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The Trouble With Regulation

Alyce Lomax
February 17, 2009

For months now, people have been glorying in the supposed failure of the free market and how lack of regulation got us into our current dire predicament. However, let’s not be too hasty. Regulation is imperfect and can often cause more problems than it prevents.

What we have here is a failure to regulate?
Everybody’s howling about free market policies bringing us to this, but they’re ignoring the argument that Federal Reserve policy is very much at fault. There’s nothing purely “free market” about the Fed’s tinkering with monetary policy.

The Fed under Alan Greenspan created a massive bubble. Basically, we experienced way too much “boom” and the idea that we could constantly borrow our way to “growth.” Now we’re busting. Of course, the boom was darn good for companies that focused on things people want more than need. The bust is making things tough all over except for bargain companies like McDonald’s (NYSE: MCD  ) and Wal-Mart (NYSE: WMT  ) .

Many argue that some regulations directly fed into the crisis, such as the Community Reinvestment Act and its impact on how Fannie Mae (NYSE: FNM  ) proceeded, as well as its impact on banks’ lending practices. I’ve also seen it pointed out that the savings and loan crisis happened despite the fact that it was one of the most regulated industries around.

Regulators vs. reality
Meanwhile, I’ll bet we can all think of examples when regulators have done things that simply didn’t seem to make sense. How about the Federal Trade Commission’s bizarre and ongoing witch hunt against Whole Foods Market (Nasdaq: WFMI  ) ? Whole Foods’ CEO John Mackey contended that the FTC asked for more documentation from his company when it was trying to acquire Wild Oats than it demanded when ExxonMobil (Nasdaq: XOM  ) hooked up. Meanwhile, the whole thing was absurd, since Whole Foods faces competition from everybody from Wal-Mart to Trader Joe’s.

It probably seemed clear to most of us that Sirius XM (Nasdaq: SIRI  ) was struggling under the weight of competition from many fronts, but the Federal Communications Commission took its sweet time (a year and a half) giving the OK for their merger. There’s an argument that that delay contributed to Sirius XM’s particularly dire predicament now.

The Securities and Exchange Commission could be seen as a poignant symbol of failure; it was founded after the Great Depression specifically to protect investors. In October, it was arguable that the SEC had let us all down in many ways, including allegations that it had been seeking enforcement against small violators rather than tackling large ones. More recently, the agency’s failure to uncover the alleged Madoff Ponzi scheme should make our blood run cold, especially since some even tried to alert the agency that something was amiss.

So shouldn’t we be extremely leery of increasin