By Daniel M. Ryan
The final touches are on the Obama Administration's further-regulation plan for the financial services industry. It's almost certain that it won't be seriously blocked, even if there's some whittling around the edges. Not after last year's crisis, even if memories are beginning to fade. The Federal Reserve will get the power asked for; the Congressional drubbing Fed chair Bernanke endured last week was little more than a hazing. Call it a "Washington compliment," as every serious candidate for new powers has to go through the same grilling. What's more important, from the Obama Administration's perspective, is that President Obama can say something was done.
A cynic would say that's all they're really looking for. It's common practice to give credit to the government for "recovery packages" as soon as the economy takes a turn for the better – even if the measures haven't been implemented yet. Words are what runs D.C., a town where votes are horses. For all I know, a staffer wag might write a "tough" regulatory bill that contains measures which have already been enacted. It would take a strong man indeed to heft up a hard copy of the Federal Register, and a very patient one to read through all of it. The search function of the Register's Website might very well save a lot of embarrassment, or elicit some if any regulatory redundancies can be found therein.
The centerpiece of the bill, the creation of a kind of Consumer Protection Agency for financial products, managed to hit the D.C. sweet spot. Simply put, there will be little public opposition to it except amongst the principled – i.e., libertarians. That's because there are financial-service providers who will greet the measure with some relief.
Consider what would happen to a mortgage firm that tried to explain what's entailed by, say, an option ARM. By "explain," I mean going through the associated responsibilities with a fine-toothed comb in plain language – and making sure the customer understands all of them. How long would it be before a customer looks the mortgage rep in the eye and says, "Are you patronizing me? Are you trying to tell me I don't know what I'm doing?"
How long with a mortgage shop with this policy last in a competitive marketplace?
Regulations whose ostensive purpose is to "rope in" an industry often succor it. I'm not merely referring to capture theory, or to the old American tradition of the feds basically endorsing informal means of self-governing. I also mean that regulations can be used as a kind of excuse to assuage a dissatisfied customer.
Flight delays? Bring up national security and the terrorist threat.
A customer comes in the liquor store a little inebriated, one that it might not be best to sell to? Spread your hands and invoke the alky laws.
An excited client calls and wants to buy a gold-exploration stock that's trading at eight cents per share? Ingratiatingly inform them that the S.E.C might have you hauled away in handcuffs if you don't obey the "Know Your Client" regulations.
An excited borrower comes in and wants a new house now with the aid of a friendly mortgage? Now, once that reform bill is passed, all you have to do is pull out the bullet list and apologetically say that the feds are making you do it. "Of course, I have to go through this 'understandable disclosure' bit because I'll get in hot water if I don't. You know how Washington is nowadays…"
Libertarians have actually done many businesses a real service in pushing the D.C.-Tyrant line. Unfortunately for free marketeers, the typical helpee has no intention of getting behind any serious deregulatory effort. He's just glad of the libertarians' efforts because it makes his "sorry, it'd offend Washington" explanation easier to swallow.
In some industries – the brokerage industry is actually one of them – invoking the regulations doesn't always pacify. Some clients will just get angry at the broker. This kind of industry often has some kind of shadow guidelines, with brokers telling each other how much bend is too much; management basically turns a blind eye unless the heat gets turned on. In others, most obviously the airline industry, invoking the regulations is enough to calm almost all customers down. The ones who aren't can have a certain label affixed to them to make sure discontent doesn't spread that widely.
The fact is, self-regulation has a downside: it requires the vendor to firmly stick to a "no" on his or her own recognizance, sometimes alone. The industry most known for the internal-guideline approach is the banking industry, and heated competition nibbles away even at those standards. What industry is widely disliked for being full of Dr Nos?
It's an unfortunate conclusion for a deregulation enthusiast, but many businesspeople are inured to their shackles as long as they can blame the shackler. Continual libertarian complains about federal-government overbearingness just play into it. If you ever wondered why libertarians could have captured so much common-sensicality but have so little influence, this "shackler theory" explains it. There's just too much risk nowadays in saying "Sorry, but we won't take your trade. Nothing personal, but it's not worth our while."
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