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How the Government is Creating a Black Market in Financial Services

When the Dodd-Frank law was adopted with its vast increase in bank regulatory authority, the “too big to fail” problem was made permanent. In the name of never bailing out the banks again, new regulations have been imposed and some other financial services (like hedge funds and insurance companies) have been swept into the same regulatory net.

What do you suppose is going to happen now?

When the Endangered Species Act Threatens Wildlife” is an instructive story by Terry L. Anderson, in The Wall Street Journal, October 20, 2014. We have made this mistake before.

The Endangered Species Act prohibited harming bald eagles and other creatures, and also now protects their habitat. Rural landowners in North Carolina have been prosecuted for cutting their timber and clearing land, because it “might hurt woodpeckers.”

So, landowners in North Carolina are cutting down all their old pine forests now before woodpeckers are sighted on their lands. Terry Anderson knows a lot about this subject, running the Property & Environmental Research Center in Bozeman, Montana.

Today, as the Dodd-Frank law is extended to non-banks and imposing capital controls and regulations, the capital markets are going to retreat. They are going to adapt, just as the landowners have adapted to the Endangered Species Act. We will begin to see more and more “innovative” forms of financial services that are totally unregulated and unsupervised. That might be a very beneficial thing, if the market sets such things up with a firm legal framework and recourse (in case you don’t get your money back).

Larry Fink, chief executive of BlackRock, the world’s largest asset manager, was interviewed in the New York Times last month about how new federal regulations imposed under the Dodd-Frank law are driving investors into more and more risky investments. More people looking for loans now are turning to investors who take the risks, and cost more.

“[Risky investments have] actually helped society,” Mr. Fink said. “They’ve provided loans that banks are not providing any more. The regulators have created an environment in which they have now said ‘society needs to be more protected, we need to have more capital for the banks, we need to be protected’, and therefore many people are being crowded out, they’re not being offered loans.”

See “Fink blames regulators for move into riskier assets” (Financial Times, October 1, 2014) by Tom Braithwaite.

BlackRock is being threatened with the possible new Dodd-Frank regulation that applies to companies “too big to fail.” But, Larry Fink knows how the financial system works, and he knows how free the capital markets really are. They defy government regulation. But, that adds to risk and possible frauds.

The lessons from the Endangered Species Act show how government’s good intentions always lead to failure and waste of resources. Farmers and landowners are now using the “Three ‘S’ method: Shoot, Shovel, and Shut Up.” It is bad enough in the rural environment, and it will spell a bigger problem for the financial markets in our future.

The Dodd-Frank regulations are controlling only a part of the financial services market. It is impossible to control that environment any more than the Endangered Species Act can control what the farmers do with their timber. The consequences of sweeping regulations such as Dodd-Frank imposes are not likely “to protect” the markets, but to weaken them.

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