Bacon's Rebellion

Democracy Thrives in Sunlight

Regulation Run Amok – Community Banks

—

by

James A. Bacon
in

This is a story of regulation run amok. It’s been said that the road to hell is paved with good intentions. Never is that thought more germane than when applied to government regulation. In today’s episode of “Regulation Run Amok” we’ll examine the unintended consequences of some well meaning regulation on community banks. For an excellent account of this phenomenon, please read the op-ed piece, “Main Street Lenders Choked by Regulators.”.

Several quotes from the op-ed piece should be of interest to the readers of BaconsRebellion:

“It appears that, having failed to detect the sub prime, housing and derivatives bubbles (which emanated from Wall Street), the regulatory agencies have decided to get tough on Main Street lenders.”

“If you want to figure out why the economy cannot find solid footing, look no further than the way the regulators are treating commercial real estate loans in community bank portfolios.”

There has been a great deal of talk about government regulation lately. Liberals believe that all manner of problems would be solved if the government just regulated more of our lives.

Conservatives note that the government is already too big (based, at least, on the size of the deficit). However, liberals ignore the simple fact that heavy regulation has often failed despite America’s 100+ year long experiment with “big government”. Conservatives turn intellectually blind when reminded that it was often their conservative heroes (Reagan, GW Bush) who grew the size of government and the size of the related deficits the most.

Given the obvious issues with both liberal and conservative dogma, I am today adopting the Realist political philosophy. This philosophy will espouse the recognition of simple truths. One of those truths is that government is not sufficiently competent to play as large a role in our lives as the liberals would like it to play. The regulatory pummeling of community banks while those “too big to fail” only get bigger is but one example of this reality.

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52 responses to “Regulation Run Amok – Community Banks”

  1. Anonymous Avatar
    Anonymous

    Excelent post Groveton — until the very end.

    Being a realist is really great, almost like an AntiPartisan.

    But why not declare "liberal" and "conservative" as what Dr. Risse calls Core Confusing Word.

    They are, as AZA pointed out meaningless pedgion holes.

    Keep up the good work and have a safe trip to the other side of the Pacific.

    Observer

  2. Gooze Views Avatar
    Gooze Views

    Groveton,
    Not a bad post for a rookie.
    I agree that when the Citis and Merrills and Wamus and AIGs of the world screw up, the little guy banks get hurt. There are many examples of them doing good and creative work, such as one small North Carolina community bank using its tiny share of TARP funds to help builders and buyers finance new houses in unique ways.
    Some of the problems in the post you cite, however, aren't necessarily regulation per se. One is "mark to market" accounting that regs require. It is a questionable way of bean counting and in a down market tends to help diminish housing prices beyond the pale of reality. "Mark to market is not essential and maybe GAAP and FASB need to rethink it. It is an accounting issue not a regulation one.
    Plus, there are ways to exempt banks with lower assets from big time regs.
    I guess I am a liberal and I state emphatically that regs are necessary. But I have a problem as you do with one size fits all.

    Peter Galuszka

  3. Groveton Avatar
    Groveton

    "But why not declare "liberal" and "conservative" as what Dr. Risse calls Core Confusing Word.".

    I like that. But doesn't EMR use new terms in place of the "core confusing words"? Like "inside the clear edge" instead of urban / suburban?

    What new terms for political philosophy would you suggest?

    Also, I heard a fascinating radio advertisemnt on the country music station I like. It was from Lenox Financial. As I understood the ad it was claiming that the government supports refinancing of mortgages even if the borrower is under water on the house. They said this was the biggest no brainer in the history of the world. Those are the exact words.

    I was wondering if the functional human settlement crowd on this blog (aka Risse's Rangers) had an opinion on how lending affects human settlement patterns.

  4. Anonymous Avatar
    Anonymous

    Groveton:

    On Core Confusing Words.

    I believe Dr. Risse's approach is to identify words that cause confusion because different people have different understandings of what they mean.

    He then does not use these words but instead substitutes a word or phrase that clearly defines what is intended.

    If that word may be confusing to some but there is no better term he Capitalizes it and includes the definition in GLOSSARY. (I have heard him grumble of late that Jim Bacon has not yet linked to the current GLOSSARY so beware of words one reached in the link on the front page.)

    As to the impact of lending on settlement patterns:

    You may have heard about "Wrong Size House / Wrong Location"?

    At a discussion group recently he outlined the insights one can gain from examining foreclosures and short sales by Radius Band.

    Quite eye openng.

    Observer

  5. Anonymous Avatar
    Anonymous

    Oh yes on the 'L' word and the 'C' word:

    Why not use 'those who love MORE regulation' and 'those who see less regulation as THE answer'?

    But then you can probably do much better.

    You agreeded on the position of Real Conservatives re leaving Marcellus Gas where is was until there was a safe way to remove it and the market would pay for those processes.

    That is a great start at ending the tossing of rocks at empty pigeon holes.

    Observer

    Observer

  6. James A. Bacon Avatar
    James A. Bacon

    Money graph from the article: "It appears that, having failed to detect the subprime, housing and derivative bubbles (which emanated from Wall Street), the regulatory agencies have decided to get tough on Main Street lenders."

    I feel so much safer knowing that the feds are looking out for me!

  7. Anonymous Avatar
    Anonymous

    "..government is not sufficiently competent to play as large a role in our lives as the liberals would like it to play. "

    Look, I'm no fan of stupid government regulation, but this is beneath your usual level of thought.

    Neither is Private industry sufficiently culpable, or responsible, nor does it have the same incentive as government to play as large a role in our lives as thay would like. Besides, there isn;t that much money inthe world.

    We need government to assure equal recognition of rights, to ensure the peace when they are not recognized, and to do certain things that PE willnot or cannot do.

    Government has the strength of staying power and vision that looks beyond the next quarter, it has an interest in long term grwoth and profits, and it has financial resouces and borrowing power that cannot be matched by PE.

    If we have a problem with government programs we should do two things:

    a)come to some agreement as to HOW we decide what is a good program and bad. That procedure should be based on provable financial results and not liberal or conservative dogma.

    b) based on a) get rid of the crap that doesn't work.

    But first, you need a decision process that is sufficiently robust and sufficiently neutral that neither side can realistically claim it is slanted against THEIR interests.

    They will do this anyway, but if the process is sufficiently robust, and evidently fair their current claims will fall on deaf ears.

    RH

  8. Anonymous Avatar
    Anonymous

    Core confusing words:

    We have let liberal and conservative become stereotypes.

    I sais in a preveious post that conservatives want to control what is taught in education but liberals just want to spend money.

    My thinking is that a true liberal would not care so much What is taught, provided there is variety, choice, and the moeny to fund it.

    So, a true liberal would support a conservative brand of sex ed as long as a more liberal brand was available, and the moeny to fund both.

    Same with a conservative version of archeology vs other (liberal)interpretaions, like real science.

    A liberal who won't support a fair test under equal funding opportunity, is no liberal but simply an ideologue of a different stripe.

    A conservative is stuck with two problems, confronted with the same issue: he won't spend the money, and he only wants one choice.

    Therein lies the beauty of [part of] Groveton's argument: offer a choice a( a real choice, not a false one, Larry), make them pay for what they want, and see what happens.

    When I first arrivced in wilmington NC, to go to UNC (they had a fine, early oceanography program), it wasnot long after desegregation, and much of NC was still some kind of defiance.

    Dozens of Christain Schools of various brands and denominations had sprung up in store fronts and worse. Public schools were largely abandoned to blacks and the whites too poor to pay for even the worst segregated education.

    During the time I was there, the storefronts gradually disappeared, as parents discovered they could not do as good a job on a limited budget as the government could.

    I had no children in school and no stake in the matter, but that was my observation, over time. My only bias was that I went to a highly integrated public high school: one with several varieties of skin colors, if that is what you mean by integrated.

    While I lived there, my wife worked for an ultra, ultra, conservative newspaper, not to say one that was outright racist.

    Times were hard, and you did what paid a check.

    The owner, was an utterly engaging guy. Thoroughly charming and at the same time despicable in all the "good old boy" ways. He had a serious case of testostoerone overload, along with a jock background – and two daughters.

    You could see this coming. He raised them like sons, and guess what happened? As late adolescents they turened into lesbians.

    Whenhe found ut, it was as if someone had taken his head off, rotated it 360 degrees and put it back on.

    He was a changed man.

    His newspaper, based on a niche market to begin with, failed. He could no longer find the heart to write the same kind of vicious attacks he ususally published. (Photo of an Afro Pick, Healine: Black Children are Carrying These Weapons to Your Child's School).

    His Children left private school and went back to public school.

    The Private Enterprise that supported his childrens school failed.

    So, it is not always government htat fails: PE has a pretty good track record at that.

    What is the difference?

    If government fails it wastes the publics money.

    If PE fails it wastes the publics money, but only that portion of the public that CHOOSES to take the risk.

    Surely we can find a way to combine the best of both worlds.

    RH

  9. Anonymous Avatar
    Anonymous

    I feel so much safer knowing that the feds are looking out for me!

    You can always put it under your mattress and trust the local gendarmes to look out for you.

    RH

  10. Anonymous Avatar
    Anonymous

    "One is "mark to market" accounting that regs require. It is a questionable way of bean counting and in a down market tends to help diminish housing prices beyond the pale of reality."

    Sorry, if you don't have a market, how do you know what a fair price is? Government price fixing?

    Bad enough that government has to step in to assure that the market prices externalities, lets not get crazy.

    Housing prices fell because youcould not get lending. Youcould not get lending because the loans were sliced and diced cupiditously, such that the value was unknown. In turn, this happened because the rating agencies were essentially bribed by those creating the (s;liced and diced) securities.

    This was not a market failure: this was fraud.

    RH

  11. Anonymous Avatar
    Anonymous

    "He then does not use these words but instead substitutes a word or phrase that clearly defines what is intended."

    You mean what he interprets what is intended.

    Now you have tow confusing terms.

    Better to use the original term and explain how you interpret it. That way as people accept y0ur interpretation, or not, the meaning changes over time.

    Tell him to stop making things worse.

    RH

  12. Anonymous Avatar
    Anonymous

    I applied for a loan onced from Citi.

    It was a terrible experience.

    The salesman promised one thing, but the loan originator told me something different.

    I never could talk to the same person twice.(The old, you don't know who youare negotiating with scam.)

    Could not find out whne myclosing was scheduled.

    Finally, the called me (4:00 PM) and told me my closing was the next day, 40 miles away.

    When I arrivced, the rate was a full point higher than I signed utp for and I walked out. They told me I couldn't do it, but I was gone.

    The next day I wrote to the CEO and complained, and about four days later I got a call fromn som VP. Hew wanted to know waht he could do to fix the situation, and I sai send back my application fee, which he promised.

    Then I told him I had alrady closed the loan with another lender, three days insteead of four weeks.

    I never saw tha application fee,a nd swore never to do business with Citi again.

    Guess who bought my mortgage?

    RH

  13. Anonymous Avatar
    Anonymous

    Thee was such a thing as the "Location Efficient Mortgage" but I think government regulation killed it.

    RH

  14. Gooze Views Avatar
    Gooze Views

    RH
    You misunderstand mark to market accounting. It means that instead of placing a price on the house you want to sell, you go by the "mark" of prices that other houses nearby yours have been selling for. That price doesn't recognize whether your house has any special attributes that make it a better sales prospect deserving of a better price. If all the houses within an arbitrary radius of yours are in a price spiral, so too will yours be.
    It has absolutely nothing to do with "the government" setting prices. And frankly, I am getting a little tired of some of the commenters not being able to see past their political dogma to understand some basic economic trends.You folks are all smart. Let's try to show it.
    Peter Galuszka

  15. Anonymous Avatar
    Anonymous

    Government in the shadows permits "special deals." Now everyone, big, small, rich, poor, black, white, female, mail, corporation or association, must have the right to contact government. But do they have a right to do so in secret or in relative secrecy? No.

    If there were more visibility, the special deals would be less likely to occur. What if every lobbyist meeting with the Treasury Department were streamed on the Internet? What if every lobbyist meeting with a member of Congress were streamed on the Internet?

    Would this make a difference?

    TMT

  16. Anonymous Avatar
    Anonymous

    TMT:

    I'm with you. You have hit the jackpot. Sunshine gurantees the growth of democracy. Of course, it needs a little fertilizer too.

    But just like my fields, it is important to know where it goes.

    RH

  17. Anonymous Avatar
    Anonymous

    You misunderstand mark to market accounting. It means that instead of placing a price on the house you want to sell, you go by the "mark" of prices that other houses nearby yours have been selling for. That price doesn't recognize whether your house has any special attributes that make it a better sales prospect deserving of a better price.

    Complete and utter nonsense.

    Mark to market accounting has NOTHING to do with the value of your house.

    I have 100 shares of GE that I paid $2500 dollars for.

    For my own purposes, I can keep that on the books at $2500 no matter what. It is part of my net worth.

    But, if I try to go borrwo money,and the banke asks what my net worth is, I have to represnt the value of that stock at the time I make the application.

    Ottherwise, I am lying to the bank. What I am worth is what it is likely to sell for, today.

    It is no different for my house.
    I keep it at book value, what I paid for it plus capital improvements. Even though it is worth far more than that, at least I know my lender(s) cannot complain.

    And, my personal financial planning is conservative on account of it. If I ever sell it, my net worth will take a big jump.

    But none of that has ANYTHING to do with mark to market accounting. My house will sell for whatever I can get, regardless that it has the most magnificent deck within ten miles. The buyers will consider that.

    Mark to market accounting is ONLY anissue for publicly traded firms. Otherwise Enron can claim the value of water in downtown Memphis OR Nashville is $100 a GALLON.

    The morgage slicer and dicers created a market for which no value was readily determined.

    The vast majority of mortgages wsere and are still being paid on time. But, because of what happened in the secondary lending market, money was no longer for loan.

    Unless you had cash money up front, you could not buy, and prices fell.

    Those people that are able to buy with cash are doing so, at a huge bargain. enough of a bargain to make the forgone interest look like a bargain.

    Sorry, but absent huge government interference, your house is going to sellfor preety much what other houses near is sell for, plus or minus amenities.

    RH

  18. Anonymous Avatar
    Anonymous

    Prequel on my [ultimate] Citibank loan.

    When I decided to build, interest rates were low.

    I took some cash out of my retirement plan to make the down payment, locked in a price for the pre-fab, and applied for a building permit.

    The county lost my drawings, three times. They hassled me over soil type, foundation plans, geothermal heat pump (probably the first one in the county), inspection on a prefab (built to state standards) etc etc.

    It took 18 months to get the building permit, and 9 weeks to get the house.

    The funny thing about this is that I was WARNED. WhenI went into talk to the planning agency they looked at my plans and told me notto worry: "We treat private builders differently."

    At the time I was yooung an stupid. Now i would have understood that what they meant was, "Don't screw with the establishment, or we will haze you."

    That experience had a lot to do with my present insistence on EQUAL rights for EVERYONE. Liberal or Conservative, Gay or Straight.

    Now, I'll say this. The professional builders paid for professional "runners" to sit inthe building and walk their stuff through. They wanted something,and they paid extra to get it.

    I don't think that is an excuse for outright government malfeasance.

    In the meantime, interest rates spiked from 6.5 % to 10.5%. I figure unecessary government intervention cost me $50,000 by the time rates went back down and I refinance.

    I say it was uneccessary because the house ultimately got built, with only one concession to governmtnent. And ultimately, that one proved to be unneccessary as well.

    Not the least of the problem was the money I withdrew to pay for the house. Since that did not happen (because of one government) the other government charged me a HUGE hit in income taxes, that otherwise would have disappeared in (forgiven) interest payments.

    The whole thing would have been unecessary if Groveton was in charge. The whole thing would have been impossible if EMR was in charge.

    YET, of the two, Id guess EMR was the "liberal"

    RH

  19. Groveton Avatar
    Groveton

    "If there were more visibility, the special deals would be less likely to occur.".

    I agree.

    I'd use the following logic chain:

    1. We should have the least amount of regulation possible, but no less.

    2. If any one entity must regulate, that entity should be part of government directly controlled by elected officials.

    3. Recent events have indicated that, in certain areas, the level of regulation is insufficiently low.

    4. The overall size of government and a reading of existing regulation indicates that, in some areas, government is over-regulating.

    5. Special interests will spend vast amounts of time and money to influence regulation to benefit themselves rather than "the people".

    6. Transparency in government will inhibit special interests from comandeering the regulatory process.

    Based on these beliefs, it seems to me:

    1. We need a top-to-bottom review of existing regulations. Gov. McDonnell's "efficiency committee" might be a good place to start. Redundant or unnessesary regulations should be targeted for elimination.

    2. Certain areas, like the financial sector, probably need more regulation. All new regulation should be considered only with a "total cost of regulation" calculation attached.

    3. A bright kleig light must be turned on all aspects of government. All donations to politicians must come from either named individuals or named companies. No more PACs, funds, indirect contributions, etc. All meetings between lobbysts and politicians or those on the staff of the politician must be recorded in the public domain.

  20. Anonymous Avatar
    Anonymous

    All donations to politicians must come from either named individuals or named companies. No more PACs, funds, indirect contributions, etc. All meetings between lobbysts and politicians or those on the staff of the politician must be recorded in the public domain.

    Amen. Let's write a regulation to getit done.

    Um, that total cost of regulation sounds a lot like TC = PC + EC + GC

    RH

  21. Anonymous Avatar
    Anonymous

    Groveton:

    On the right track but need one other step:

    Corporations (or any other form of an Enterprise) is not a person. Only persons can donate.

    Persons who make the decisions must be accountable.

    Observer

  22. Anonymous Avatar
    Anonymous

    RH said:

    “Better to use the original term and explain how you interpret it. That way as people accept y0ur interpretation, or not, the meaning changes over time.”

    Now we know RH is a neanderthal

    Like those knuckle draggers, he would be perfectly satisfied if his personal physician diagnosed stomach cancer, sclerosis of the liver, diverticulosis, appendicitis and 47 other common ailments as ‘evil humors of the gut.’

    By the way I define neanderthal as “anyone who has economic or social delusions that compound Geographic Illiteracy.”

    Jed M

  23. Anonymous Avatar
    Anonymous

    I am with you Peter.

    However, I find RH amusing – in a Beverly Hillbilly sort of way.

    Some of his recent gems:

    “If it is not profitable, it is not sustainable.”

    RH has never heard of Hazel Henderson nor does he understand the Nelson Axiom for the foundation for all human economic activity.

    One wonders how much return on investment RH’s mother made on raising him?

    RH is an expert on hydrofracking? Then perhaps he can tell all exactly what is in the hydrofracking slurry. It will be a great help to those suing gas companies millions of dollars for polluting their wells. Most of the slurry may be water and drilling mud but how many parts per million does it take to destroy an aquifer?

    He said it all when he said in another comment:

    “that is news to me.”

    A lot of things would be news to him if he just paid attention and did not try to spin what he remembers from college and what he stumbles onto via the Internet into ways to justify his overwhelming selfishness and egocentric perception of the social contract and his disdain for the well being of future generations.

    By the way that is my definition of a ‘neanderthal.’

    rcj

  24. James A. Bacon Avatar
    James A. Bacon

    Guys, please tone down the ad hominem attacks. I can understand that you find Ray Hyde's views infuriating. I often do myself. But labeling him a neanderthal — one of the milder epithets hurled against him — does not diminish his arguments in any way. You are far more effective when you attack the substance of his arguments. Thanks.

  25. Anonymous Avatar
    Anonymous

    Who says we are all 'guys?'

  26. Anonymous Avatar
    Anonymous

    Mr. Bacon:

    You misunderstand the use of 'neanderthal' in those too posts.

    Read it again. I and others are just following RHs rules of word derivation.

    Jed M

  27. Anonymous Avatar
    Anonymous

    RH does not make 'arguments' he makes nasty, abusive, demeaning and snide remarks.

    He offers useful comments from time to time but cannot resist kicking dirt on anyone withwhom he disagrees.

  28. Larry G Avatar
    Larry G

    well I am no lover of regulation myself either and I know that might be hard to believe but I don't want people who are functionally blind driving on the highways; I do not want obvious pig poop in my romaine lettuce and when my car says 3 year warranty and it craps out and the dealer says tough cookies, I want something more substantial than "I'll never buy from you again" to be in play.

    That's the truth for most of us.

    You do not want to receive a letter from your FDIC-less bank saying they have gone out of business and your account is gone.

    If your child's car seat folds in half with him in it – you're NOT going to be satisfied with a refund and sincere apology.

    This discussion of regulation is dumb.

    Of course, NO ONE wants dumb, redundant, unnecessary regulation.

    So what? I don't want to dodge horse manure on the metro escalator either. What's the point?

    Every sat at a stop signal that was "regulating" you really stupidly?

    Of course you have.

    Do you then say that because of that – all stop lights need to be removed because some of them don't work right?

    Everybody wants regulation "done right".

    Good luck. Next time your electricity goes out, threaten to change suppliers…

  29. Gooze Views Avatar
    Gooze Views

    Woah,
    Let's back up. My one and only issue with RH here is that he is blaming mark to market acounting on government regulation.
    That is wrong. Mark to Market started showing up in GAAP in the early 1990s. It really took hold with Enron. In neither case did any part of the federal government initiate anything.
    It is NOT the case of the bad ole government shoving something down someone's throat. In the case of Enron, Enron wanted to use mark to market because it fit their schemes And the SEC went along with it.
    What I find so frustrating with this blog and some of the conversation is that people cannot separate facts from their views. Fine if you hate regulation and the government. But please don't twist facts just to fit your dogma.
    If you do, either the truth squards will hunt you down or reasonsable people will just leave the Blog saying it is simply bullshit.

    Peter Galuszka

  30. Anonymous Avatar
    Anonymous

    "Corporations (or any other form of an Enterprise) is not a person. Only persons can donate." No political donations from nonprofit entities, interest groups, trade associations, labor unions, professional associations. No bundling. Individuals can make contributions.

    Larry, having dealt with the regulatory process, both state and federal, for more years than I'd like to think, one of the biggest problems is that regulation is used to favor one competitor over another, one technology over another, etc.

    I don't have problems with most regulations that protect consumers against fraud, or that protect the purity of food and the like, but why should the federal government decide between Verizon or Comcast? Telecommunications regulation has been a mess for years, as regulators have tried to achieve this or that market result. John McCain had it right when he proposed to set a date certain where anyone could enter anyone else's market. Instead, we've had years of the big guys protecting their markets to the result of a loss of consumer welfare. I suspect other industries are the same. More transparency might help rid this perversion of regulation.

    TMT

  31. Anonymous Avatar
    Anonymous

    Corporations (or any other form of an Enterprise) is not a person. Only persons can donate.

    Not according to the Supreme court.

    Until the legislature legislates themselves out of their biggest paycheck, we are going to have to live with the constraints we have.

    For the time being, Observer is observing a dream world.

    RH

  32. Anonymous Avatar
    Anonymous

    That is wrong. Mark to Market started showing up in GAAP in the early 1990s.

    You are right of course. I stand corrected.

    But that has nothing to do with local housing being priced at market. [Even if the market is screwed up. Most mortgages are bieing paid, but those owning oieces of many morgages don;t now how they are sorted. Fear sets in, lending dries up, people go out of wrok, home price fall.]

    Cash speculators and bulders are buing up developable land at 20 to 50% off.

    RH

  33. Anonymous Avatar
    Anonymous

    By the way I define neanderthal as “anyone who has economic or social delusions that compound Geographic Illiteracy.”

    Thank you Jim.

    I grew up in a literate family, and my father s food explining how words came to be ad how the evolve.

    Sure, we invent new words, when they are needed to differetat new knowledge.

    But EMR has taken it upon himself the bo the sole arbiter of an entire new esperanto of rural conservation disguised as urban cramming.

    If he wants to sell his ideas he will be more successful speaking to people in their language than is Esperanto. Even if he thinks their language is imprecise.

    I really could care less WHAT the docor calls my ailments. He may be Russian and my understanding of it Greek. What I care about is that he has a solution I can afford, and hope to see someday.

    Otherwise, he's a quack.

    RH

  34. Anonymous Avatar
    Anonymous

    RH does not make 'arguments' he makes nasty, abusive, demeaning and snide remarks.

    For example?

    My mom taught me that if I didn't have something good to say, keep my mouth shut.

    My argument, is based primarily on the preamble to the Constitution and the golden rule: treat others as you would be treated.

    Liberal or conservative, you can convince me that nearly any policy is a good idea if you can show me that no one is worse off because of it.

    If you accept the idea that every policy creates winners and losers, your ideas don't meet my standards. Pretty simple.

    RH

  35. Anonymous Avatar
    Anonymous

    Unlike EMR's diatribes, my philosophy does not require name-calling, epithets, emotionally laden words, or conspiracy theory.

    Even my wife doesn't get it. At dinner to night she went absolutely apoplectic laying blame on "big oil executives" for the gulf situation. She thinks I'm heartless about the losses in wildlife and human employment harvesting wildlife.

    She thinks the big executives should pay to clean it up, and she says she wishes we never bought another drop of oil.

    OK, we can become Amish and put in solar panels tomorrow. But even she recognizes we can't afford solar panels, so she knows that her desires and her budget don’t correspond. She can’t make the leap to the global budget and global desires, and she thinks I’m heartless because I can.

    I think that if yu can’t afford it and you think everyone else can, somehow, then yuare not listening to the golden rule. You are not protecting people equally.

    It is not the oil executives who will pay for this, it is us. When everyone who thinks as she does gets their way, gas will be $9 a gallon.

    We fly planes and crash them and kill hundreds of people, then we find out why, in some considerable detail, and make sure it never happens again. That way. Then we discover a new way to kill 200 people.

    But we pretty much know how to build and fly airplanes. A lot more than we know how to control 50,000 psi six miles away, under water in the dark.

    I heard a news story about some senator who was shocked to learn that a blowut preveter has 87 failure modes. Airplanes have thousands of failure modes, but we manage them, most of the time. Listing the possible ways to fail is one part of the analysis. Determining the probability of that failure is another, and determining the criticality of the failure should it occur, is another. You cannot prevent every possible failure, nor do you need to.

    We have learned that the External Cost of oil has just gone up substantially. The response will be to add more Government Cost, and that will result in more production cost. Total cost of oil is going to go up.

    Environmentalists should be thrilled because they have wanted this all along. Environmentalists [and my wife] are all about blame. CERCLA is the liability act for a reason.

    But regardless of blame, the situation we are in does not change, and the best path forward does not depend on blame. The best path forward is still going to be the one that gets us the lowest total cost throughtthe best combination of production costs, external costs and government costs.

    Larry will argue that no one knows what that is. Well we know that every sea otter saved in the Valdez wreck cost $83,000. We have data, but we refuse to use it because we prefer to nsist that certain things are priceless.

    It does not matter what you think something is worth. If you cannot afford it, you can't have it.

    Unless you are willing to steal.

    RH

  36. Anonymous Avatar
    Anonymous

    Hazel Henderson is an economic iconoclast. But while she writes about destroying the icons of contemporary economic thought, she makes a nice profit selling her books and TV shows.

    I imagine it makes EMR insanely jealous.

    RH

  37. Groveton Avatar
    Groveton

    OK … I'll take my crack at mark to market…

    As I recall, mark to market was always used for businesses who had the primary goal of buying investments with a ready liquid market. Mutual fund companies, for example.

    After Sarbanes – Oxley, the mark to market approach was applied somewhat zealously. Even companies with relatively modest portions of their balance sheets invested in non-cash (or cash like) assets had to mark to market. And … this had to be done even if there was no liquid market for the investments. In other words, they had to have their auditors estimate the value of the non-liquid assets every quarter. Since this jigging and jagging of balance sheet values forced net income up and down each quarter, many companies simply stopped taking minor equity investments in other companies.

    Within the last 3 years, the strict mark to market rules have been relaxed for many companies with minor investments.

    However, the new banking regulation (as applied to community banks) has reinstated mark to market accounting for the housing underlying the community banks loan portfolio. This is new. Previoulsy, the loan was either performing or non-performing. With the new accounting treatment, the bank has to adjust the valuation of homes which catalyzes volitility (in either direction) for the perceived value of the homes nearby.

    Finally, my obligatory poke at the unintended consequences of regulation. While the FASB (with government prodding) was forcing healthy companies to mark minor investments to market each quarter it was also blind to the real value of credit default swaps. The credit default swaps were perceived to be safe since they were largely insured by other companies. However, nobody considered what would happen if the insurers were insolvent.

    At least, that's my layman's understanding.

  38. Larry G Avatar
    Larry G

    so… two questions:

    1. – what does "mark to market" have to do with the valuation of collateralized mortgage securities?

    2. – what kinds of holdings do Community Banks hold that are now required to be mark-to-market that where not before?

    answers?

  39. Larry G Avatar
    Larry G

    I find it amusing that the claim made is that heavy regulation has proven ineffective but then it is identified as what harms the market and need to be repealed.

    Just FYI – Commercial real estate has cratered in many areas not due to regulation of any kind but rather because the space cannot be leased – no customers.

    Why no purchasers of commercial real estate?

    Would you believe that we are just now starting to emerge from a recession so bad that more than a few economists were convinced would have been a depression worse than the last one had this administration not acted quickly with TARP/STIMULUS/Etc?

    The question is not whether or not "heavy" regulation does not work in some situations but rather does it work in others?

    We know it does.

    But those opposed to it use the failings to justify NO regulation – i.e. the Reagan-era mantra – "deregulation" fueled by an avalanche of corporate money – paying for the best "deregulation" that money can and does buy.

    Was the answer to the Reagan era Savings & Loan meltdown – NO regulation? Is that what they did? Did they decide that regulation is what caused the Savings & Loan scandal and that the solution was to remove regulation?

    How about Enron?

    What are the same hypocrites who say that regulation doesn't work saying about Barney Frank and Fannie/Freddie?

    Well, of course, that Barney Frank PREVENTED proper regulation of Fannie/Freddie and that's why they went "amok".

    So which is it?

    Did Fannie/Freddie run "amok" because they were not properly regulated – or not?

    answer please.

  40. Anonymous Avatar
    Anonymous

    RH said:

    "I imagine it makes EMR insanely jealous."

    Why cam he not keep your snide remarks and 'imagine'ing to yourself?

    No wonder his poor wife is at her wit end.

    AZA

  41. Lloyd the Idiot Avatar
    Lloyd the Idiot

    Forget mark-to-market accounting, the death knell for community banks will be the 5% risk retention standard for mortgage loan originators. If adopted, each lender would have to retain 5% of the "risk" in any loan the lender makes. That means that community banks, lacking the capital of the big banks, would be forced out of lending and, hence, collapse. A host of other regulations applicable to making mortgage loans and other types of lending (the Fed's Regulation Z and HUD's new rules under the Real Estate Settlement Procedures Act to name two) have so complicated lending that small banks just can't efficiently meet the changes. Truly, the regulators, and Congress, have gone overboard – and it's only going to get worse with the bizarro world financial services reform bill being debated in the Senate this week.

    As to what's "conservative" and what's "liberal" when it comes to regulation, it can get confusing. Sure, Republicans believe in state's rights, but state regulation of financial institutions is far more cumbersome and detrimental to the banking business than a single federal regulator.

    Also, as to who is responsible for Fannie/Freddie's collapse, see my post at http://lloydtheidiot.blogspot.com/2010/04/anyone-else-have-any-ideas.html. The short answer: Barney Frank

    In short, I couldn't agree more with the post

  42. Larry G Avatar
    Larry G

    sesThe community banks were not making significant residential mortgage loans to start with – all they were doing was originating the mortgage then selling it to those who would aggregate them into Collateralized market securities and as long as there were steady buyers of sub-prime and even no-doc loans, the local banks were happy to make money from the transaction fees.

    As far as Barney Frank and Fannie/Freddie is concerned no one has successfully explained how one minority congressman with a Republican President and Republican House of Representatives stopped the majority party and Presidency.

    In fact, the truth is that the Republicans were not inclined to regulate to Fannie/Freddie to start with as per their basic anti-regulatory philosophy.

    no one has ever answered this simple question but folks go right on believing what they wish.

    The Republicans had 8 years to recognize the danger and to take appropriate action to rein in what they knew was a serious problem but but they did not.

    If tomorrow, the Sun rose with the Republicans in charge – the proposed regulations on the table right now would be deep-sixed before the end of the day.

    Why can't youse guys admit the simple truth on this?

    you're basically opposed to regulation – as a philosophy.

    when you have control of the govt, you systematically gut it with hired guns from the industries regulated.

    then when it unravels and we have a disaster – you claim that it's someone's else fault.

    this is the ebb/flow cycle that we've seen since the Contract for (on) America.

  43. Anonymous Avatar
    Anonymous

    However, liberals ignore the simple fact that heavy regulation has often failed, just as conservatves ignore the fact that deregualton has also often failed.

    I prevfer not to look at regulationa s too much or too little, or liberal vs conservative, but instead ask two simple questions

    a) for this policy is the benfit greater than the cost?

    b) is the cost fairly shared such that no one takes an exceesive burden as a result of the policy.

    RH

  44. Anonymous Avatar
    Anonymous

    "I find it amusing that the claim made is that heavy regulation has proven ineffective but then it is identified as what harms the market and need to be repealed."

    "the local banks were happy to make money from the transaction fees."

    Every once in a while Larry makes sense.

    RH

  45. Anonymous Avatar
    Anonymous

    RH said:

    "I imagine it makes EMR insanely jealous."

    Why cam he not keep your snide remarks and 'imagine'ing to yourself?

    No wonder his poor wife is at her wit end.

    AZA

    You are amazingly sensitive to what I guess is EMRs book sales compared to Hazel Henderson's.

    Hazel Henderson sells books and other material for a profit. She proselityzes on exactlythe same things I do: how to put a price on externalities.

    She promotes green investing, to make a profit.

    I think she is a particularly bad example if you want to put down my statement that sustainability requires profit.

    I'd like to sell as many books as Hazel Henderson, and I imagine EMR would too.

    I fail to see why you would consider that to be some kind of thrird party insult.

    I suggest that he will sell more books when he sounds more like Hazel Henderson and less like "Apocolypse Now".

    On the other hand, Apocolypse now was hugely successful, but it was adverised as fiction, not reality.

    (Henderson ranks around 250,000 to 500,000 on Amazon book sales, for her books, and EMR's Shape of the future ranks 2,554,000. I have no rank, having never published.)

    RH

    gasc

  46. Anonymous Avatar
    Anonymous

    However, the new banking regulation (as applied to community banks) has reinstated mark to market accounting for the housing underlying the community banks loan portfolio. This is new.

    Thank you. My understanding of mark to market only applied to securities, I didn ot understand taht banks were ow obligated to incur the market value of homes as part of the value of their lending portfolio,

    This is new to me.

    RH

  47. Larry G Avatar
    Larry G

    the folks who oppose regulation as a harmful big govt concept that should be eschewed revealed their contradictory perspectives best during the current housing meltdown.

    They blame it bad (ineffective) regulation on Fannie/Freddie ostensibly the handiwork of one Congressman in the minority party who apparently emasculated the a sitting President and both houses of Congress who until stopped by Frank would have surely reined in Freddie/Fanny.

    When we actually compile the disjointed sound bites revisionist history of the Conservatives into a single integrated concept, we see just how foolish and nonsensical their view of reality really is.

    They were in favor of regulation but where stopped by those who traditionally favor regulation – even when they are governing.

    huh?

    that's right.

    They can't pass regulations when they have total control of the govt because one congressman stood in their way.

    so.. it's not hard at all to hear from the same mouths the idea that when regulation is actually passed …it has .. "run amok".

    yes indeed.

  48. Lloyd the Idiot Avatar
    Lloyd the Idiot

    Larry,

    The housing collapse is not Barney Frank's fault alone. Many share in the responsibility. But that's not my point. Fannie was able to fend off more stringent regulation as a result of a powerful lobby, including power with the ranking minority member on the House Financial Services Committee. Keep in mind that the Bush administration did consistently seek GSE reform, but was thwarted.

    GSE reform was not necessarily about more regulation of private lending, but, rather, removing the implicit federal guarantee protecting the GSEs and shrinking the size of the GSEs' portfolio – particularly as it related to products never authorized by Congress (that is, the stated-income loans upon which about 40% of borrowers have defaulted).

    At any rate, you can't deny now, with more than 300 amendments offered to the Senate banking reform bill, that populist sentiment for more intensive bank regulation has gone overboard.

  49. Larry G Avatar
    Larry G

    Lloyd… how can the President and the Majority party be "thwarted" when they managed to assert their power on things like Tax Cuts, two ward, the patriot act and Medicare Part D?

    How come they had the power to do those things but were "thwarted" in reining in Fannie/Freddie?

    With regard to amendments, the legislative process often sees a LOT of PROPOSED amendments – many that are very similar that will be folded into what slimmed-down compromises emerge from that process.

    This is not unusual at all with regard to the legislative process. We see it in Virginia where each GA ends ups with hundreds/thousands of proposed bills that regularly get slice and diced and slimmed down to a relatively small number.

    Even then – the law is just one part of regulation. The law leaves many questions unanswered until the administrators put together their proposals and then have them vetted by all parties, including industry and the public.

    The truth is this.

    The Conservatives do not like regulation and will pass on new regulation even when it is indicated.

    This is exactly what happened to Fannie/Freddie.

    To say that the Republicans "warned" about it but then where "thwarted" when they owned the presidency and both houses of Congress is laughable if not for the breathtaking chutzpa of the claim itself.

    If the Republicans wanted to really rein in Fannie/Freddie – I'm quite sure the "decider" would have asserted himself the same way he did on other legislation that he wanted.

  50. Lloyd the Idiot Avatar
    Lloyd the Idiot

    As an epilogue, Larry, check out this from the American Financial Services Association on the Senate banking bill that just passed. In sum, it confirms that Dems still are blocking reform of Fannie and Freddie:

    "GSE REFORM: Despite strong pressure from Republicans, the bill does not address the GSEs. Democrats have said that they will deal with GSE reform in another bill, possibly as late as next year. In place of GSE reform, the Senate adopted an amendment that would require a study of the GSEs."

  51. Larry G Avatar
    Larry G

    Lloyd, what's the other 39 obstructionists excuses for votin against SOME reform ..in not 100% perfect?

    You guys are ZEROS – Lloyd.

    You talk about the ethics of personal responsibility then you run off from your duty when you were in power and now oppose ..just to oppose.

    Full of excuses – whether you hold the majority or you are in the minority.

    The party of "no" is aptly named.

    4 Republicans stood up and voted FOR something. The others sat on their hands as they had done for the previous 8 years.

  52. Larry G Avatar
    Larry G

    Let's ask Rand Paul about Regulation Run Amok, folks.

    I'm expecting a tome on it any day now from Bacon, Groveton or Gooze.

    Rand Paul's biggest failing?

    he' honest. tsk tsk

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