Government Destroys What It Regulates

Through the years, it's been thoroughly shown that government regulation can be just as destructive as taxation.  This is so well known that Democrats openly propose using the power of government to get rid of things they don't like by regulating them out of business, such as coal mines, power plants, and the humble light bulb.

This week reveals the newest target: the Wall Street Journal reports that the Consumer Financial Protection Bureau (CFPB), Elizabeth Warren's gift to the oppressed consuming masses, plans to crack down on "payday lenders."

The Obama administration will announce Thursday the federal government's first move to regulate high-interest, low-dollar "payday loans," a $38.5 billion market currently left to the states.

This is another federal power grab because up until now, it's been "left to the states" to regulate these lenders.  State regulation was consistent with our much-neglected Constitution, which says nothing about local lending and explicitly reserves every power not specifically granted to the federal government "to the States respectively, or to the people."

State governments have written various different sets of rules, which allow the "laboratory of democracy" sort out the best way to protect poor people who want short-term loans which they can't get from banks.  Some of these regulatory schemes work better than others, but that's the point: the states with problems can learn from the example of their neighbors that did a better job.

What's more, these loans fill a real need: recent financial analysis shows that only 54% of adult Americans have the necessary savings to cover a $400 emergency expense.  A struggling worker who can't afford to fix a car will shortly get fired, which is obviously the worst possible outcome for everyone concerned.

The Dodd-Frank law requires that the CFPB "regulate payday, not annihilate it," but the complexities of the 1,300 page proposal mean that smaller lenders without high-priced lawyers on staff will be forced out of the business.  The survivors will pass the increased costs on to their customers and stop making loans to their riskiest customers.

This will be similar to what happened when the CFPB reduced the amounts which banks could charge for overdrawing an account - customers lost free checking, which had been widely available for most of our lifetimes.  When credit card interest rates were capped, millions of credit cards whose owners were now considered too risky lost their access to credit and had to buy expensive prepaid cards whenever they want to buy anything on-line.

Ordinary banks can't deal cost-effectively with low-income payday loan customers partly because of the bank's responsibilities to fight money laundering.  The cost of investigating customers well enough to make sure they aren't dealing drugs, which can lead to huge fines against the bank, is so high that banks can't afford to serve lower-income customers.  Being locked out of the banking system imposes huge costs on poor people, of which having to borrow from "payday lenders" is but one example.

Big Banks Hit Too

While regulating payday lenders out of business, the government is also making life harder for bigger banks.  The Journal reported:

Federal Reserve officials strongly signaled they will toughen big-bank capital requirements even more than they have since the 2008 crisis, a move that will add to the pressure on the largest U.S. banks to consider shrinking.

They're trying to increase costs on big banks enough to force them to split up, but other regulations are making life so difficult for smaller banks that it's not clear that the resulting smaller banks could survive after a split.  The regulators have promised to be easier on smaller banks, but we've never seen any Obama administration regulations relaxed except when they lose in court, and sometimes not even then.

It's hard to believe that small banks will get any regulatory relief, and while we applaud the goal of breaking up giant "too big to fail" banks, the right approach is simply to use antitrust laws which have been used to bust up monopolies for over a hundred years.  We could also resurrect the 1933 Glass-Steagall act, which was largely effective for half a century until it was abolished during the Clinton administration.

The Journal also reports that federal regulations are making it harder for the non-wealthy to obtain mortgages.

Jumbos, loans above $417,000 in most markets, are attractive because they typically feature high credit scores, big down payments and low default rates. And they aren't linked to the government programs that cost banks tens of billions of dollars in fines related to the subprime-loan debacle.  [emphasis added] ...

Among all approved mortgage applicants from the 10 banks, 5.3% were black in 2014, down from 7.8% in 2007; 7.4% were Hispanic, down from 10.6%. ...

Regulators have fined two smaller banks, one focused on jumbos, in the past nine months for not lending enough to blacks and Hispanics. Prosecutors have said they are developing other cases.  [emphasis added]

Banks are naturally trying to make loans that won't fall under the government entities which brought on the past housing crisis.  They're eager to lend to minorities who have either good credit or big-enough down payments to cover the cost of foreclosing after a default.  There's nothing racist about wanting to lend money only to people who will pay!  Any fool can lend money, the trick is getting it back.

The problem is that forcing banks to make loans to minorities regardless of their credit rating will repeat the housing crisis - and actually end up with those minorities being even poorer than they were before.

So we have a perfect storm of costly regulation:

• Money-laundering rules make it expensive to acquire new customers, so poor people who won't generate enough business can't get bank accounts at all.
• The new payday lending rules will have the same effect by pricing the bottom tier of customers out of the market.  They'll turn to loan sharks which will bring back the days of collection by breaking legs.
• Big banks are being required to hold more capital.  This increases their costs and makes them charge more for their services.  How nice of the Feds to protect us!  We're sure that all the people whose credit cards were canceled feel the same way.
• Banks are being criticized and fined for not lending to enough minorities because they can't find enough minorities with good credit ratings.  That's how we created the first housing crisis.
• And, like the classic parody New York Times headline for the end of the world, when the bubble once again bursts it'll be "Poor, Minorities Hardest Hit."

Democrats specialize in creating problems and then running against them.  Meanwhile, once-healthy industries and markets get destroyed.  Is that why so many people are supporting Mr. Trump?