to cover the shortfall.

However, because of regulations and decisions by regulators, BB&T couldn’t use the heroic efforts by the entrepreneur to save the business in their calculation on the riskiness of the loan.  It had to be moved to substandard debt.

The economy improved and the business began generating enough revenue to cover the cost of operations.  Near the existing property, another hotel was foreclosed on by a different bank.  The hotel operator wanted to buy it, because they could consolidate operations and get economies of scale/scope.

However, because the loan was still classified as substandard-and the profit margins on the business hadn’t grown enough to remove it from substandard, BB&T (nor any other bank) could give the operator a loan to bid on the other property.

What happened?

The foreclosed hotel sold at a price significantly below where the hotel operator would have bought it.  The appraisers started re-appraising real estate off that new low mark.  This further devalued existing properties-and here is the key:

Banks couldn’t loan out as much money to generate economic growth to businesses because of the depressed property values.

The decision and rules of the regulator hurt the local economy and depressed the standard of living for anyone that was a resident there.

These are the true knock on effects of over regulation.  They aren’t readily apparent.  Many think that government is an impartial arbiter, but the financial crisis certainly showed that it wasn’t.  So do many other instances.  It’s why big corporates lobby hard, and spend quite a bit of money to get favorable rulings from government.

Republicans can be as bad as Democrats.  No one has a market corner on influence peddling.

President Bush passed a lot of legislation that has hurt Americans severely.  The Patriot Act, Sarbanes-Oxley, and the Privacy Act.  Obama has expanded the regulatory state with two signature laws, Obamacare and Dodd-Frank.  Those laws and regulations are hurting the American economy by limiting economic growth.  They are strangling it.  That hurts citizens.

Recently, the Clinton’s said their foundation wouldn’t accept money from foreign governments or corporations once she was elected.  This was clear signaling to get your checks in now.  If she is elected (and it looks like she will be), then favors will be granted.   Hillary did this as Secretary of State and she did it in cattle futures when her husband was governor of Arkansas.  Why would things change now?

That’s not capitalism.  That’s crony capitalism bordering on fascism and it’s lowering the quality of life for all Americans.