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An Audacious Opportunity

PRESIDENT-ELECT OBAMA IS signaling that his administration intends to stiffen regulations on business, the environment and the workplace. Obama repeatedly tied his opponent to Bush’s “failed deregulatory policies.”If only it were so. “It isn’t what we don’t know that gives us trouble,” Will Rogers once said. “It’s what we know that ain’t so.” The truth …

PRESIDENT-ELECT OBAMA IS signaling that his administration intends to stiffen regulations on business, the environment and the workplace. Obama repeatedly tied his opponent to Bush’s “failed deregulatory policies.”

If only it were so. “It isn’t what we don’t know that gives us trouble,” Will Rogers once said. “It’s what we know that ain’t so.” The truth is that the Bush record in this regard is less deregulatory than that of the Clinton Administration. Worse, money spent by federal regulatory agencies under Bush, according to the Heritage Foundation, increased 44 percent from $27 billion in 2001 to $44.9 billion in 2007. In addition, the total number of pages in the Code of Federal Regulations increased more than 4,500 pages since Bush took office, with the cost of new regulations imposed on taxpayers totaling more than $28 billion. Some deregulator.

It’s true that over the last 30 years there has been significant market deregulation, but most of this took place outside of the financial services industry. The deregulation of long distance telephone rates, trucking and airline fares, to name a few, all resulted in greater efficiencies and lower rates paid by consumers. Such Internet powerhouses as Amazon.com would hardly have been possible without deregulation of data transfer and trucking rates. The repeal of Glass-Steagall in 1999 had next to nothing to do with the meltdown of markets. If anything, it allowed Bank of America and JPMorgan Chase to quickly absorb Merrill Lynch and Bears Stearns respectively, thereby avoiding further chaos and turmoil in capital markets.

The irony is that credit default swaps, the very instrument at the center of the meltdown, were not regulated by the Commodity Futures Trading Commission (CFTC) as a result of legislation signed into law by President Clinton in 2000. Nor is it certain that financial disaster would have been averted had the CFTC regulated CDOs. Clinton Treasury Secretary Robert Rubin argued at the time that their regulation would do more harm than good.

If anything, it was the lax oversight of Fannie Mae and Freddie Mac, which Republicans tried in 2005 to improve, that triggered the meltdown. The Senate Banking Committee, then under Republican control, advanced a tough measure to strengthen control over these rogue agencies, but opposition by Democrats killed it.

The U.S. economy faces an annual regulatory burden of $1.1 trillion. But the issue isn’t whether or not to regulate- rules that support transparency and protect property rights help markets function better. The question is, do regulations help people by allowing employers to operate efficiently and be more competitive in world markets. Because if they don’t, fewer jobs will be created.

Even before the credit crisis the financial industry has been losing jobs at an alarming rate. Why? No fewer than four reports by respected groups including The Financial Services Roundtable, The Committee on Capital Markets Regulation (CCMR), The U.S. Chamber of Commerce and Schumer-Bloomberg report, have shown that the U.S. is losing its pre-eminence in world financial markets because of excessive regulation and high litigation costs, all of which predated the current market meltdown. One statistic from the CCMR report is revealing. The number of IPOs by U.S. companies made solely overseas went from almost nothing before 2005 to over 4 percent in 2007. “The fact that U.S. companies would feel it necessary to offer their shares to the public for the first time in a foreign market speaks volumes about conditions in the U.S. today,” observes Peter Wallison, who heads financial policy studies for AEI.

Obama promised “change.” He has an audacious opportunity to deliver on it and be the nonconventional hero his supporters believe him to be. Don’t impulsively return to the regulate-everything-that-moves world of yesterday. That is another country. In today’s world, capital and capitalists are no longer confined by borders. They will go to places where they are well treated.

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