Diary

A Television Box, Bernie Madoff & Regulation

Once upon a time not too long ago, a mother bought a new television set for her family.  Upon bringing it home, she placed it on its stand still in the box, placed her toddler on the living room floor and went to the kitchen to start dinner.  Her toddler, being the curious creatures toddlers tend to be, wandered over to the big box and it fell on them.  Hearing the commotion in the living room, the mother ran in to find her child under the box.  She called the authorities, but it was too late- the child died of their injuries.  This made lots of news in the local press and got the attention of a local state legislator.  Concluding that the mother was obviously not responsible for leaving a toddler unattended around the box, the state passed a law requiring that boxes with certain dimensions would henceforth be labeled as “tipping hazards” in the state, probably in three languages.  This unfortunate story is true.

And although sad and true, it is also illustrative of how isolated incidents lead to knee jerk regulations and requirements placed on business.  Look at the Congressional inquiries into the Bernie Madoff scandal.  While this guy was certainly the epitome of a scumbag in every sense of the word, Congress held hearings to determine what went wrong and how to prevent it in the future.  The answer is simple, low cost, and commonsense:  Madoff is a scumbag who took advantage of “investors” who failed to do their homework.  Why did so many people walk away from his scheme?  What did they see that the others who got bilked did not see?

The more important question is: Do we need more regulation, or do we need better enforcement of the existing regulations?  With Madoff, there were certainly warning signs that regulators either overlooked, or went unheeded.  The Democratic conclusion is that Republican regulators “looked the other way.”  Well,Republicans do not hold a monopoly on “looking the other way.”  In the late 1990s, Democrats clearly looked the other way with respect to the warning signs involving Freddie Mac and Fannie Mae and Republican efforts to regulate them.  No less a Democrat than Bill Clinton admitted that Democratic opposition to Republican efforts for regulation caused a far greater challenge to the economy than Bernie Madoff ever could.

Another knee jerk reaction was Sarbanes-Oxley passed in the aftermath of the Enron and other accounting “scandals.”  Passed in haste, no one took the time to look at the possible ill-effects through deliberative debate.  Instead, the pressure was to grandstand before cameras in the name of “doing something.”  Other examples are TARP, “porkulus,” Obama’s budget, and Waxman-Markey.  A 2004 study of 224 companies with $2.5 billion in revenues revealed that it costs $3.14 million per company per year to comply with Sarbanes-Oxley.  If you are a start-up company, the average cost of compliance is $8 million.  The law had the chilling effect of discouraging entrepreneurial start-up companies- a main driver in a vibrant economy.  That same study found that 33% of the companies considered going private, selling, or merging because of the compliance costs.  The worst effect has been on IPOs, especially among the high-tech companies.  This hinders companies from raising capital and expanding operations.

While the Democrats try to portray Republicans as the party of “deregulation,” there are voices within the GOP who do tout laissez-faire capitalism.  But, realistically, the GOP does not and has never endorsed an absolute unregulated economy.  To do so would violate anyone’s obligations under the Commerce Clause of the Constitution that grants Congress the power to regulate commerce (business and the economy).  However, because that power is granted, it does not infer a license for government to get into the minute details of businesses as the Democrats seem to believe.

Harold Meyerson, a liberal editorial writer for the Washington Post, noted that a Pew Research poll indicated that 22% of respondents identified themselves as “Republican.”  He then theorized this was because of outdated ideas like tax cuts and deregulation.  He states: “The economic crisis has has plunged their (Republican) views into crisis, if not negated them altogether.”  Tell California residents that tax cuts are out of vogue.  Like most liberals, Meyerson is joining in the dance on the alleged grave of capitalism.  If not capitalism, then what?  A democratic socialist welfare state like Europe and their stagnant economies?  Interestingly, a Rasmussen poll found that 54% of Americans believe that regulation hurts rather than helps the economy.  They also found that American attitudes towards the banking industry and Wall Street in general are the same in May 2009 as they were in May 2006.  After the brief uprising and chest-thumping over items like executive compensation- which had absolutely nothing to do with the financial meltdown- attitudes reverted to form.  People like Schumer and Frank had their little 15 minutes of fame and need to ride off in the sunset.  People like Meyerson need to get their heads out of their asses and look at facts.

There are currently over 73,000 pages of regulations printed in the Federal Register.  Since Republicans seized control of Congress in 1995, over 51,000 of those pages came into existence.  Under Bush alone, 30,000 pages were added.  This qualifies Republicans as the “party of deregulation?”

Democrats often admonish Republicans that you cannot legislate morality with respect to items like gay marriage and abortion and other social issues.  That may be true, but what is business regulation other than legislated morality but on a grander scale?  Republicans are not the party of unwanton deregulation; they are the party of eliminating stupid, knee-jerk, costly regulations which were passed in haste because some scumbag may have taken advantage of investors, or because some box may have fallen on an unattended minor.  It is called “commonsense” and it something most Democrats and all liberals lack the capacity to exercise.  Obviously, in order for capitalism to succeed, there must be safeguards against fraud, especially in the banking system which relies on “reputation” for success.  Yet, if the government runs the banking industry and auto industry through regulations like they run themselves, this economy has not seen the worst yet.  While Republicans need to come to the full realization that regulation per se is not a bogeyman, Democrats have a very long way to go before they understand that regulation for the mere sake of regulation is just costly, counter-productive, and, quite frankly, just plain stupid.  As the Treasury Department sets to overhaul regulations of the financial industry, keep these thoughts in mind.