Monday, September 1, 2014

When Regulators are In Bed with Business

When Regulators are In Bed with Business

The Principle of Imminent Collapse invariably shows up when the people who are supposed to inspect and report deficiencies and non-compliance to laws fail in the performance of that public trust. It would be one thing if the failure was due to inexperience and not knowing what the outcomes would be, but all too often the failure is due to a tacit agreement that the regulation is only for show and that no actual interference will be manifest.

Rampant Capitalist Buying and Selling leads to the Principle of Imminent Collapse. When one allows free-market forces to run amuck free from oversight, regulation and rationality, a crash is unavoidable. The fallacy of Laissez-faire is that it assumes that corporations are peopled with only honest and earnest directors, managers and staff. It would be true if emotions did not interfere. The role of government oversight is to reign in the adrenaline and testosterone fueled frenzy that emerges as a corporate personality trait when the wild ride begins.

These un-watched enterprises are responsible for all the Boom and Bust cycles of the economy. In recent years, the hydraulic fracturing/drilling speculators are riding high on the adrenalin of big money from holes in the ground. They will drill, drill, drill irrespective of the production outcomes of their operations. When the price of gas falls far enough the gas from their wells will be too costly to sell and the speculators will cease operations and walk away from the toxic waste water basins they built to hold the wastes until they were ready to leave. Government action has always been required in order to remediate the damage done in the Bust phase after every Boom.

There are two levels within each regulatory organization: The workers who see the everyday activities that they monitor; and there is the management level to which they report. While the front line workers usually want to do their job, it is the unstated position of the management that government needs to stay out of the process and let business prosper. Nobody wants to hold up the rollout of the latest jet aircraft. It will cost millions if there is a delay. We can’t have big businesses incur losses due to safety concerns that are only alleged anyway. No one has proven that three rivets instead of four really would make the wing fall off.

In the Soviet-era manufacturing environment, performance criteria were commanded. Without respect to capabilities of the factory to perform, they were told they will ship 1000 refrigerators per month. They had an inspector counting the units shipped. It always was 1000 units. The problem arose when the plant had only 900 compressors to install in the 1000 units. In that case 900 functional units were shipped along with 100 non-functional ones. The inspectors were satisfied and the economic planners vindicated that they were meeting the needs of the people.

So what happens when a mortgage finance institution needs to produce 10,000 new mortgages per month to package and sell to investors and they can only find 9,000 good qualified house buyers to sign on the dotted line? Well 90% of the mortgages were good and at cursory glance, all the T’s were crossed and the I’s dotted. Everything looked good until you dig deeper and discovered that many of the mortgagees did not have adequate income to assure confident repayment. Without actually visiting the dwelling, how would the reviewer know that the $400,000 price tag was $100,000 too high? They don’t. But someone certified that the dwelling was fit and suitably priced. Somebody fudged the numbers and the report. And no one was reviewing the performance of the appraisers. Everyone was making money and the economy was flush with discretionary funds to pay for all the stuff we Americans love to buy and consume.

Older people were able to retire to upscale communities like the Charlestown Village in Catonsville, MD or other Erickson communities or hundreds of other “active adult communities” and assisted-living communities. Children could go to college and private Christian high schools.

At the top management level of the finance banks, they were seeing dollar signs floating in their dreams, too. Multi-million dollar salaries, bonuses and stock options abounded. The measure of performance was not solid quality manufacturing and delivery, but it was how many units they could ship and put the price on their Accounts Receivable ledgers. This is were the Principle of Imminent Collapse meets the metaphorical Tuna. The two concepts are so intertwined that they are almost one Principle. There were no independent regulators or auditors to call out the business practices as being damaging.  In many cases the government relied of the companies themselves to self report and self-regulate. How smart is THAT?