Uber-Regulation?

This has been a pretty active week for the markets, consumers and for the fans of Michael Jackson and Farrah Fawcett. The deaths of two 70s/80s icons is painful given the circumstances of their untimely ends. But since this is a finance blog, I'll stick to my knitting.

Over the last several posts I have been discussing how interest rates and the Fed have a direct effect on you. This week, Chairman Ben Bernanke testified about his role in the forced or some say shotgun wedding of Merrill Lynch and Bank of America. There is some shreds of evidence that the CEO of BoA was forced to take the deal even though he (CEO) had doubts and was contemplating getting out of the deal. According to sources, both Bernanke and Paulsen either directly threatened the CEO with being fired or implicitly suggested changes would be made if the merger didn't close. Now what does this have to do with me? If you own BoA stock, you may have felt that the deal at the time was a bad one and didn't realize the CEO was forced to do it. The more scary fact is that there appeared to be heavy government interference in a commercial deal. I am in the camp that we don't need government involved to that depth in business.

This testimony came in wake of Obama and the Treasury's proposal for sweeping overhaul of the financial regulation of the economy. One key request was to give the Fed more power to call the shots on management teams, increase capital requirements and other measures. Another key request was the establishment of a consumer financial protection agency which would have some rule making authority. For people looking to borrow money for themselves and their business, while this extra protection may sound appealing, think again. Banks are heavily regulated to begin with and adding another layer which could cause rule conflicts are not the right answer. I believe innovation will be stifled along with the flow of credit to people and businesses that need it. After 9/11, regulations were put in place in the name of protecting us against terrorism. This law (Patriot Act) was passed without thinking through the ramifications. Again, we have politicians putting things together that are not well thought out.

The mess we are in now was a combination of a lack of regulation and a lack of oversight. IndyMac failed partly due to the lack of oversight of the Office of Thrift Supervision. Fannie/Freddie Mac took on way too much risk because Congress looked the other way. Now, we do have to think about the unregulated credit default swaps that sunk AIG. We don't need czars, uber-regulators and councils of regulators. We need an overhaul of the existing regulators, staff them properly and monitor their performance more effectively.

Now that my soap box has collapsed, what does this have to do with you? If you rely on credit, you have reason to worry. Credit will be even tougher to obtain and with that the growth of the economy will be anemic. That growth puts money in your pocket and provides a better way of life. This is a dangerous time in our history. During times of crisis, we put in safeguards with the best intentions. History has shown us that time and time again, these safeguards hinder innovation and economic growth.

Stay tuned for my next post as I'll venture into the health care plan and the financial impacts for you.