Rough Draft of Taxing the Rich

Let me know what you think.

3 ways the rich create jobs:

1.       They spend lots of money on consumable goods

2.       They save money in banks which invest that money

3.       They invest in their own ventures, creating jobs

1 They spend money on planes and expensive cars and houses, vacations and other luxuries. When anyone spends money there must, as a law of nature, be someone on the receiving end of the transaction. Nobody gives money to air etc… So when rich people spend money on a jet or car they are paying people to build those things for them. The jets and cars do not appear out of thin air, there are millions of people that go into manufacturing the car; and many will not have a job if the rich people stop buying their fancy jets and cars. It takes more than one person to produce a car. It takes miners to mine the metals, engineers to design the tools to mine and craftsmen to construct them, trains or trucks to ship the metal to refineries, engineers to design trucks and train and craftsmen to construct them, people to use the metal to build the car, after it has been designed etc… and a million other people along the way. All of these people have these jobs because people like the rich person paid money, which then circulated through the system and down to these individuals, for their expensive car. Adam Smith called this the Division of Labor.

·         For Examples see Adam Smith’s The Wealth of Nations: “The shepherd, the sorter of the wool, the wool-comber or carder, the dyer, the scribbler, the spinner, the weaver, the fuller, the dresser, with many others, must all join their different arts in order to complete even this homely production. How many merchants and carriers, besides, must have been employed in transporting the materials from some of those workmen to others who often live in a very distant part of the country! how much commerce and navigation in particular, how many ship-builders, sailors, sail-makers, rope-makers, must have been employed in order to bring together the different drugs made use of by the dyer, which often come from the remotest corners of the world! What a variety of labor too is necessary in order to produce the tools of the meanest of those workmen! To say nothing of such complicated machines as the ship of the sailor, the mill of the fuller, or even the loom of the weaver, let us consider only what a variety of labor is requisite in order to form that very simple machine, the shears with which the shepherd clips the wool. The miner, the builder of the furnace for smelting the ore, the feller of the timber, the burner of the charcoal to be made use of in the smelting-house, the brick-maker, the brick-layer, the workmen who attend the furnace, the mill-wright, the forger, the smith, must all of them join their different arts in order to produce the wool coat.” (p.19)

·         Another example is that used by Milton Freidman when he discusses who made a pencil: “Look at this lead pencil, there’s not a single person in the world who could make this pencil. Remarkable statement? Not at all.  The wood from which it was made, for all I know, comes from a tree that was cut down in the state of Washington. To cut down that tree it took a saw, to make the saw it took steel, to make the steel it took iron ore. This black center, we call it lead but it’s really graphite, I’m not sure where it comes from, but I think it comes from some mines in South America. This red top, the eraser, a bit of rubber, probably comes from Malaya. This brass piece, I haven’t the slightest idea where it came from, or the yellow paint, or the paint that made the black lines, or the glue that holds it together. Literally thousands of people cooperated to make this pencil. They are people who don’t speak the same language, who practice different religions, who might hate one another if they ever met. When you go down to the store to buy this pencil you are, in effect, trading some of your (money) for the (labor) of these thousands of people.” – Milton Freidman, Free to Choose series (TV show). The more expensive the item is that you’re purchasing the more money other people make.

2 They save money in banks which then invest that money. When someone puts money in a bank it doesn’t just sit there, the bank turns around and invests it in other things. That is why they can pay interest on your savings account. They give it to people to buy houses or cars or to start businesses. The more money banks have to loan out the more opportunities there are for the middle and lower income people to receive loans for cars, houses, businesses and other things that a bank lends for.

·         Once some rich person saves money in the bank the division of labor starts all over again: The rich person gets paid a high wage. The rich person then puts his money in the bank to save it for a rainy day. The bank uses that money to make loans. The loans go to housing developments. The money injected by the rich person’s money from the bank in the housing development provides jobs for the construction workers. The construction workers buy the raw materials, wood, nails, plaster etc… which then starts the whole division of labor cycle over again. Therefore, a rich person putting his money in the bank puts food on the table for countless people.

3 They invest in factories or other businesses. When a rich person has a lot of money they would like to make more money. In order for them to do this they might build a factory or start a new business or give money to others so that they can start a business. This, once again, starts the whole cycle of the Division of Labor all over again. They may make more money but they also provide jobs for others.

Wealth is not caused by the person receiving the wealth, but by those who buy their products. If we think it is unfair for rich people to make so much money and not pay taxes we should stop buying their products, not penalize them for filling a market need. Ludwig von Mises says:

·         “In the market economy (like in the United States) the consumers are supreme. Their buying and their abstention from buying ultimately determine what the entrepreneurs produce and in what quantity and quality (nobody forces anyone to buy anything). It determines directly the prices of the consumer’s goods and indirectly the prices of all producers’ goods, viz., labor and material factors of production. It determines the emergence of profits and losses and the formation of the rate of interest. It determines every individual’s income… It makes all men in their capacity as producers responsible to the consumers… The market adjusts the efforts of all those engaged in supplying the needs of the consumers to the wishes of those for whom they produce, the consumers. It subjects production to consumption.

·         “The market is a democracy in which every penny gives a right to vote. It is true that various individuals have not the same power to vote. The richer man casts more ballots than the poorer fellow. But to be rich and earn a higher income is, in the market economy, already an outcome of a previous election. The only means to acquire wealth and to preserve it, in the market economy not adulterated by government-made privileges and restrictions, is to serve the consumers in the best and cheapest way. Capitalist and landowners who fail in this regard suffer losses. If they do not change their procedure, they lose their wealth and become poor. It is consumers who make poor people rich and rich people poor. It is the consumers who fix the wages of a movie star and an opera singer at a higher level than those of a welder or an accountant.” (Socialism, p.490)

·         “What made some enterprises develop into ‘big businesses’ was precisely their success in filling the best demand of the masses.” (p. 487) Therefore it is not that they stole from the common man to become rich. The common man put them there by the common man’s choice. We caused them to be rich, not the other way around.

Taxing the rich is said to benefit the poor. Even if the poor receive money that was taken from the rich it does not help them. Giving money to people just because they are poor creates a “welfare state” where people feel like they no longer have to work and can depend on the government to support them. The government creates a form of dependency which eliminates the desire of people to work. If someone is paid by the government just because they were poor they would have little to no desire to work. It therefore, does not help anyone, neither those receiving or those losing the money.

Taxing the rich to give that money to the poor destroys the moral of hard work and eliminates the merit based system. It restricts the rich people on their right of the “pursuit of happiness.” It turns the society into a society of victims and not of earners. I deserve it vs. I must earn it. It creates a sense of entitlements by people who should not, by nature, be entitled to anything. The world runs on people pursuing their own self-interest; i.e. if you did not earn it you do not deserve it.

·         In an interview this is what Ayn Rand says: Interviewer: Let me ask you this question about human rights. You’ve spoken favorably about the right to the freedom of speech and other human rights; but I assume you would not ascent to the usual list of rights so much publicized these days, such as: the right to a minimum standard of living, the right to the equality of opportunity, the right to a free education and so on. Why? What is the basis of the distinction? Ayn Rand: Well there you have a complete contradiction! This concept of rights demands, as a right, values which do not in fact belong to man in nature. In other words, the right to a minimum sustenance means that a man without any effort on his part is entitled to sustain his life. Well since nature does not provide men with a minimum sustenance, the only way of maintaining or implementing such a right would be to breach, infringe and deny the right of some other man. It means that some other man is charged with the un-chosen responsibility to support the man who is guaranteed the minimum sustenance. It means that some men are to be enslaved to the minimum or maximum needs of others. Not only is it a vicious concept but whichever you might wish to call it, it cannot possibly be called a right. Nobody could in fact maintain the right of some men to enslave others. …Since nobody gets any production, any material values, any physical substance from nature itself, nobody has the right to claim any minimum guarantee because it can come only from other men, and nobody can claim the right to enslave other men.

The rich don’t get richer, the middle class does. 75% of people who are in the top 2% of income earners in America were not there last year and will not be there next year. People’s incomes change from year to year based on a million different factors. Here is an interview between economist Thomas Sowell and radio personality Dennis Prager:

Dennis Prager: The next charge that is made: We have greater income inequality, the gap between the rich and the poor, than ever before in America.
Thomas Sowell: That is the number one big lie of our time. And it’s based on abstract statistical categories rather than flesh and blood human beings… If you follow specific individuals over time you discover, for example, that the bottom 20% of tax payers in 1996 had their income increase by 91% by 2005. Meanwhile, the top 1% of taxpayers had their income decline by 26% over that same time period. Now, it’s true that the top bracket has a higher percentage of the income than the bottom bracket by a greater percentage at the end than the beginning (of that time period).  But they are wholly different people in these brackets.
Prager: There are wholly different people in these brackets, meaning?
Sowell: Over half of the people who were in the bottom 20% in 1995 were not there in 2005.
Prager: Oh I see, I see. That’s right.
Sowell: If you get it into the top one hundredth of one percent of income earners, which presumably are the rich everyone talking about, the turnover is 75%. Three-quarters of the people who were in that bracket in 1996, were no longer in that bracket in 2005… It’s usually people who have a spike in income one year that puts them in that bracket. You know you sell your house in California, well good heavens you’re way up there that one year. Now, unless you have a second house that sells a second year, that’s a one year wonder.
Prager: So your answer to the Democrats refrain, that the inequality is greater than ever, is that those groups fluctuate; and that in fact since ’96, in any event, the income of the bottom fifth has risen far more and the top one percent has declined?
Sowell: Absolutely!
I met a UC Berkeley professor while I was in Mexico. He had owned a nice house in California for several decades, before the houses were very expensive. He also owned a house in upstate New York. When he retired he sold his personal residence in Berkeley (when you sell a personal residence it is taxed as income, not capital gains) and moved to New York. For that one year his income was in the millions because he sold his house. He never made that much before and will never make that much again. This is just an example of how skewed the statistics are, and how they are made to seem like the rich always stay rich and the poor are always subject to them. There is no logical base for this argument.

The rich don’t get richer, the middle class does. Think of the top five wealthiest people in the United States. People like Warren Buffet, Bill Gates, Ted Turner, Steve Jobs, Michael Dell and Sam Walton are some that would come to mind. What do all these people have in common? They are all billionaires. What else do they have in common? None of them inherited their wealth, they are all self-made men, as are 80% of all millionaires and billionaires (The Millionaire Next Door p. 2). They are all founders of the companies that made them billionaires. What else do they have in common? They all started in the middle class. Here is another way the statistics are skewed in favor of those who are pushing for more taxes on the rich, saying the rich are getting richer and the poor are getting poorer. It is obvious from only casual thinking that none of these men started out rich. They were middle class. So when they made their billions does that mean the rich got richer or that the middle class got richer? The middle class is the one that produced these people, so shouldn’t they get the credit?

The government caused the problems we are in today, not the rich, so why penalize the rich for something they didn’t do? Government spending is out of control, we are nearly $15.2 trillion in debt. Modern rhetoric says that we have to have some way to pay for this problem and that it should be the rich who are paying for it. Why give them the responsibility for something that was out of their control. The unbridled spending habits of the American government caused the deficit, and the rich have to pay for it. However, if the government had been responsible in the first place there would be no need of taxing them any higher than others. “For classical nineteenth-century liberalism, which assigns to the state the sole task of safeguarding the citizen’s property and person, the problem of raising the means needed for public services is a matter of small importance… If liberal writers of that period have been concerned to find the best form of taxation, they have done so because they wish to arrange every detail of the social system in the most effective way, not because they think that public finance is one of the main problems of society” (Mises, p. 444). If the government could control itself taxation on the rich would not be an issue. It is the governments fault we are in debt, no the rich, so why tax the rich?

We should not tax the rich because we are therefore penalizing people for being successful. The vast, vast majority of those who are wealthy have earned their wealth through legal and ethical means. So why should we penalize them for being successful and doing what others couldn’t? People don’t realize that the top 2% of a country that has 310,000,000 people in it means that there are 6,200,000 people that make up the top 2%. Not a small number by any means, and to think that they all got their wealth in unethical way is a slap in the face of logic. There is a strong chance that anyone we come in contact with will someday be a wealthy person. It’s actually a one out of fifty chance that you will, at one time in your life or another, make it to the top 2% of all income earners in the country. When you get there it will most likely be because you made smart decisions and worked hard. You invested your money and researched what would be the most profitable venture for you to take. It will take time, not just overnight. So why should you be fined because you put in all that hard work and achieved what took years to achieve? If you did it why can’t someone else? Everyone is capable, through work and diligence, to realize wealth, so why penalize them when they are successful? “To maintain and accumulate capital involves costs. It involves sacrificing present satisfactions in order that greater satisfactions may be obtained in the future. Under Capitalism the sacrifice that has to be made by the possessors of the means of production, and those who, by limiting consumption, are on the way themselves to being possessors of the means of production. The advantage which they thereby procure for the future does indeed not entirely accrue to them. They are obliged to share it with those whose incomes are derived from work, since other things being equal, the accumulation of capital increases the marginal productivity of labor and therewith wages. But the fact that, in the main, the gain of not living beyond their means (i.e. not consuming capital) and saving (i.e. increasing capital) does pay them is a sufficient stimulus to incite them to maintain and extend it. And this stimulus is the stronger the more completely their immediate needs are satisfied. For the less urgent are those present needs, which are not satisfied when provision is made for the future, the easier it is to make the sacrifice. Under Capitalism the maintenance and accumulation of capital is one of the functions of the unequal distribution of property and income” (Mises, p.178).

People wanting to tax the rich are jealous, and are in it for selfish reasons. “It is untrue that some are poor because others are rich. If an order of society in which incomes were equal replaced the capitalist order, everyone would become poorer. Paradoxical though it may sound, the poor receive what they do because rich people exist.

“And if we reject the argument for the general conscription of labor and for equality of wealth and incomes which is based on the statement that some have their leisure and fortune at the expense of the increased labor and poverty of others, then there remains no basis for these ethical postulates except resentment. No one shall be idle if I have to work; no one shall be rich if I am poor. Thus we see, again and again, that resentment lies behind all socialist ideas” (Mises p. 394).

The Dodd-Frank act

Taken from The Economist Magazine

Too big not to fail

Flaws in the confused, bloated law passed in the aftermath of America’s financial crisis become ever more apparent

Feb 18th 2012

SECTIONS 404 and 406 of the Dodd-Frank law of July 2010 add up to just a couple of pages. On October 31st last year two of the agencies overseeing America’s financial system turned those few pages into a form to be filled out by hedge funds and some other firms; that form ran to 192 pages. The cost of filling it out, according to an informal survey of hedge-fund managers, will be $100,000-150,000 for each firm the first time it does it. After having done it once, those costs might drop to $40,000 in every later year.
Hedge funds command little pity these days. But their bureaucratic task is but one example of the demands for fees and paperwork with which Dodd-Frank will blanket a vast segment of America’s economy. After the crisis of 2008, finance plainly needed better regulation. Lots of institutions had turned out to enjoy the backing of the taxpayer because they were too big to fail. Huge derivatives exposures had gone unnoticed. Supervisory responsibilities were too fragmented. Dodd-Frank, named after its co-sponsors, Senator Chris Dodd and Congressman Barney Frank, attempted to address these issues (section 404 is one of those aimed at excessive risk exposure). But there is an ever-more-apparent risk that the harm done by the massive cost and complexity of its regulations, and the effects of its internal inconsistencies, will outweigh what good may yet come from it.
The law that set up America’s banking system in 1864 ran to 29 pages; the Federal Reserve Act of 1913 went to 32 pages; the Banking Act that transformed American finance after the Wall Street Crash, commonly known as the Glass-Steagall act, spread out to 37 pages. Dodd-Frank is 848 pages long. Voracious Chinese officials, who pay close attention to regulatory developments elsewhere, have remarked that the mammoth law, let alone its appended rules, seems to have been fully read by no one outside Beijing (your correspondent is a tired-eyed exception to this rule). And the size is only the beginning. The scope and structure of Dodd-Frank are fundamentally different to those of its precursor laws, notes Jonathan Macey of Yale Law School: “Laws classically provide people with rules. Dodd-Frank is not directed at people. It is an outline directed at bureaucrats and it instructs them to make still more regulations and to create more bureaucracies.” Like the Hydra of Greek myth, Dodd-Frank can grow new heads as needed.
Take the transformation of 11 pages of Dodd-Frank into the so-called “Volcker rule”, which is intended to reduce banks’ ability to take excessive risks by restricting proprietary trading and investments in hedge funds and private equity (Paul Volcker, a former chairman of the Federal Reserve, has argued that such activity contributed to the crisis). In November four of the five federal agencies charged with enacting this rule jointly put forward a 298-page proposal which is, in the words of a banker publicly supportive of Dodd-Frank, “unintelligible any way you read it”. It includes 383 explicit questions for firms which, if read closely, break down into 1,420 subquestions, according to Davis Polk, a law firm. The interactive Volcker “rule map” Davis Polk has produced for its clients has 355 distinct steps.

Boom time for lawyers
“I fear that the recently proposed regulation to implement the Volcker rule is extraordinarily complex and tries too hard,” Sheila Bair, a former head of the Federal Deposit Insurance Company (FDIC), told Congress in December. A notable pre-crisis critic of regulatory gaps, she now believes that in this case “regulators should think hard about starting over again with a simple rule.” Her comments were made before the Commodity Futures Trading Commission (CFTC), the fifth federal agency involved, issued its own proposal on proprietary trading on January 17th. That one is 489 pages long.
When Dodd-Frank was passed, its supporters suggested that tying up its loose ends would take 12-18 months. Eighteen months on, those predictions look hopelessly naive. Politicians and officials responsible for Dodd-Frank are upbeat about their progress and the system’s prospects, at least when speaking publicly. But one banker immersed in the issue speaks for many when he predicts a decade of grind, with constant disputes in courts and legislatures, finally producing a regime riddled with exceptions and nuances that may, because of its complexity, exacerbate systemic risks rather than mitigate them.

For the same reasons that bankers are worried, lawyers are rubbing their hands. For many of America’s most prominent law firms helping companies to cope with Dodd-Frank is a vital service to clients, a lubricant for the American economy and a great new business. Daily updates on Dodd-Frank from Davis Polk and Morrison & Foerster have become as important to many on Wall Street as newspapers. Their popularity looks set to endure: according to Davis Polk only 93 of the 400 rule-making requirements mandated by Dodd-Frank have been finalised. Deadlines have been missed for 164 (see chart 1). And litigation is just beginning.
On July 22nd 2011 the United States Court of Appeals for the District of Columbia upheld a challenge by two trade groups to a Dodd-Frank-related rule on shareholder voting put forward by the Securities and Exchange Commission (SEC); the court found that the rule was backed by insufficient or faulty economic analysis of costs and benefits. On December 2nd, another case on similar grounds was filed in a Washington, DC, district court by two securities-industry trade groups, this time against the CFTC, concerning restrictions on derivative holdings. If that court, too, finds for the plaintiffs expect a deluge of further suits.
Along with requiring oodles of contestable rules, Dodd-Frank mandates 87 studies on big and small issues, ranging from the impact of drywall on mortgage defaults to the causes of the financial crisis. Once again, deadlines have been missed and progress is limited: 37 studies have yet to be completed. The ones that have been finished have received little public attention; trying to drink from the rule-making fire hose leaves little time for absorbing the output of the reporting one. Some of the reports seem to reach odd conclusions. A report from the FDIC contends that had Dodd-Frank been in effect four years ago, Lehman Brothers’ creditors would have received 97 cents on the dollar; one expert on the case calls this ludicrous. The problem is not that the reports are necessarily wrong, but that no one is scrutinising them.

Another product of Dodd-Frank is a plethora of new government powers and agencies (see chart 2) with authority over areas of the American financial system and economy affecting veterans, students, the elderly, minorities, investor advocacy and education, whistle-blowers, credit-rating agencies, municipal securities, the entire commodity supply chain of industrial companies, and more. Quite a lot have tasks already done by others—frustrating the act’s worthwhile objective of consolidating fragmented pre-crisis supervision. A new office within the Treasury department is intended to forecast and head off disasters—already a goal of research groups at the 12 regional Federal Reserve Banks, the Federal Reserve Board, the president’s Council of Economic Advisers and numerous federal agencies, not to mention universities, think-tanks and private firms.
If the roles of many of these Dodd-Frank entities are overly familiar, their funding—which often skirts constitutional requirements for congressional approval—is more exotic. The new research bureau in the Treasury will be entitled to the proceeds of a new tax on banks. The new Consumer Financial Protection Bureau (CFPB) will be funded by the Fed.
But the really big issue that Dodd-Frank raises isn’t about the institutions it creates, how they operate, how much they cost or how they are funded. It is the risk that they and other parts of the Dodd-Frank apparatus will smother financial institutions in so much red tape that innovation is stifled and America’s economy suffers. Officials are being given the power to regulate more intrusively and to make arbitrary or capricious rulings. The lack of clarity which follows from the sheer complexity of the scheme will sometimes, perhaps often, provide cover for such capriciousness.
For example, the new CFPB will have latitude to determine what type of financial products can be provided to which consumers and at what cost, as well as the right to pursue institutions for acting in an “abusive” fashion (a term with no legal definition). Requirements for “living wills” that encompass hypothetical business plans have to be pored over by regulators; “stress tests” insert government assumptions deep into the decisions banks make about their capital. Such tests are not new to Dodd Frank. But the befuddling form the act gives such ideas unintentionally opens a path to much more state interference.
Dodd-Frankenstein’s monsters
Another problem with complexity is that it encourages efforts to game the system by exploiting the loopholes it inevitably creates. Take the simple matter of nomenclature. Anticipating the Volcker rule, bank departments previously using the word “proprietary” have been dropped, renamed or quietly shifted to sheltered corners. The shadow banking system existed before the crisis, but expect it to grow as some financiers decamp to companies that evade Dodd-Frank’s definitions.
The fees banks can charge for debit cards are being sharply reduced, but other retailers with similar products have received a waiver, courtesy of the so-called Durbin amendment (named after a Democratic senator, Dick Durbin). Consequently the payment industry may be in the early stages of a rule-driven and otherwise unlooked-for transformation with no rationale in efficiency or safety. The bank-remittance business, which was also selectively hit with new rules, is facing a similar shake-up. The governments of Japan, Canada and the European Union have had their hackles raised by the fact that American federal and municipal bonds will be exempt from the Volcker rule, however it is put into practice, whereas their own bonds will not. Goldman Sachs’s chief financial officer, David Viniar, has said that inefficiencies in the market resulting from Volcker could make trading more profitable—which was hardly the point.
Paying up
There could well be unintended consequences at the level of the employee, too. Last August the SEC opened an office mandated by Dodd-Frank that is dedicated to examining whistle-blower complaints. It collected 334 reports in its first seven weeks; no one will say how many have come forth since, but many more are expected the better known the office gets. This may sound welcome. But Dodd-Frank’s provisions for massive payments to the whistle-blowers—of up to 30% of any monetary sanctions collected on the basis of their report—will make the SEC route more attractive than using companies’ own processes, and may thus make corporate governance less effective.
For their part manufacturers seem largely unaware that a provision in Dodd-Frank concerning the extraction of minerals from in and around the Congo will mean that they will have to begin filing information on their entire supply chain to the SEC. This is officially estimated to affect 1,000-5,000 companies at a cost of $71m. The US Chamber of Commerce thinks it will affect hundreds of thousands. The National Association of Manufacturers estimates it will cost $9 billion-16 billion. Conflict minerals are a disturbing issue. They were not one of the causes of the global financial crisis.
The overall cost of all this—both directly to public and private institutions and indirectly to the markets—is staggering. At the same time as banks are sacking employees in operating roles, they are adding swarms to cope with various requests from government agencies and other new filings, all to avoid violating rules that may never come into existence and temporary measures that may be rescinded. That is without looking at losses in terms of business not done. Loans that might not fit into a category favoured by regulators are being trimmed or withdrawn.
Jamie Dimon, JPMorgan Chase’s boss, reckons the direct costs to his bank, America’s largest, will be $400m-600m annually. “Additional regulations resulting from the Dodd-Frank act may materially adversely affect BB&T’s business, financial condition or results of operations,” said one regional bank in its recent annual filing to the SEC. Other institutions are said to be in the process of drafting similar statements, or, at the least, planning to acknowledge the costs in the conference calls that surround quarterly earnings.
Banks are trading below book value. Low valuations make it hard for banks to raise the capital that would allow them to lend more, as politicians would like. This state of affairs is in part due to the condition of the economy. And the reasonable goal of restricting banks from taking private risks with socialised consequences may in some cases reduce their value. But it is hard to find a banker or analyst who doesn’t privately attribute a lot of the low valuation to the unnecessarily harsh impact of current regulations.
Inevitably, banks themselves are adding to the costs with a vast lobbying effort. SIFMA, a financial industry trade association, says it has 5,490 people dealing with various subcommittees, almost all devoted to Dodd-Frankery. And there are quieter attempts to blunt the act’s provisions or redirect them to the advantage of one set of financial institutions or another. The Occupy Wall Street crowd, with its emphasis on government-business collusion, would be enraged if it knew.
But most bankers are reluctant to discuss the law in public, and will do anything to avoid commenting on regulators. This is in part due to the risk that, given the industry’s low public esteem, complaining would be inflammatory and counterproductive, perhaps also bringing with it regulatory retribution. A few also see the possibility of gaining an edge: some well established banks consider themselves better able to handle the costs than smaller or newer ones, particularly those that don’t have cushy relationships with regulators. Others, according to the head of one large bank, are quiet only because they do not understand the scope of the changes.
Back to the drawing board
All of which leads to the question of what Dodd-Frank has actually achieved. More information on America’s derivatives markets will be available to regulators than was previously the case, though how much will be useful is debatable. A new (untested) insolvency procedure is now in place for firms like AIG, which lacked an alternative to bankruptcy or bail-out before the crisis. But the heavy lifting on higher capital requirements for banks is being done internationally via the Basel 3 process. And Dodd-Frank has hardly touched Fannie Mae and Freddie Mac, the two big government-sponsored lending entities that received the largest bail-outs in 2008, and which are more important in the housing markets than ever.

The muddle stands in sharp contrast to the aftermath of earlier legislation. The banking-reform act of 1864 consolidated America’s fragmented currency system and enabled Abraham Lincoln to finance the civil war. The period of reregulation between 1933 and 1940 reserved a safe harbour for commercial banks, which were backed by federal deposit insurance but didn’t attract speculative capital because of caps on the rate of interest that could be paid. Risk was left to investment banks and asset-management firms, tempered by abundant requirements for disclosure and a shift in where the burden of proof lay in litigation, from plaintiffs to defendants.
Even Dodd-Frank’s creators can bring no similar clarity to its intentions. In 2009 Mr Frank attempted to frame the new law’s goals under four heads: securitisation, compensation, liquidation and systemic risk. But in a single speech his ambitions overflowed to consumer protection and the reform of ratings agencies, too. Ambition is often welcome; but in this case it is leaving the roots of the financial crisis under-addressed—and more or less everything else in finance overwhelmed.

Correction: The direct annual cost to JPMorgan Chase of these regulations is not going to be $400 billion-600 billion as we first wrote. A figure between $400m and $600m is rather closer to the mark. This was corrected on February 17th 2012.

Over Regulated America

Taken from The Economist Magazine

The home of laissez-faire is being suffocated by excessive and badly written regulation

Feb 18th 2012 

AMERICANS love to laugh at ridiculous regulations. A Florida law requires vending-machine labels to urge the public to file a report if the label is not there. The Federal Railroad Administration insists that all trains must be painted with an “F” at the front, so you can tell which end is which. Bureaucratic busybodies in Bethesda, Maryland, have shut down children’s lemonade stands because the enterprising young moppets did not have trading licences. The list goes hilariously on.

But red tape in America is no laughing matter. The problem is not the rules that are self-evidently absurd. It is the ones that sound reasonable on their own but impose a huge burden collectively. America is meant to be the home of laissez-faire. Unlike Europeans, whose lives have long been circumscribed by meddling governments and diktats from Brussels, Americans are supposed to be free to choose, for better or for worse. Yet for some time America has been straying from this ideal.

Hardly anyone has actually read Dodd-Frank, besides the Chinese government and our correspondent in New York (seearticle). Those who have struggle to make sense of it, not least because so much detail has yet to be filled in: of the 400 rules it mandates, only 93 have been finalised. So financial firms in America must prepare to comply with a law that is partly unintelligible and partly unknowable.Consider the Dodd-Frank law of 2010. Its aim was noble: to prevent another financial crisis. Its strategy was sensible, too: improve transparency, stop banks from taking excessive risks, prevent abusive financial practices and end “too big to fail” by authorising regulators to seize any big, tottering financial firm and wind it down. This newspaper supported these goals at the time, and we still do. But Dodd-Frank is far too complex, and becoming more so. At 848 pages, it is 23 times longer than Glass-Steagall, the reform that followed the Wall Street crash of 1929. Worse, every other page demands that regulators fill in further detail. Some of these clarifications are hundreds of pages long. Just one bit, the “Volcker rule”, which aims to curb risky proprietary trading by banks, includes 383 questions that break down into 1,420 subquestions.

Flaming water-skis

Dodd-Frank is part of a wider trend. Governments of both parties keep adding stacks of rules, few of which are ever rescinded. Republicans write rules to thwart terrorists, which make flying in America an ordeal and prompt legions of brainy migrants to move to Canada instead. Democrats write rules to expand the welfare state. Barack Obama’s health-care reform of 2010 had many virtues, especially its attempt to make health insurance universal. But it does little to reduce the system’s staggering and increasing complexity. Every hour spent treating a patient in America creates at least 30 minutes of paperwork, and often a whole hour. Next year the number of federally mandated categories of illness and injury for which hospitals may claim reimbursement will rise from 18,000 to 140,000. There are nine codes relating to injuries caused by parrots, and three relating to burns from flaming water-skis.

Two forces make American laws too complex. One is hubris. Many lawmakers seem to believe that they can lay down rules to govern every eventuality. Examples range from the merely annoying (eg, a proposed code for nurseries in Colorado that specifies how many crayons each box must contain) to the delusional (eg, the conceit of Dodd-Frank that you can anticipate and ban every nasty trick financiers will dream up in the future). Far from preventing abuses, complexity creates loopholes that the shrewd can abuse with impunity.

The other force that makes American laws complex is lobbying. The government’s drive to micromanage so many activities creates a huge incentive for interest groups to push for special favours. When a bill is hundreds of pages long, it is not hard for congressmen to slip in clauses that benefit their chums and campaign donors. The health-care bill included tons of favours for the pushy. Congress’s last, failed attempt to regulate greenhouse gases was even worse.

Complexity costs money. Sarbanes-Oxley, a law aimed at preventing Enron-style frauds, has made it so difficult to list shares on an American stockmarket that firms increasingly look elsewhere or stay private. America’s share of initial public offerings fell from 67% in 2002 (when Sarbox passed) to 16% last year, despite some benign tweaks to the law. A study for the Small Business Administration, a government body, found that regulations in general add $10,585 in costs per employee. It’s a wonder the jobless rate isn’t even higher than it is.

A plea for simplicity

Democrats pay lip service to the need to slim the rulebook—Mr Obama’s regulations tsar is supposed to ensure that new rules are cost-effective. But the administration has a bias towards overstating benefits and underestimating costs (see article). Republicans bluster that they will repeal Obamacare and Dodd-Frank and abolish whole government agencies, but give only a sketchy idea of what should replace them.

America needs a smarter approach to regulation. First, all important rules should be subjected to cost-benefit analysis by an independent watchdog. The results should be made public before the rule is enacted. All big regulations should also come with sunset clauses, so that they expire after, say, ten years unless Congress explicitly re-authorises them.

More important, rules need to be much simpler. When regulators try to write an all-purpose instruction manual, the truly important dos and don’ts are lost in an ocean of verbiage. Far better to lay down broad goals and prescribe only what is strictly necessary to achieve them. Legislators should pass simple rules, and leave regulators to enforce them.

Would this hand too much power to unelected bureaucrats? Not if they are made more accountable. Unreasonable judgments should be subject to swift appeal. Regulators who make bad decisions should be easily sackable. None of this will resolve the inevitable difficulties of regulating a complex modern society. But it would mitigate a real danger: that regulation may crush the life out of America’s economy.