Wednesday, January 9, 2013

“It's a Wonderful Life” On Regulatory Policy: Introduction

’Twas the night before Christmas

Sorting out the good, bad and the ugly is important to investing.  A well-designed public policy would do the same. “It's a Wonderful Life” makes the identity of the good guys very apparent.  The bad guy is equally apparent.   It's the ugly where the movie gets most interesting and is most relevant to regulators. 
Unfortunately, in the real world, good, bad and ugly overlap and trade places.  Even in “It's a Wonderful Life” that overlap exists.  For example, both the Baileys and Potter are bankers.  Is that a good, bad, or ugly?  If you are one of the Bailey’s customers who has a home and wouldn't have otherwise, it's good.

If you are dealing with Potter and he offers you $.50 on the dollar for your assets or conceals the fact that he is holding your deposit, it's bad.

For ugly, all you need to do is to remember that bank runs threatened both the bank and Bailey Building and Loan.
Unfortunately, many of those formulating and implementing public policy seem unable or unwilling to deal with the complexity.  One ends up wondering whether they could even deal with Bedford Falls.  They seem bent on telling people how to pursue perfectly legal activities, often focusing on the wrong people.  They seem to be bent upon ignoring the most severe risks associated with banking.  At the same time, they're unwilling to face the fact that there are people committing criminal activities.
It's worth looking at some of the shortcomings of these policy wonks and bureaucrats.  Their mistakes create opportunities and warnings for investors.  Perhaps as a Christmas present to The Hedged Economist who likes to include examples in postings, the news on Christmas Eve day was full of examples of failures to distinguish good from bad.  As follow-up, perhaps as presents that arrived late, the days after Christmas provided other examples. 

Taking advantage of the opportunities created by regulatory mistakes, or fiddling their folly, as it's sometimes called, can be entertaining and profitable.  Regulatory shortcomings have far more serious implications than the short-run investment opportunities they create.  Frequently, our policies and regulatory focus are not addressing the most important issues.  Three shortcomings stand out: 1) obviously, focusing on the wrong institutions involves significant waste of resources, 2) not focusing on the appropriate phenomena means that policy and regulation is not addressing things that could have a significant impact on the economy, and 3) considerable injustice results from the failure to properly prioritize issues.
Over the next three days each of those shortcomings will be addressed in a separate posting.

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