market discipline

FCC Might Actually Roll Back an Outdated Regulation!

by Ryan Radia on October 15, 2008 · 1 comment

in Tech & Telecom

If you wanted to communicate over long distances in real-time 25 years ago, you had little choice but to rely on your local phone company for carriage. Email and mobile phones were still oddities, and neither SMS text messages nor tweets had even been conceived.

Federal regulators, concerned that some companies might not maintain a  high level of service, imposed reporting requirements so the FCC could monitor phone companies and ensure calls were being handled properly.

Fast forward to 2008, and the traditional phone company is but one of numerous firms providing voice and data services to consumers. From cable digital voice to cell phones to free, IP-based applications like Skype, there are a growing number of ways to talk to people in another part of the country. Yet federal regulators have continued enforcing strict reporting requirements on phone companies, forcing these firms to spend countless man-hours filling out forms that some Washington bureaucrat may one day glance over. And these FCC rules apply exclusively to phone companies, putting them at an unfair advantage simply because they happen to be older and more well-established.

As we’ve discussed many times before, the FCC’s paperwork-intensive service quality reporting rules impose millions of dollars in compliance costs on phone companies. These costs are passed on to customers, resulting in higher prices without any actual benefit.

The FCC’s service quality reporting requirements needlessly duplicate the function of a competitive marketplace. How could a phone company get away with subpar service without losing customers to superior competitors? Market discipline-not federal regulation-is ultimately what pushes telecom firms strive for high quality service.

Fortunately, in a notice published today in the Federal Register, the FCC describes its plans to provide regulatory relief to AT&T and Verizon, among others. This needed reform will help reduce unneeded regulations, possibly translating into more competitive offerings from telephone companies.

Of course, the Federal Register is loaded with myriad regulations that, collectively, cost Americans well over $1 trillion dollars per year (as CEI catalogues in its annual publication, Ten Thousand Commandments: An Annual Snapshot of the Federal Regulatory State). The FCC’s decision to relieve telcos of reporting rules is a welcome move, but we have a long way to go before the regulatory leviathan is in check.

Kling hits secondary market — misses benefits

by Fran Smith on October 3, 2008 · 2 comments

in Bailout Watch, Economy

Arnold Kling hits the creation of the secondary market for mortgage loans as the major factor — 50 percent — causing the current financial crisis. As Kling wrote:

In hindsight, I think that the crisis was caused by
a) creation of the secondary mortgage market (50 percent)
b) low down payment mortgages (30 percent)
c) the “suits vs. geeks” divide (15 percent)
d) other (5 percent)

The more I think about the secondary mortgage market, the less I like it. Any widespread benefits, such as lower mortgage interest rates, are microscopic. On the other hand, several times (not just recently), the market has been used to create or enhance regulatory loopholes that undermined the safety of the financial system as a whole.

I am surprised that Kling so lightly dismisses the benefits as “microscopic” of one of the most positive innovations in the mortgage market.  Just think about it.  Financial institutions — primarily savings and loans — prior to the creation of the secondary market, took in short-term deposits and made long-term, fixed-rate loans (30 years).  Until the early 1980s, Regulation Q set the limit on the interest rates that could be paid on deposits.

[click to continue…]

Financial Regulators Not the Answer

by Iain Murray on September 18, 2008

in Economy

With the British financial markets in meltdown, most of the blame has attached to speculators. In a desperate attempt to be seen to be doing something, the Financial Services Authority has reportedly banned short selling of stocks in “disorderly markets.” In other words, shorting a stock in a normal market is fine but when prices start falling rapidly, the practice will be banned.

This is a foolish, knee-jerk reaction that attempts to have it both ways. For clear explanations of why short selling is an important market discipline, conveying valuable information especially in difficult markers, see here and here. To sum up, the author of the second piece, Andrew Lilico, says, “Let me say this overly frankly: curtailing short selling would be a really really stupid idea, pandering to the most incoherent rantings of incoherent, nay ignorant anti-capitalists.”

As Hans and John have demonstrated repeatedly below, the dead hand of government is responsible for most of the market distortions that have led to this crisis. A regulator in the UK may have just made things much worse, and potentially caused the end of London as one of the world’s great financial centers.

UPDATE 7:40pm: I was unaware that the US had a similar regulation in place until 2007. Andrew Stuttaford argues that it was a good thing.