REGULATION TIME BOMB, CAN YOU SAY CRA

 

People who know me well are aware that I expound at length sometimes about the destructive effects of over regulation on the economy. The pervasive intrusion of the world’s manufacturers into the U. S. market place multiplies the damage done to American businesses by our tax and regulatory burden. The products of our businesses must be competitive in the free market or the businesses will fail! To illustrate my point consider the 5.4 Billion hours each year that Americans spend complying with the tax code. The cost of this time, even at the minimum wage, is $39.15 Billion dollars a year not counting the cost of the taxes themselves. The federal bureaucracy pumped out 80,000 pages of new regulations in 2013 alone. Laws are passed by the legislative branch of government and submitted to the President for signing into law. Once signed the laws are turned over to one of the departments of the federal government’s leviathan bureaucracy to write the enacting regulations. The cost of complying with and proving compliance with these regulations is a cost that our international competitors don’t have. Allow me to illustrate my point using one law from the 1970s.

In 1977 President Carter signed into law an innocuous piece of legislation called the “Community Reinvestment Act” (CRA). The purpose of the legislation was to encourage banks to lend in their local communities and thereby stimulate local economies. Administrations change and with them the emphasis that is placed on enforcement of existing laws. Regulators started holding banks accountable for CRA compliant lending quotas in the mid 1990s under the Clinton administration. The move put pressure on lenders in low income areas to increase loans with relaxed lending standards so that they could meet the quotas. Interest rates were high enough at that time to discourage a wave of refinance even with the lower standards. Regulators again on Clinton’s watch threatened to make mortgage companies, who weren’t governed by the law, comply with the CRA. The threat got mortgage companies to behave as if they were regulated by the law extending its effect. Regulators pushed by the G.W. Bush administration next favored low to no down payments loans when evaluating a banks compliance with the CRA. During the Bush administration banks were informed that all lending standards that exceeded CRA standards risked being seen as evidence of unfair lending. In regulator speak that is big time arm twisting to make banks lower all of their lending standards. Bankers couldn’t object to the arm twisting publicly without appearing to resist an important piece of civil rights legislation. Automated underwriting of loans was thrown about, in the most pejorative way, during congressional hearings as evidence of bad practice or even predatory lending. John Carney in his excellent article in Business Insider, 6-27-09, put it this way. “Those not employing automated underwriting would be putting their CRA rating at risk. Automated underwriting was seen as a way of eliminating bias in lending.” Banks felt safe making the loans as home prices kept rising improving collateralization at the same time Fannie and Freddie offered to buy $2 trillion worth of “affordable mortgages” from primary lenders. CRA loans did not have higher default rates than other loans increasing the banks sense of security. Banks that did not meet CRA volume guidelines could still qualify by buying Mortgage Backed Securities (MBS) based on CRAs. The pernicious evolution of regulations aimed at social engineering in the home ownership market across multiple administrations combined to build a bubble that burst in the autumn of 2008.

Over and over again with the predictability of the sun setting, politicians and bureaucrats place artificial constraints on a free market and end up causing the market to collapse. A trillion dollar TARP bail out for banks and a worldwide recession costing countless jobs and business failures came about courtesy of unelected bureaucratic regulators who never suffered repercussions. Today banking regulators are once again encouraging sub-prime home mortgages while the FED is pumping Billions of dollars a day into the economy building the next securities bubble on Wall Street. Meanwhile Congress fails to pass a single constitutionally mandated budget for five straight years and continues deficit spending at record levels. The new healthcare law is in the process of crippling 1/6 of the economy while, for some strange reason throwing 13 million illegal aliens into the legal workforce with a path to citizenship is the priority for Congress. The President with executive orders and EPA regulations is in the process of doing to the coal industry what over-regulation did to Americas steel mills.

Coming full circle I struggle to understand the madness of our own government taxing and regulating manufacturers until they can’t compete in the marketplace with foreign goods, all the while pontificating about jobs being their number one priority. I have personally run a manufacturing business for thirty one years and lived with endlessly increasing regulation and its compliance paperwork. It is time to vote for Congressmen with business experience so that they understand the necessity of reducing government interference in our free market.