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Opinion

To boost the economy, burst the regulatory bubble

From housing to Wall Street, government prodding and over-regulation have caused more problems than they’ve solved.

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Many other developed countries have achieved far higher rates of home ownership without encouraging banks to make bad loans, allowing banks to unload loans on taxpayers, or rewarding their richest citizens with tax benefits and subsidies of up to a million dollars for buying the most extravagant homes.

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Stack of disclosures

Even before the Dodd-Frank law, all homeowners were familiar with the stack (often several inches high) of documents and “disclosures” that they reviewed and signed before completing a home purchase. While this paperwork no doubt satisfies government regulators, few if any homeowners were equipped to read them, much less understand them.

In fact, a single-sentence regulation would have been more effective in curbing both predatory lending and foolish borrowing – namely, a requirement that would-be homeowners must make a minimum 20 percent down payment. And marginal borrowers who couldn’t afford conventional loans and down payments should have been made to sign a one-page statement in bold, 16-point type before agreeing to an exotic loan:

I UNDERSTAND THAT MY MONTHLY PAYMENT COULD DOUBLE IN SIX MONTHS, AND THAT MY INTEREST RATE MAY TRIPLE BY NEXT YEAR. I FURTHER UNDERSTAND THAT, STATISTICALLY, GIVEN MY UNSATISFACTORY CREDIT HISTORY AND MINIMAL DOWN PAYMENT, MY CHANCES OF LOSING MY HOME TO FORECLOSURE WITHIN THREE YEARS EXCEEDS 90 PERCENT.

Such a warning would actually serve the public, but in the real world, the stacks of government rules may be harming more than helping.

Cost of regulations

According to a 2010 study by the Competitive Enterprise Institute, in 2009 federal regulatory agencies generated 3,503 “final rules,” each consisting of hundreds, often thousands, of pages of barely-intelligible rules.

The study further found that “annual regulatory compliance costs hit $1.18 trillion in 2009.” And more were the in the pipeline, with 59 different federal departments, agencies, and commissions in the process of promulgating more than 4,000 regulations, 184 of which are “economically significant rules, packing at least $100 million in economic impact.”

These byzantine rules have become so complicated that even the regulators can’t understand them, let alone enforce them. And lack of enforcement makes the public more susceptible to whiz kids at high-flying investment banks who create exotic investments such as credit default swaps, inverse floaters, and synthetic collateralized debt obligations. All of these exotic instruments have one feature in common: they create extreme leverage.

Yet the thousands of pages of additional regulations in the Dodd-Frank law don’t effectively address this underlying problem.

Again, a simple, one-page banking regulation would be far more effective:

EVERY BANK OR INVESTMENT HOUSE IS REQUIRED TO MAINTAIN A RESERVE OF 20 PERCENT FOR EVERY DOLLAR LOANED OR INVESTED, AND NO INVESTMENT SHALL BE OFFERED WHICH DOES NOT REQUIRE THAT AN INVESTOR MAINTAIN A 50 PERCENT EQUITY.

Instead of addressing extreme leverage simply and aggressively, the Dodd-Frank law will soon unload countless new rules on hapless regulators, banks, and consumers.

Uncle Sam is right to take action to prevent another housing bubble. To do that, it’s going to have to pop its own inflated sphere: the regulatory bubble.

Robert M. Hardaway is professor of law at the University of Denver Sturm College of Law and the author of the forthcoming book, “The Great American Housing Bubble: The Road to Collapse."

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