The movie “It’s a Wonderful Life” is shown every year at Christmas and we usually watch it. This year was no different. Mr. Bailey of Bailey Savings and loan is shown what life would be like if he hadn’t been alive. It was not very pretty. His town was called “Pottersville” after Mr. Potter who was a financial rival who was not willing to take chances on where he invested or loaned money. He only wanted to finance things that he knew would be good for him. Bailey Savings and Loan was willing to loan money to people who were of good character and needed money and Mr. Bailey knew they would try to pay him back if they could. Mr. Potter was not willing to do that. He was not willing to do anything with his money if he would be good for him. So in his world – “capitol was rationed”. The result was not pretty. People did not have as much and weren’t nearly as happy.
There have been a couple of articles lately about the our Federal government and the Dodd-Frank legislation which was supposed to protect us from a repeat of the “Great Recession” which has caused banks through well-meaning legislation to “ration capitol” by in essence becoming “Mr. Potter”. The rules require banks to act like Mr. Potter and have caused a lot of the Bailey Savings and Loans to close. The authors say the result may have a lot to do with why low-interest rates have not been much help to the economy. Low interest rates are good only if you can qualify for loans, and if you can qualify, you probably don’t need the money. The statistics are that “since 2008, one in four community banks have vanished. That ‘s 1,971 banks according to the institute for Local Self Reliance.” The people needing money the most are typically small start-up companies who have not been able to qualify for loans with the bigger banks. And the bigger banks are under tougher requirements. And start-up companies in the past recession recoveries have supplied most of the new jobs. So in the name of saving us from another great recession, the federal government has become Mr. Potter and the country may be starting to look like “Pottersville”.
Another article that has made my paper recently has been about the results of the “Sarbanes-Oxley” legislation that was written after the 2001 recession as a way to save us from a repeat. (Interestingly enough, the Fed dropped the rates after that recession to almost the level of today for about 18 months instead of the 8 or 9 years that we have had since the “Great Recession”. The Fed was accused of keeping those rates down too long and causing the “Great Recession”) Maybe the culprit of 2007 recession might have been – at least in part, the Sarbanes-Oxley legislation which was passed in 2002 with the good intentions of keeping us free from future recessions. Sarbanes-Oxley required a significant increase in auditing requirements for public firms. Since 2002 academic studies and annual reports apparently reveal that auditing costs have increased to double, triple or even quadruple what they were before. A 2009 SEC study found that smaller public firms have auditing costs 7 times more than large public companies. Not surprisingly over the past decade the number of firms that are listed on the U.S. stock exchanges has dropped by almost 30% . And the size of companies launching IPO’s (going public) has gone up significantly.
The alternative to getting bank loans for most small companies is doing equity financing through stock offerings. If one getting loans is not permitted and the other is too expensive – what is one to do? The “road to Hell is paved with good intentions” and the “Law of Un-intended Consequences” has not been repealed. Our representatives in Washington are well-intentioned, but they are also interested in re-election and don’t seem to have any interest in admitting that things did not go quite the way they had hoped. But instead make promises to fix problems. Maybe the best answer is to keep the Federal Government from “trying to save us”. We might be better off if the government did nothing?
There is a book by Charles P. Kindleberger called “Manias, Panics, and Crashes” . What he did was study all the economic crashes since the Tulip Crises of the late 1400’s. His conclusion is that they all go through the same phases. People development a mania for something and put way too much money into it driving up the price expecting it to go up forever. Which it of course doesn’t, and so panic sets in and there is a crash where people lose money and economies crash. The crash of the economy may hurt people who do not participate in the mania. Sound familiar? But economies usually recover on their own after they get over people and governments trying to help. One interesting thing about the book is none of the manias that lead to the crashes happen over the same thing twice. Since the 1400’s we’ve never had another Tulip Mania. Nor has anything else ever been the cause of a crash twice. Apparently we learn from our mistakes without the government’s help.
So if the same thing never happens twice, do we need government to help us with what we have all ready learned. The military is often accused of preparing to fight the “last war” which is a mistake because with the advancement of weaponry, skills, and tactics, we have never fought the same war twice. Maybe we have our government saving us from the crash, when we’ll never have another one like it. We will have another one, but it will have a different cause. And the government action may cause untended consequences that will either cause another problem or keep us from recovering as fast from the last one. Maybe it would be better if the government did not do anything?