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Government Regulation and Ingenuity

A recent review of Michael Moore’s new film, Capitalism: A Love Story, concludes with the following summary:

Surely what spun out of control because of government indulgence and indolence needs to be repaired by government regulation and ingenuity.

This pretty much captures in a nutshell what I see as the basic problem with where we are currently heading on the road to bigger government. A great many of our current problems have been created by an overreaching and exponentially expanded government. Worse, government regulation heaped upon government regulation has done absolutely nothing to protect the general population. In fact, all it has done is to enrich those large enough to play the regulatory game, and put financial welfare of the nation at risk.

Consider for a moment the banking system. This is without a doubt among one of the most regulated industries in America. Yet, despite these regulations, the system continues to have massive failures. Regulations didn’t stop the S&L; crisis from occurring, and additional regulations post S&L; crisis didn’t stop the financial crisis that led to the recent “too big to fail” crisis. Actually, interventions since too big to fail has done only one thing, make the biggest banks bigger:

When the credit crisis struck last year, federal regulators pumped tens of billions of dollars into the nation’s leading financial institutions because the banks were so big that officials feared their failure would ruin the entire financial system.

Today, the biggest of those banks are even bigger.

The crisis may be turning out very well for many of the behemoths that dominate U.S. finance. A series of federally arranged mergers safely landed troubled banks on the decks of more stable firms. And it allowed the survivors to emerge from the turmoil with strengthened market positions, giving them even greater control over consumer lending and more potential to profit.

J.P. Morgan Chase, an amalgam of some of Wall Street’s most storied institutions, now holds more than $1 of every $10 on deposit in this country. So does Bank of America, scarred by its acquisition of Merrill Lynch and partly government-owned as a result of the crisis, as does Wells Fargo, the biggest West Coast bank. Those three banks, plus government-rescued and -owned Citigroup, now issue one of every two mortgages and about two of every three credit cards, federal data show.

At the same time, the government’s favoring of everything big has not been without its casualties.

Five more US banks shut down on September 4, pushing the total failures to a whopping 89 entities so far this year.

The count of collapses is more than three-fold that of 2008, when 25 banks went out of business in wake of the raging financial meltdown.

Even scarier is the fact that the worse is yet to come for the banking sector. Unemployment figures continue to rise, and with the rise of those unemployment numbers, it is only natural to expect that defaults on the unsecured debt represented by credit cards will increase. What does that mean for the remaining large banks that now issue “two of every three credit cards” remaining on the market? It’s bad news. Now consider that defaulting credit card debt is not the only problem these bank behemoths are going to face:

Some $700 billion of option ARMs were written in the U.S. between 2004 and 2007. Most option ARMs are set to recast after five years — meaning that the first wave of higher payments is hitting borrowers this year.

WaMu [now owned by Wells Fargo] — which wrote $133 billion worth of option ARMs when house prices were at their peak between 2005 and 2007 — said in its annual report last year that 13% of its option ARM loans are due to recast this year. The bulk of recasts are due to take place between next year and 2012.

Now, you don’t need to be a PhD economists to see the writing on the wall. People’s home costs are about to go up in a big way. At the same time, all indicators are that we are on the road to a “jobless recovery” of the economy:

Many experts envision a jobless recovery, in which the economy grows but job losses persist. That would reprise the end of the last recession in 2001, when payrolls continued to decline for nearly two years afterward.

Actually, maybe you do have to be a PhD to understand how it is possible for the economy to grow without jobs. We’ve lost over 7 million jobs since the recession began. I consider myself to be a reasonably well-educated guy, and I’ve got to tell you, I don’t understand how the economy can truly recover when people are without jobs. But, I guess that the beauty of government ingenuity. It doesn’t have to make sense.