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DOES GOVERNMENT REGULATION WORK? by ERIC L. STATTIN, National Service Director for Savings and Loan, Los Angeles Regulation of business by government is not new. The Emperor Hammurabi established a central government in Babylon around 2000 BC and promulgated a code of over 300 laws. Some dealt with business activity and seemed to be aimed at assuring integrity in business dealings. Some 15 centuries later, Aristotle wrote the following: "He who purposes duly to manage any branch of economy should be well acquainted with the locality in which he undertakes to labor and should be naturally clever, and by choice industrious and just; for if any one of these qualities be wanting, he will make many mistakes in the business which he intends to take in hand." Aristotle was talking about management of business, not its regulation by government. Today, however, much business decision-making and policy-setting are preempted by specific government regulation or by a regulatory agency. Are the qualities Aristotle required in a business manager present in today's regulatory bureaucracy? One way or another, most of American business is regulated by federal, state, and local government. Some industries are more closely regulated than others: the railroads, truckers, and public utilities, for example. They have territories, rates, quality of service, and even accounting systems prescribed for them. Financial institutions are also closely regulated by federal and state authorities, and it is the effectiveness of that regulation which is to be questioned here. Does government regulation of financial institutions work? There is plenty of evidence that government regulation of financial institutions does not work. There is even more public opinion to that effect. A skeptic might even suggest that in those circumstances where regulation does seem to work, other factors are really responsible. The present regulatory system was shaped by conditions which were generally negative and which the public and the institutions themselves wanted to avoid repeating. Of all the calamities, the Great Depression was probably the most profound. Notwithstanding this negative genesis, most regulators of financial institutions see their role as one of making positive contributions to our society and our economy. Naturally, there are obvious conflicting interests. Businessmen, homeowners, and trustees of deposit insurance funds would measure success differently. How regulators deal with these interests is one way of gauging their success. The Regulatory Tightrope The Home Owners Loan Act of 1933 and the National Housing Act of 1934 were drawn to provide emergency relief to homeowners then suffering from the Depression and to encourage future thrift and home ownership. The federal savings and loan system, Federal Home Loan Bank System, and Federal Savings and Loan Insurance Corporation (FSLIC) were created to help meet these objectives. Federal insurance of bank deposits came into being also. Perhaps the greatest conflict among regulators of financial institutions is that which exists between the providers of capital and the users of capital. Other conflicts exist within the classes of capital providers and within the classes of capital users. Lately there have also arisen conflicts between regulatory agencies. For example, the SEC and federal bank regulators disagree over how full " f u l l" disclosure should be for publicly owned banks. The SEC wants bank stockholders to be fully informed, while bank regulators are fearful that bad news might cause the depositors to lose confidence and bolt. How do the regulators deal with conflicts and decide which policy will best serve the "public interest"? The savings and loan industry represents a simple example of providers (mainly individual savers) who had put up $286 billion at year end 1975. How does the Federal Home Loan Bank Board balance thrift, economical home ownership, and the interests of the FSLIC? A federally chartered savings and loan organization is required to make most of its home loans to people of modest means. Regulations also prescribe the maximum loan to value ratios and require that most loans be made on properties within a prescribed distance of their off ice. Such limitations are intended to reduce the investment risk, and thus protect the savers' interests and the FSLIC. But what happens when people of less than modest means expect or are perceived by politicians as deserving to become homeowners? Many of these families cannot come up with a 20 percent down payment on even a $30,000 home. When that home inflates in value 10 percent or more annually, the prospective homeowner is further behind. The government's response has been to subsidize both the risk and the direct cost of housing. The problem is that a few of these arrangements are in the form of hidden subsidies that offer a potential for regulatory abuse. For example, the FHLBB is under no legal or self-imposed 34
Object Description
Title | Does government regulation work? |
Author |
Stattin, Eric L. |
Subject |
Savings and loan associations -- United States -- Law and legislation |
Abstract | Illustration not included in Web version |
Citation |
Tempo, Vol. 23, no. 1 (1977), p. 34-37 |
Date-Issued | 1977 |
Source | Originally published by: Touche Ross, & Co. |
Rights | Copyright and permission to republish held by: Deloitte |
Type | Text |
Format | PDF page image with corrected OCR scanned at 400 dpi |
Collection | Deloitte Digital Collection |
Digital Publisher | University of Mississippi Library. Accounting Collection |
Date-Digitally Created | 2010 |
Language | eng |
Identifier | Tempo_1977_Spring-p34-37e |