The New Paradigm - More Regulation

The day of the unregulated (or minimally regulated) free market is coming to an end. It does not work. The rules, both written and unwritten, that have governed our economy since the end of WWII are changing. I strongly suspect that the US is going to go through a relatively long period, and at times painful, process of de-leveraging and reallocating its resources so it can be successful in the new economy of the 21st century. Text in bold is my emphasis. From Market Watch:

Franklin Delano Roosevelt's method of dealing with the Great Depression will be the rallying cry in Washington after the elections, no matter which party wins the White House.

It's as plain as the nose on your face. The days of wine, roses and deregulation are numbered. In their place will be a slew of regulations aimed at the financial services sector, which will have far-reaching consequences for the markets and the economy.

The forces of free markets have held the upper hand for more than a quarter of a century. Now it looks as though the advocates of a more active government will become ascendant.

The two major candidates for the Democratic nomination have already indicated that they favor a more active role for government. And if the Republicans' frontrunner, Sen. John McCain, R-Ariz., should become president, he will probably move in this direction as well.

The Wall Street Journal quoted him the other day as saying that "unfettered capitalism is not something that I support." He added: "...from time to time throughout our history, there are excesses and we (had) to fix them as quickly as possible ... we have to take measures to make sure they never happen again."

There is certainly plenty of precedence for a swing of the pendulum away from free markets toward increased government intervention in times of economic distress, such as we have now with the subprime crisis.

FDR's New Deal consisted of a myriad of laws aimed at combating the Depression.

Among them was the Glass-Steagall Banking Reform Act, which separated commercial from investment banking, the Securities and Exchange Commission, which began federal regulation of the stock market and the Wagner Act, which guaranteed workers the right to form unions.
In addition, a number of "alphabet agencies," such as the Agricultural Adjustment Administration (AAA), the Civilian Conservation Corps (CCC) the Federal Emergency Relief Administration (FERA) and the Works Progress Administration (WPA) were created to provide immediate relief while laying the groundwork for economic recovery.

These also firmly established the influence of government over the private sector.

From there you can fast-forward to the Basel Accord of 1988. This was the result of an agreement reached by the central banks and supervisory authorities of 10 countries to strengthen the international banking system by establishing new capital adequacy standards for the banks. This impacted the banks' profitability by forcing them to set aside funds that they might otherwise use to make money.

The collapse of Enron Corp. precipitated the passage of Sarbanes-Oxley and its accompanying Public Company Accounting Oversight Board. I don't have to tell you what that has done to corporate managements, their boards and their accountants.

Even now, there is talk of more regulation.

Last month, the Senate began investigating the investments being made by sovereign wealth funds controlled by foreign governments. And just last week, the Financial Stability Forum, which includes central bankers, banking supervisors and other financial authorities, said that increased oversight might be needed if market-led improvements don't work.

Next year, expect a number of hearings aimed at finding out the origins of the subprime mess, who was at fault (or asleep at the switch), how it can be ameliorated and prevented.

As a result, there will be more regulations, thus government interference in the free markets, and more caution on the part of lenders and brokers. Besides the effects this will have on the economy, look for the rate of homeownership to decline as well.