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InsiderOnline Blog: October 2008

How Less Regulation (Not More!) Could Help Unfreeze Credit

The Paulson plan was supposed to unfreeze the market for short-term lending that’s needed to keep the economy moving. Why, some might wonder, can’t the market figure this out without government help? Economist Jerry Bowyer points to some government-created bottlenecks. In particular, he argues that because the Sarbanes-Oxley law has criminalized so many regulatory violations for financial executives, the banks are now afraid to take any action at all regarding mortgage-backed securities:

These securities, which the government invented (through Fannie Mae …) and foisted upon the banks (through the Community Reinvestment Act), now has regulatory cooties. Own it and you’ll get sued. Sell it and you’ll get sued. Keep it and the regulators will force you to write it down to panic-level prices—and then you’ll get sued. Try to foreclose and state and local government will refuse to enforce the contract. Try to get private equity investment to keep your balance sheet alive and you find the door barred by 80-year-out-of-date regulations like the Bank Holding Company Act.

Bowyer suggests:

Perhaps the mark to market regulations could be suspended before the taxpayers are forced to move in. Maybe if some of these rules are eliminated, little or no taxpayer dollars will be needed. If Congress doesn’t want to put public dollars into this, it should let private equity put private dollars in.

It’s a silly throwback to the 1920s, which only allowed bank-holding companies to buy a majority investment in a troubled bank. Back then, all banks were local. Now banking is an international industry. Mutual funds, private individuals, hedge funds, venture capitalists, leprechauns, unicorns…everybody should be allowed to buy bank shares. If everybody is not allowed to, I’m afraid everybody will be forced to.

Posted on 10/01/08 03:05 PM by Alex Adrianson

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