Deregulation . . . Regulation . . . What’s the Difference?

Attention credit card holders! Thanks to the Fed, you are now protected from potential rate increases (and perhaps also from yourself—read more here.) It seems like just what the doctor ordered—more regulation for a wobbly world. This has been a leitmotif during the past months—a recession and a stock market steeply off its highs are penance for eight years, or more, of reckless deregulation.

Which begs the question: What exactly is this "deregulation"? What bill? What law? What financial deregulation has actually happened in the last eight years? Are people confusing "deregulation" with "increased regulation"?

For example, the accounting morass that enveloped the banks and their "toxic" mortgage holdings was due in part to mark-to-market accounting (regulation) compounded by new fair value definitions in the immensely ill-considered FAS 157, issued November 2007 (more regulation). In short, banks had to report their assets as if they were liquidating them tomorrow—which is complicated if assets trade infrequently, are fairly illiquid, and/or can't find a willing audience at the moment, as was the case with many mortgage-backed securities. How else do you know this accounting stricture was bizarre? Though banks wrote down these loans, have you? Said another way, banks wrote down billions in mortgages that most Americans continue to make monthly payments on.

What about the talented Mr. Madoff and his stupendous Ponzi scheme? Many blame hedge funds' light regulation, going so far as calling his actions an "indictment of his era." And yes, hedge funds escape the more onerous regulation of registered investment advisers. But Mr. Madoff was a registered investment adviser with the SEC and operated in the most strenuously regulated sphere in the known universe. Keep in mind, the SEC is not now, nor ever was, meant to be a crime-fighting unit. They set rules and dole out punishment for transgressors. More regulation wouldn't have prevented Madoff's giant shell game—what Madoff did is against the law and has been forever. Unfortunately, the world will always have crooks. Relying on the SEC to do your due diligence is akin to wrecking your car in a high speed crash and then blaming the highway patrol for not pulling you over. Though folks may claim Madoff signifies a trend, the vast majority of the industry operates honorably or at least in holy fear of being outed as a crook.

When the road gets rocky, it's human nature to long for a bit more order. Or to believe we only got in this mess because of a lack of cosmic tidiness. But what of this charge of mass "deregulation"? The only thing reasonably like deregulation was the Gramm-Leach-Bliley Act, repealing part of the Glass-Steagall Act of 1933. This allowed banks to offer securities and insurance products and vice versa. (Incidentally, it was signed by President Clinton in 1999, not Bush.) While the 1999 act removed a major operating restriction, it arguably didn't result in fewer regulations for banks, but more since banks now had to satisfy banking and securities and insurance regulators. (Those longing for job security ought to consider a career as a compliance officer.)

Though frequently painted as a deregulator, Bush signed the intensely onerous Sarbanes-Oxley Act in 2002. And he did repeatedly, though unsuccessfully, call for greater oversight of Fannie Mae and Freddie Mac. I challenge you to find one bill anywhere in the last eight years that materially lightened the regulatory load for Financials. Call Mr. Bush what you will, but a deregulator he ain't.

Perhaps when folks complain about "deregulation," they mean the pace of new regulation hasn't been brisk enough to satisfy them. It's their prerogative to prefer oodles of rules, but will increasing regulations get them what they want? Consider the Fed's recent ruling on credit cards. As with all government tinkering with private enterprise, we're certain to have unexpected consequences. What do you think happens if banks can't ratchet rates on problem borrowers? They'll make sure they aren't left holding the bag by raising rates across the board on the vastly more responsible borrowers. And those with a short history probably just won't qualify for credit cards at all. Why is it preferable to live in a world where a recent college graduate can't qualify for a credit card to buy a suit to interview for his or her first job?

Personally, I'm all for more kids buying more suits. So if you're like me, when folks cry for more "regulation," don't shudder in fear. Perhaps they've got it backwards! Let's have more of this "regulation" stuff. "Deregulation" certainly has put us in a sticky spot.