To Start Rescue, Fix Regulators

These authors propose sun setting Fannie Mae and Freddie Mac. What a thought.

How about sun setting regulation of all kinds? Voluntary exchange under rule of law that prohibits violence, fraud, and other forms of compulsion from others is what works for people. Singapore is the world's poster child for that prescription. Laws with definite and harsh punishment for violations, but no regulation, and lots of voluntary exchange.

Laws tell people what they must NOT do, and at least in western jurisprudence, the law assumes that the vast majority of people will obey the law. People are presumed innocent until shown to be guilty. When they are shown to be guilty, they are punished. We hope that punishment deters at least some law breaking.

Regulations tell people what to do, how to do it, when to do it, and how they must report to bureaucrats what they did already, and what they're planning to do in the near future. I know this because I've consulted with three large federal bureaucracies (EPA, FDA, and USDA) for about half of my professional career. I know this further because I am a Registered Investment Advisor, and I know first hand how the SEC and FINRA go about their business. They can't detect Madoff, but they will certainly pull my license immediately and fine me if I miss a reporting date.

Regulators assume that the vast majority of people will break the rules. Regulators further assume that they are charged with oversight, prescription, and prevention of breaking the rules.

If regulation worked, we wouldn't have the mess we have right now. The SEC, the Fed, state bank examiners, the FDIC, and other financial market regulators have all failed as regulators. That's not because they are bad people, it's because regulation cannot work and never has.

Imagine for a minute how it would be if we expected the police to behave as regulators. It's against the law to steal. But if the police were to behave as our society seems to expect regulators to behave, the police would have to try to keep thieves from stealing! Could they do it?

The police would evidently need to require that we all inventory our possessions annually or more frequently, document where the stuff came from, fill out reports (reports that couldn't possibly be read), and submit to random searches of our homes to make sure we didn't have stolen stuff.

Does that strike you as absurd. It should, but that's exactly what government, and evidently we folks who elect government, expect regulators to do. It is absurd. The police do not and cannot prevent crime. Regulators do not and cannot prevent bad behavior either. Regulators can impose huge costs on the rest of us and gum up the works, though. We've have lots of evidence about this, some of it rather recently in financial markets.

I say up with law, down with regulation.