A business columnist bids farewell and looks back

It's not about more or less regulation

it's about the right regulation

February 26, 2012|Jay Hancock

There comes a time for every trader to tally the bets that paid off, revalue the stinkers and recalibrate assumptions according to changing facts.

Mutual funds do this every day. Banking companies, which still hold subprime mortgage bonds that are vastly overvalued on their books, don't do it often enough.

Business columnists, if they are honest and faithful, mark their beliefs against reality every few months, if only to themselves. When they stop writing a semiweekly column after more than a decade, however, perhaps the reckoning should be explicit and public. (I'm leaving The Baltimore Sun to work for Kaiser Health News in Washington.)

In 2001, when I started writing a financial and economics column for The Sun, I was a strong believer in the power of markets and the profit motive to improve life for everybody. I still am. Thanks to the Industrial Revolution and the development of motor transport, telephones and electric power — all accomplished by entrepreneurs — millions have risen from squalor to lives of comfort and meaning.

But markets need more tending and vigilance than I realized in the fall of 2001, when the dark side of free enterprise was about to appear after years of brilliance.

I had forgotten what Charles Kindleberger, the great economic historian at MIT, told me in the 1990s. Fabulous financial bubbles, Kindleberger taught, always reveal fabulous fraud after they deflate.

The Enron scandal, the WorldCom flimflam and dozens of lesser thefts associated with the dot-com collapse verified this proposition. So, only a few years later, did the mortgage bubble, as if the economy gods had concluded we were especially slow learners.

To what degree the fraud and wasted investment were caused by the Federal Reserve's extraordinarily low interest rates will be debated forever. Certainly the Fed's looseness was a necessary condition for the bubbles that developed.

But it was not sufficient. To allow crazy businesses as well as promising ones to float stock in the dot-com craze, to let feckless homeowners as well as responsible ones borrow at low rates, required a failure of regulation by the Fed, the Securities and Exchange Commission and many others.

Above all, the mortgage crisis taught the dangers of excessive debt and not enough equity — at all levels. When homeowners and mortgage bankers alike are in hock to the gills, it takes only a tiny market reverse to make everybody insolvent.

Excessive mortgage debt was encouraged by favorable tax treatment. The deductibility of interest payments also fueled the debt-happy buyouts by Mitt Romney's Bain Capital that even Republicans are criticizing. So it's amazing that the Obama administration has attacked equity by proposing a large increase in the tax on stock dividends. Equity and dividends should be promoted. Debt and interest, their evil twins, should be tolerated but not encouraged.

Maryland and Baltimore have survived the decade in some state of dignity, thanks to the justified war in Afghanistan, the homeland security boondoggle and the disastrous con job of George W. Bush's invasion of Iraq. The continued escalation of health care spending has also boosted the area's economy.

But all that revenue is diminishing or at risk. When presidential candidates argue about returning the nation to a sustainable fiscal course, they're arguing about the future of Maryland. The military, security and medical expenditures that are breaking the federal budget have also kept job and economic growth in this state far ahead of that of other states.

To the degree that Congress raises taxes to maintain spending at a relatively high level, Maryland will benefit. To the degree that Congress shrinks deficits with spending cuts, Maryland will suffer. In any event, the state's private-sector employers, who have added zero net new jobs since 2000 — even with the post-9/11 blowout that enriched contractors — will become increasingly important.

Maryland's vulnerability as a high-tax, high-cost state surrounded by cheaper alternatives may become more obvious.

Back to regulation. It's astounding how hard-charging, can-do corporate titans seem to become helpless sissies when presented with a few extra government rules.

True, bad or counterproductive regulation is often a danger. A good case can be made that the high cost of complying with the Sarbanes-Oxley law, passed in the aftermath of the Enron and WorldCom scandals, has priced many companies out of the public stock market.

The true cost and effectiveness of the Dodd-Frank financial reforms won't be known for years, although, as many have pointed out, industry requests for tweaks, loopholes and exceptions added to the law's maddening complexity. The ultimate risk of regulation is that it could cause America to lose its edge in innovation, technology and entrepreneurship.

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