It’s the Regulations, Stupid.

Today on the radio there was a small business owner who was saying that he could not get a business loan to get the capital he needed for cashflow.  He had several orders on the books, but he did not have the cash needed to buy the parts and pay his employees, so he was unable to fill the orders.  He said that if he could just get a loan of $25,000, he could turn it into $100,000 within a year.

This made my ears perk up.  I thought that maybe I could loan him $25,000, or maybe get together with a few friends and pitch in $5,000 each.  Maybe we could give him a loan with an 10% interest rate or something – a little higher than the banks are offering because of the added risk we’d be taking, but then again he has not been able to get a loan from the banks so it would be a good deal for him.  If he were truly able to turn it into $100,000 by the end of the year, paying us $2,500 for the use of our money would seem like a good deal.  As it is he can’t make money and his customers can’t get their products. 

I know I’d be taking a risk, but then every once in a while you take a risk.  You say, “I don’t know if I’ll ever see this money again, and if I don’t that will be alright.  Maybe I could make a good return from it, though, if things do work out.”  There is a lot of risk but also a lot of reward.

But then it hit me.  There are probably regulations on such loans.  I would probably have to send paperwork into some government agency.  I would probably have to hire a lawyer and an accountant to do things right, and even then they may make a mistake.  There might be special regulations on me – I might have to file with the FDIC or the SEC or someone.  They might say I’m a bank and need to keep a certain cash reserve.  I might need to file all kinds of paperwork to open an account with the Federal Reserve.  I might need to file 1099’s for my wife and kids and install wheelchair ramps on the doors to my house.  The trouble was I just don’t know.

Obviously I decided to give up the idea.

There was a time when all I would need to do was look at the risk, see if I thought the guy had a good business and would be able to pay me back, and then draw up a contract and shake hands.  Now there are so many regulations, all put in place in the name of making us safe.  The trouble is there is a one-size-fits-all approach to everything, and the people making the regulations could really care less if loans get made or jobs are created – that’s not their job.  They just make sure people follow the regulations. 

Some people even go into a town and crucify a couple of capitalists, to make an example of them, and make the others scared, as a former administrator said.

There is a great deal of debate about the level of taxes.  But the thing that really slows the economy isn’t the taxes, it is the regulations.  How many businesses were not started just because people had a great idea but then didn’t even know how to navigate the labyrinth of government to get started.  How many jobs don’t exist because it was too difficult to hire someone?

Couldn’t we just drop all of the regulations, see which ones are really needed, and start building again?  Maybe make all regulations expire every ten years if not reinstated?  Maybe see if anyone is reading all of the paperwork that is being generated and if not, stop requiring that it be generated.  In the least, provide a lot of support to help people through the process – maybe even have civil servants fill out some of the forms for them.

It’s not the taxes, it’s the regulations that really cripple job growth.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.


  1. How well did all those non-regulated loans work out for the economy when they were giving mortgages out to anyone who could fog a mirror back in 2008?

    • Good rhetorical question – please forgive me for answering it. A full discussion requires a post – I’ll work on that for Saturday.

      The answer is that the loans (actually from 2003 until about 2008) were regulated. The bubble developed despite the regulations. Because of the bubble, there are now additional regulations and all kinds of additional disclosure requirements that cost a lot of money but probably generate paperwork no one really looks at. When is the last time you reviewed the privacy policy that you bank is required to send to you?

      These new regulations have increased the reporting burden substantially. There is also a reluctance to make new loans because there is fear that the Government can step in and change the rules (note the pressure on banks to change the loan terms for mortgages that are underwater and the heavy-handed way the GM bond holders were treated during the auto bailout).

      One of the critical requirements for free enterprise to work is that contracts must be enforcable. Otherwise, no one will be willing to do business. This is probably a contributing factor to the length of time it is taking for the US economy to recover, compared to other recessions like 2000 and 1983.

      • Don’t get me wrong, I’m a free market capitalism guy, but when watching documentaries like “Inside Job” it was shocking to see how little regulation there was for the mortgage industry or the rating agencies.

        Giving people with no jobs and no assets massive loans and then slapping AAA ratings on them…

    • I agree, letting people fail is part of capitalism. The mortgage loans were not part of a normal free market transaction though. Otherwise banks wouldn’t loan to people with bad credit. That would be bad business.

      They loaned to them so they could package loans and sell them to hedge funds with fake AAA ratings on them. That had nothing to do with free markets or letting people fail. It was all about creating fake securities that could be sold to a greater fool in a market with no oversight.

      Although it may not sound like it, I actually agree with you and your point of view after reading several of your posts. Keep up the posts. They force me to think about my own ideals.

      • The whole point current restrictions on hedge funds is to only allow people who are educated enough and who have the financial resources to suffer a loss to invest in them. I believe you need to have $1 million or more in assets and a history of investing to get into one. Are there people who shouldn’t be investing in hedge funds but who fit the criteria, sure, and maybe this is another indicator that regulation doesn’t work all that well many (note I didn’t say any) times. (Note, the people I think really shouldn’t be involved with hedge funds are penions and endowments. Actually, I don’t think anyone should invest in hedge funds because it is a foolish arrangement where the manager gets richly rewarded when things go well and gets off without a loss when things go bad, but that doesn’t mean no one should be allowed to invest in them if they want to!)

        Now, would these educated people (hedge funds and professional managers with the trading firms) whowere buying these things be foolish enough to believe if you loan money to a person who can’t pay it back it is risky, but loaning it to a lot of people who can’t pay it back is as safe as putting the money in top quality bonds? I seriously doubt this. I think they were buying these pools of mortgages because these instruments were paying a high interest rate compared to everything else and they thought they could handle the risk. It is when things went bad that they suddenly started to be victims.

        Please keep up the comments as well. I do read and thnk about new information I get. That’s how we all learn.

      • I agree about hedge funds. It’s like heads I win, tails you lose.
        It’s the rating agencies that kill me. How could those mortgage backed securities ever get AAA ratings?

      • I totally agree. I don’t know what the ratings agencies were thinking. I would hope their ratings would mean less now.

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