The Perils of Government Regulations and Unintended Consequences

Washington public policy is replete with examples of government regulators thinking they know best, imposing new government rules that then exacerbate the existing problems. As things become worse, they blame the free market and call for more government regulations to fix the burdens they created. Of course, just as it was the first time, the cure is worse than the disease. And the vicious cycle continues.

Massachusetts Senate candidate Elizabeth Warren could be the poster child for the law of unintended consequences. Warren’s career was built upon advocacy of government regulations that created bigger problems than those she initially addressed. As the problems compound, so does her call for even more government red tape.

All of this mader her a hero to the progressive community, a Harvard professor, an advisor to the president and a creator of a new regulation-pushing agency of government known as the Consumer Financial Protection Bureau (CFPB). Maybe once, she will get something right but don’t hold your breath. The housing market collapse is a case in point.

In 1994, President Clinton and his cronies laid the groundwork for the creation of the Housing Bubble and the Wall Street crisis a decade later. The Investors Business Daily uncovered a “smoking gun” memo that declared war on a near invisible enemy – racism is mortgage lending:

At President Clinton’s direction, no fewer than 10 federal agencies issued a chilling ultimatum to banks and mortgage lenders to ease credit for lower-income minorities or face investigations for lending discrimination and suffer the related adverse publicity. They also were threatened with denial of access to the all-important secondary mortgage market and stiff fines, along with other penalties.

The threat was codified in a 20-page “Policy Statement on Discrimination in Lending” and entered into the Federal Register on April 15, 1994, by the Interagency Task Force on Fair Lending. Clinton set up the little-known body to coordinate an unprecedented crackdown on alleged bank redlining.

This government edict unleashed a wave of mortgage lending – including a significant number to those who could never pay back their loans – that ultimately lead to the collapse.

Rather than recognizing that a government edict led to the demise of the economy, Elizabeth Warren and her protégé, Richard Cordray not only called for more government regulations to fix the problems that the initial government regulation created, but Cordray took it a step further – suing companies who took advantage of the new government rules. Cordray took advantage of the lawsuits by gathering hundreds of thousands of dollars in political contributions for the state Democrat Party, but that story is for another day.

Warren declared that a new government agency – the CFPB – would police Wall Street and Main Street for abuses of the free market. The president cited a fee increase from Bank of America as an example of where the CFPB would be empowered to roll back. The president failed to mention the fee was a response to another government action -price limits imposed on credit card transactions by the reform bill he signed into law.

The Investor Business Daily’s investigation into the subprime mess offers compelling evidence that should cast a distressful light on the CFPB.

The CFPB has been empowered to regulate nearly every financial transaction known to man. From banning “payday loans” to limiting fee increases, this government agency will compound existing problems and call for more government regulations to addresses the inequities they created with their mandates. This of course will be destructive to the economy, but given Cordray’s past, its safe to assume it will be profitable for the DNC.

And unless unaccountable structure of the CFPB is changed (or the agency repealed outright), there will be little Congress can do about it.