Why more regulation won’t solve our ‘regulatory problem’

It has become fashionable for Democrats, and particularly President Obama, to characterize the last decade as all but unregulated when it came to business, commerce and finances. 

In fact, President Obama, in his recent Oval Office speech made that very point:

“Over the last decade, [the Minerals Management Service] has become emblematic of a failed philosophy that views all regulation with hostility—a philosophy that says corporations should be allowed to play by their own rules and police themselves.”

The implication of course is two-fold. On the one hand government claims that if there had been tighter regulation and more money spent on a good regulatory regime, we probably wouldn’t have suffered the financial melt-down, and certainly wouldn’t be suffering this deep sea blowout and gusher. More stringent regulation, it seems, is what Obama sees as the panacea. And that, of course, means more government control.

Secondly, it shifts the blame. The fact that MMS has been under the Obama administration for 16 months is ignored. But the reference to the last decade puts the onus for this failure right where Obama has always attempted to put every problem he faces – on Bush and the Republicans.  In this particular scenario, the onus is on the greedy oil companies (in others on “Wall Street” or just the generic “greedy corporations”). 

George Will rightfully calls the claim of a regulation deficit a “strawman” argument. A look at the money spent in the last decade for regulation seems to bolster Will’s argument, not the administration’s.  CATO@Liberty cites a study by George Washington University of St. Louis that says both regulatory spending and regulatory staff rose during the Bush years.

In fact, regulatory spending actually rose an inflation-adjusted 31 percent during the Bush administration (FY2002-FY2009) and regulatory staff saw a 42% jump during that same period. Those numbers argue persuasively against the claim that the previous decade saw less regulation, less money spent on regulation or that there were fewer regulators than when the previous Democratic president was in office.  In fact, that decade saw rather large net increase in both regulatory dollars and personnel.

So what is the problem then? 

Perhaps there’s more to it than just trying to pass off all the present problems on a lack of regulation and the previous administration.  Perhaps, instead, part of the problem is policy. For instance, there are few objective analysts who don’t fault the policy outlined by the Community Reinvestment Act (CRA). The  “steroids” added by the Clinton administration in 1990s, implemented by Fannie Mae and Freddie Mac and pushed by government since the mid-70’s are a big part of the housing market meltdown.

It could also bureaucratic ineptness or corruption. We know, for instance, that Bernie Madoff was able to run rings around the SEC regulators for years. We also know that some of those regulators prefer porn to work. And we certainly know that MMS was corrupt and essentially taking advantage of relationships with those they were regulating for some personal perks.

Neither of the examples can be attributed to problems with the regulations per se or, necessarily, the regulatory regime, as this White House would prefer you believe. There distinct possibility exists that had politicians not made the CRA policy and pushed its implementation through easy but risky lending, the housing bubble may never have formed, much less burst.

And it is certainly true that had the SEC done its job in the Madoff case – the clues and signs were there to have caught that fraud very early in its execution – many investors would have been saved billions in losses.

Lack of regulation has not been the problem. 

As the numbers tell us there hasn’t been a lack of regulators or regulatory spending. And it is hard to argue the regulatory regime has been lacking when the tools to detect, prevent or stop violations of the regulations were available.

 The call for more regulation is a cure for the wrong problem. Instead, much of what the nation has suffered can be attributed to a few problems – poor policy, a lack of competent oversight, and regulatory capture. These duties are shared by the executive and legislative branches of the federal government – both, by the way, now run by Democrats for over a year and a half at a minimum. Until those problems are solved, all the regulations, regulators and spending in the world won’t yield better results.

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