The Uniform Building Code once allowed holes in railings such that nothing larger than a 9” sphere could be passed through any opening.  When a baby fell through the railing to its death from the terrace of a Chicago high rise, the requirement was reduced to 6”.   It was later further reduced to the current standard of 4”.   If they find a baby with a 3” head (and it is their job to look), the allowed hole will smaller; it’ll never get larger.  .While this may be warranted, my point is that generally regulation only moves in one direction: from less restrictive to more restrictive. 

Thanks to our friends on Wall Street and their Washington facilitators, we are now entering what will certainly be a period of increased government regulation.  The free-market skeptics and the bureaucrats have been dealt a new and better hand.  I would argue that the banking system is a special case and needs controls even in the most free-wheeling of free enterprise environments.  The integrity of the currency is paramount and is the responsibility of the government.  If this requires federal insurance for deposits, the government can – indeed must – define reasonable parameters for lending.  It cannot simply say we’ll-insure-your-depositors; go-lend-all-the-money-to-your-idiot-brother-in-law-if-you-like.  The Reagan administration didn’t quite understand this and hence the S&L fiasco on the eighties.  (What ever happened to Neil Bush?)  

Nevertheless, while there is a case for reasonable regulation in certain defined areas of the economy, the current climate is such that I fear the regulators will be unleashed to do their will and the economic consequences will be significant and negative.  Having lived for years with overblown building codes, capricious zoning controls and zealous rent controls, I know how much economic activity I personally have passed on because of bureaucracy and the silly and expensive (and often unnecessary) requirements imposed by the government.   The aggravation is extreme and the risk multiplied.  Good ventures are sacrificed to the whims of the regulators.

Now the government is not only likely to regulate but to take a direct hand in management as a condition of bailout loans.  They also propose to actually take equity stakes in certain companies and industries. 

You haven’t missed a payment on the 6% mortgage on you house in twenty years.  Your neighbor hasn’t missed missing a payment in a year.  So Barney Frank wants to buy their mortgage (with your tax money), forgive half of it and lower your neighbor’s rate to 3% on the other half.  Meanwhile, your rate stays at 6%.  Wonderful! Middle America will love this. 

The big-three auto companies want $25 billion to stay afloat.  (A bargain next to AIG.)  They will likely get it and have dictated to them what they must build. Toyota will eat them for lunch while they wait for Washington to approve the latest line on flex fuel cars which burn ethanol which is produced with large government subsidies so that arable land is devoted to grow fuel instead of food so that the impoverished nations of the world are forced to live (more likely to die) with significantly higher food prices.  We’re buying General Motors, folks, and Nancy Pelosi will run it.    

As the pendulum swings from right to left, regulation will likely swing from too lax to too severe.  With the Democrats in absolute control of the federal government, we are in for some ominous restrictions on economic activity.  I shutter to think of Dennis Kucinich telling Warren Buffet what to do