The Push to Regulate Markets

There's a lot of talk about the need to regulate product and financial markets, and how to avoid overreaction or favoring special interest groups in the process. First, Jim Hamilton:

Catch the wave, by James Hamilton: ...I don't always agree with Representative Barney Frank (D-MA), but I thought his remarks in yesterday's Boston Globe were right on target:

Well-functioning financial markets depend on transparency and confidence that institutions are playing by clearly defined rules. Both were in short supply in the months leading up to the August meltdown and remain so today. Large pools of unregulated capital, often highly leveraged, especially in hedge and private equity funds remain opaque and have been joined by massive sovereign investment funds to transform the financial landscape in ways that are out of reach of regulators here at home and in other wealthy countries. We lack the information that we need to ensure safety and soundness as well as the confidence that comes from the requirements mandating governance and reporting standards that apply to publicly traded companies.

To an important extent these new pools of capital are structured in a fashion that allows them to avoid the scrutiny that is required of firms and financial institutions in the regulated sectors. We should not be surprised. It is a fact of life that investors and firms will seek to innovate their way around whatever regulatory strictures apply, whether they deal with health and safety, labor protections, or reporting obligations. This tendency has been exacerbated by a 30-year attack on the very notion of a regulatory role for governments and loud professions that the market not only knows best, but knows everything.

Our job is to understand the changes in the financial marketplace and consider what we must do to ensure that our regulatory system is able to keep up with those changes. Innovation is as important in financial markets as it is in product markets, but it would be foolish to act as if regulatory structures, designed for a different world, do not have to be as nimble and innovative as those they regulate.

On the other side of this argument we seem to have Fed Chair Ben Bernanke, who argues that lenders have learned their lesson and these problems are being corrected on their own. Now, I happen to believe there is also a lot of truth to what Bernanke is saying here as well. But I would invite those in the Federal Reserve to look a few months down the road and ask how this discussion is going to play out if, as I fear likely, the financial consequences of previous reckless real estate lending continue to grow. Each new report of another failed institution, another family losing their home, another pension fund without the money to pay the retirees, and another decline in real estate prices is going to mean more pressure for the kinds of changes that Representative Frank has called for, and burn more of the political capital of anyone who tries to argue against them.

While I agree with what Representative Frank had to say, the devil is in the details. I would vastly prefer to have the staff at the Federal Reserve craft these reforms. But doing so requires the Fed to get on board now to try to set the direction for this debate, before they get swept aside by a political tsunami. ...

Not everyone trusts the Fed to impose the needed regulation, but I agree that the Fed is better suited for the task than congress and also hope the Fed will step in and regulate these markets as needed to ensure they function smoothly. My biggest worry is an overreaction that cuts off credit to people who traditionally have had trouble finding anyone to lend to them.

When it comes to other federal agencies, those in charge of regulating product markets, I would also like to see more reaction to the recent push for regulation and testing of toys, food, etc., and the reasoning is similar. But while it would be best if federal agencies would step in and provide the needed regulation in areas such as food and product safety, they are not very willing to do so. The competence is there - most of these agencies have very qualified (apolitical) staff working for them - but the current leadership in these agencies is generally very much opposed to regulating the marketplace. Sometimes the opposition is justified since industry will attempt to use these kinds of rules as protectionist measures, and markets will self-correct in response to problems in many cases. But opposition is not always justified and I would prefer to see federal agencies step in and act to preempt legislators who may not fully comprehend the economic issues, and who are subject to capture by special interest money, both of which can work against legislation that best protects the public interest:

In Turnaround, Industries Seek Regulations, by Eric Lipton, NY Times: After years of favoring the hands-off doctrine of the Bush administration, some of the nation’s biggest industries are pushing for something they have long resisted: new federal regulations.

For toys and cars, antifreeze and fireworks, popcorn and produce and cigarettes and light bulbs, among other products, industry groups or major manufacturers are calling for federal health, safety and environmental mandates. Some of those industries are abandoning years of efforts to block such measures, often in alliance with the Bush administration, which pledged to ease what it views as costly, unnecessary rules.

The consequences for consumers, though, are not yet clear. The tactical shift by industry groups is motivated by a confluence of self-interests: growing competition from inexpensive imports that do not meet voluntary standards, and a desire to head off liability lawsuits and pre-empt tough state laws or legal action... Concerns that Democrats could soon expand their control in Washington has also prompted manufacturers or producers to seek regulations that they consider the least burdensome, regulatory experts say. ...

Rick Melberth, director of regulatory policy at OMB Watch, a Washington group that tracks federal regulatory actions, agreed. “I have never before seen so many industries joining a push for regulation,” Mr. Melberth said. “What we need to watch closely is if this will achieve a real increase in standards and public protections or simply serve corporate interests.”

Some industries and consumer groups are aligned in seeking the same regulations... Other industries, though, are endorsing mandated government standards that fall well short of what consumer advocates want or what tougher state rules require. ...

“I am worried about industry lobbyists bearing gifts,” said Edmund Mierzwinski, consumer program director at the U.S. Public Interest Research Group in Washington. “I don’t trust them. Their ultimate goal is regulation that protects them, not the public.” ...

[I]ndustry officials, consumer groups and regulatory experts all agree there has been a recent surge of requests for new regulations, and one reason they give is the Bush administration’s willingness to include provisions that would block consumer lawsuits in state and federal courts.

Such pre-emption clauses were included, for example, in a drug label rule issued by the Food and Drug Administration in 2006 and in a new fire-prevention standard for mattresses imposed by the Consumer Product Safety Commission in July, said David C. Vladeck, a professor at the Georgetown University Law Center.

The preemptions bar consumers from filing liability claims in courts and supersede any tougher state regulations, extremely valuable protections for a major manufacturer, Mr. Vladeck said. “This is Christmas,” he said of industry, “this is their wish list.” A number of businesses are seeking such preemptions, though the clauses are being challenged in many courts. ...

While federal agencies have embraced some of the proposed regulations, in other cases they have resisted, stalled or moved slowly on them, frustrating industry groups.

“We have had a very, very uphill battle trying to get regulation,” said David H. Baker, a lawyer for the Lighter Association. The organization, representing cigarette lighter manufacturers, has been seeking a mandatory standard because unsafe, inexpensive Chinese imports were flooding the market, but staff members at the Consumer Product Safety Commission recommended against such a rule, saying the number of deaths and injuries did not justify it. ...

Last year, almost all of the nation’s spinach crop was destroyed after contaminated spinach ...sickened nearly 200 people in 26 states, killing a Wisconsin woman. It was the last straw for large growers, who now support mandatory safety standards. But the Department of Health and Human Services has been slow to endorse them, leading some proponents to conclude that the agency has objections.

“It’s a little unique when both consumer groups and industry associations are out there saying that we need new regulations, and the government doesn’t agree,” said Jenny Scott, vice president for food safety programs of the Grocery Manufacturers Association. ...

Comments

[evagrius]

"Such pre-emption clauses were included, for example, in a drug label rule issued by the Food and Drug Administration in 2006 and in a new fire-prevention standard for mattresses imposed by the Consumer Product Safety Commission in July, said David C. Vladeck, a professor at the Georgetown University Law Center.

The preemptions bar consumers from filing liability claims in courts and supersede any tougher state regulations, extremely valuable protections for a major manufacturer, Mr. Vladeck said. “This is Christmas,” he said of industry, “this is their wish list.” A number of businesses are seeking such preemptions, though the clauses are being challenged in many courts. ..."

Do the manufactureres/ sellers advertise that such a pre-emption is linked to the products they sell?

As a consumer, I would never buy such a product.

[robertdfeinman]

I think "over regulation" is in the eye of the beholder. What it really means is that the person feeling aggrieved is losing some money or potential gains and he is disregarding the gains somewhere else.

So the spotted owl or snail darter prevent development and thus, the regulations must be excessive, but that's because those pushing for relaxation of the rules assign no value to these creatures.

Regulation doesn't impose a cost on industry, regardless of what they claim. If it's done fairly (say inspection of chickens) then all suppliers have the same added expense. None are put at a competitive disadvantage. If they feel that their costs have now gone up they are free to raise their prices to compensate. If they claim that the can't raise their prices because of competitive pressure than the regulations aren't being applied fairly (perhaps beef isn't being inspected).

Regulations were put in after a long history of disasters. Why we have to relearn this lesson every couple of generations is a wonder. I can understand the capitalists having a selective memory, but legislators are supposed to know why the legislation exists.

If they have been willing to trash regulations this can only be a sign that our democracy is not functioning properly. The regulations were put in as a result of public pressure. The public is no more willing to eat tainted meat now then they were in the days of Upton Sinclair.

[zinc]

http://www.nypost.com/seven/09132007/business/black_gold_rush.htm

"Hedge funds, meanwhile, gang-traded crude oil "with a vengeance" to push its price through the $80 ceiling twice, raising alarms of higher oil prices in the $90 range this hurricane season.

Analysts said hedge funds used fresh cash obtained by institutions in the Federal Reserve's rescue moves two weeks ago to wage a new speculative assault on crude.

"The hedge funds have returned to energy and commodities with a vengeance," said energy analyst Peter Beutel of Cameron Hanover.

"There's a huge number of funds buying in.

"On the other side of this argument we seem to have Fed Chair Ben Bernanke, who argues that lenders have learned their lesson and these problems are being corrected on their own"

The Fed seems so confident that the IB's have learned their lessons that their loaning money to these "market makers" (crime families}.

Regulation - only of the sheeple.

[esb]

In the absence of (asset) inflation, the percentage of the population which is able to handle multi-hundred-thousand-dollar debts is actually substantially smaller.

Which is why the housing game came into its own after 1970 (and we all know what was done during that year, do we not?).

Its all about the I. Inflation.

Now I have been thinking about this entire extended issue (housing, inflation and the like) for several weeks (as have most of us). What has come to dominate my thoughts is the way in which this housing "event" came to its apex, with masses of desparate buyers motivated by fear into something of a panic, feeling "if I do not get myself and my family housed right now, I will never in my life be able to afford to do so."

Now we have large numbers of people consumed with the fear of being put out into the street.

The Bush years, where the spirit of the people (the zeitgeist, if you will) was one of fear. Fear of "evildoers," fear in housing, fear in banking, fear of "systemic collapse." Fear, fear, fear and fear.

Throughout the years of my life (1946- ) I can recall nothing quite like this (perhaps 1962 comes close).

[gordon]

On financial markets, Prof. Thoma says: "Not everyone trusts the Fed to impose the needed regulation, but I agree that the Fed is better suited for the task than congress...". On consumer regulation he says: "…opposition is not always justified and I would prefer to see federal agencies step in and act to preempt legislators who may not fully comprehend the economic issues, and who are subject to capture by special interest money...".

Wow! Americans really do seem to have lost any trust in their own National legislature.

[Winslow R.]

Mark wrote: "Not everyone trusts the Fed to impose the needed regulation, but I agree that the Fed is better suited for the task than congress...."

How so? This statement could be interpreted in many ways almost all of them antidemocratic.

Proposing regulation over legislation assumes current statues are beyond need of reform.

Mark wrote: "I would prefer to see federal agencies step in and act to preempt legislators who may not fully comprehend the economic issues, and who are subject to capture by special interest money, both of which can work against legislation that best protects the public interest"

And heads of federal agencies are immune from conflicts of interest?

I don't think either system is functioning very well right now, but my vote goes with congress, especially around election time which is better than never at all.

[gordon]

Apparently there's a journalist called Charlie Savage who's written a book on concentration of power in the executive branch of the US Govt. This might be useful reading.

[Mark Thoma]

I guess I wasn't very clear. Let me try it this way (and risk confusing the issue further...).

Suppose, as an example, that monopoly power is a problem in the economy. I would rather have the FTC and Justice Department apply existing law (built up over many, many years along with legislative adjustment as needed) rather than having the legislature step in and try to craft new solutions to the problem becasue agencies are not allowed to interfere. In many cases, the laws we have work just fine, but they have to be used.

There are very competent, dedicated people in these agencies who are there through both Democratic and Republican administrations. Unlike the leadership they are not political appointees, and they have a lot of experience and knowledge in their specialties. But if they are prevented from using their knowledge and experience to address problems, and problems persist, then we may get the legislators trying to solve the problems instead leading to a preponderance of confusing and sometimes contradictory rules and regulations when what we already had on the books would have worked just fine.

[Winslow R.]

Mark wrote:"I guess I wasn't very clear. Let me try it this way (and risk confusing the issue further...)."

It's becoming 'very clear' you are a transforming into a technocrat.

Technocracy ("techno" from the Greek tekhne for skill, "cracy" from the Greek kratos for "power") is a governmental or organizational system where decision makers are selected based upon how highly skilled and qualified they are, rather than how much political capital they hold.

http://en.wikipedia.org/wiki/Technocrat

[robertdfeinman]

Mark Thoma:
I think you have made a very good argument for why the civil service needs to be overhauled (again). Obviously there are too many political appointees in executive departments and they have too much influence.

Originally it was the case that all such employees were political, thus the first several rounds of civil service reform. It seems doubtful that meaningful reform will be forthcoming since both parties like the ability to reward friends with such jobs when they are in power. Legal challenges have all failed since the Supreme Court has ruled that such political appointments are the traditional prerogative of the winning party.

If there were to be a change, I think the one that would have the best chance would be to require confirmation of all political appointees, not just those at the top of each department. Why does the whitehouse need 1000+ employees? This could also be fixed by budgetary means. What are the chances that the next president Clinton will be willing to give up this perk?

[gordon]

Thanks, Prof. Thoma. Though I'm not an American (and therefore run the risk of being invited to go play in the traffic), I'm going to stick to my guns on this, not least because foreigners are concerned about the growth of unbridled executive power in the US Govt. and the consequences it has for the whole world.

To say that existing legislation isn't enforced is to point to a failure of executive Govt. The undoubtedly competent and dedicated people you refer to can't act in the face of executive (read Presidential) opposition, because the top-level executive Govt. controls them. As you say: "...if they are prevented from using their knowledge and experience to address problems, and problems persist...". You are no doubt better aware than I am of the executive interference in the Justice Dept. which has been in the news lately, and I have read of other examples of executive interference with environmental enforcement. Maybe existing consumer-protection legislation isn't being properly enforced either.

In the face of such failure of executive Govt., waiting for an election to bring in a new executive is an inadequate response. As Savage apparently says in his book (see link in my previous comment), there is no guarantee that an incoming Democratic administration would rectify the situation - incoming Democrats are more likely to use these powers themselves, rather than abandon them. Such a situation isn't a solution to a problem of selective enforcement; it just means that selective enforcement persists, but (maybe) in an opposite sense.

That leaves it up to Congress itself to assert the responsibility of the executive to enforce the laws. I can't see any other option. Unless that happens, the competent and dedicated people in various Federal agencies may as well go on vacation.

[Justin Rietz]

As esb points out, I am sure many of us have been pondering "where did things go wrong". For me, it is a puzzle that I keep turning over and over in my head - like when I am trying to remember the name of a movie from 10 years ago and I can't let go of it.

I keep coming back to interest rates. With interest rates held low by the Fed, and the resulting "cheap" mortgages, demand for loans increased. This steadily drove up housing prices, making people fearful that if they didn't buy now, they would miss out - both on home prices and low interest rates. It became a self-feeding cycle. Had interest rates been allowed to adjust to market forces (i.e. no Fed intervention), the demand for mortgages would have driven up rates and thus coolied demand.

On the flip side of the coin, people looking to save money yet maintain liquidity were faced with low returns. Firms offering money market accounts provided the best rates, often by lending to higher risk home buyers. Savers, protected by the FDIC (a married couple is protected up to $400,000 at any given FDIC insured institution, I believe) could treat these rates as risk free. Hence, an ample supply of funds for the firms to lend out to riskier buyers. Margins earned by lenders also played a role, but I haven't delved deep enough into this area to comment.

Regarding legislation of consumer products, I would argue that the Bush administration's push for tort reform was in fact a push for regulation. A consumer hurt by a product should be able to recover full compensatory damages and not be limited by what the government thinks is reasonable from a business perspective. Moreover, the threat of massive lawsuits due to a harmful or defective product is a strong incentive for a producer to maintain a high standard of quality. Regulations, on the other hand, are less of a threat and more of an obstacle - as has been pointed out above.

[ken melvin]

Strange form of democracy when such as Bush and Reagan get to decide which laws to enforce. Not so strange, many of their supporters agreed that it should be so.

[paine]

mark guides his craft into conflictional waters

i detect --- as others here also detect ---
a profound if not fully examined
fear of the two body monster
made out of "people's" reps

better a mandarin solution
easily effectuated by a simple change of emperor

"let a thousand agencies contend "

fantasy :

madame clinton takes the purple
and unleashes the dc mandarins

we have a busy hive again
unside the belt way
as the long cuffed up neutral experts
are frred and set about
blowing off 40 years of cobwebs

go on a " good ole reg " enforcement binge

nope it's not to be another 1913
let alone a second 1933
god forbid
thos types of hair brained novelty fixits
like in the first case....errr the fed itself ...
and
in the second case ....what ??
err better where to begin
the sec ...fdic... the wagner act ....
better i not get started
nope lets just go for
a nice Hoover II type solution
same old same old
only spiced up
put into higher gear

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