Money Goes Where It’s Treated Best

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RegulationAs the old saying goes “money goes where it’s treated best.” And it is certainly true when it comes to regulating an industry. In regulating an industry, the government must treat money well in order to maintain the health of the companies under its jurisdiction. The regulation of the financial sector imposed by The Obama Administration will have tremendous negative consequences if the old proverb is not quickly learned. The negative effect will ripple to weaken the firms in it and the entire financial sector, along with the entire economy, which is counterproductive for the intended role of any responsible regulation.

Excessive regulation will lead many financial firms to flee a jurisdiction. Hedge funds, private equity groups and others will “vote with their feet” and move to areas with limited or no governmental authority. In other words, financial firms will flee where its money will be treated better than in the United States. And that is a disaster waiting to happen. Due to the interconnected nature of the global financial system, the actions of a rogue firm operating from literally anywhere could imperil the banking framework for the world.

For the financial institutions that remain under a harsh regulatory regime, the costs are onerous. Compliance costs impose a tremendous burden on the companies. Many financial firms, such as banks and credit unions, are very low margin operations. Regulatory costs also make it prohibitively expensive to start new hedge funds or private equity groups. That denies consumer a greater choice in banking and investment services being offered from a wide array of businesses. The same rules and regulations make it very difficult for an entity to recover from a down period, too. Profits will be low or non-existent in bearish markets, but the regulatory costs will remain high. And again, it will cause investors’ money to go where it is treated better.

Many times regulations will deny financial firms profits or even result in riskier activities. When Glass-Steagall was the law of the land, commercial banks in the United States were denied lucrative investment banking fees. As a result, the money went oversees where profits had to be sought from risky overseas lending, which created a series of disasters. The same is true with the recent housing crash: regulatory pressure led to subprime lending to borrowers who could not repay their mortgages. That resulted in widespread defaults from which the global economy has still not fully recovered.

When the financial sector is overregulated, it is the entire economy that suffers. Capital, rather than flowing to its most efficient usage to the benefit of the masses, is misallocated to please the regulatory master. From that, higher unemployment is the result, not just in the financial industry, but for all. Thousands of much needed jobs in the United States will be lost and replaced in overseas only further benefiting our foreign competitors. And many other revenues collected from taxes, maintenance of the offices, business expenses and similar will be spent overseas.

History is replete with examples of this happening. Apple now keeps tens of billions of dollar overseas to avoid American taxes. The Eurodollar was created from the huge supply of American dollars abroad that investors wanted to keep out of reach of the Federal Reserve. Offshore banking centers around the world were franchised to serve the needs of capital seeking the most hospitable regulatory environment.

This will not cease and it is treacherous for the global financial system. Uneven regulation in the reinsurance industry has many companies chartered in foreign countries without an adequate capital base. Should a natural disaster strike in the United States like Hurricane Sandy and these reinsurance companies turn out to be the ones that have underwritten the policies, there will be a terrible price to pay by the taxpayers in those areas. In would have been far better for the elected officials to work with the financial companies rather than cause them to flee.

There is certainly a needed role for regulatory bodies in the financial sector, but it is in strengthening the companies and protecting the consumers, not threatening the stability of the entire economy. All will benefit if financial transactions take place in the United States, rather than in emerging centers such as Cyprus and Malta. If our government is not careful, American dollars will go and will be treated better elsewhere than at home, to the best interest of none of the parties involved..

Anna Timone (195 Posts)

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