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Comment by nemo44x | Hacker News Reader

Regulations have their purpose to be sure. But they have a dark side as this article points out.

Regulations lead to lobbying. And lobbying leads to corruption. I think one of our biggest problems is we have tried for years to have a pseudo free market while tampering with it so much to create the situation we are in now.

For instance the financial crisis. One big reason for this was regulations forcing banks to make awful loans in Bush’s “ownership economy”. This led to a situation where free market products (mortgage backed securities and derivatives) were corrupted with so many bad loans. The free market never had a chance.

We all blame the banks but it wasn’t entirely their fault.

We see it with college loans. You either make things like this entirely socialized or market based. Too much socializing the free market or free market socializing, depending on your point of view creates these problems.

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There's a very fine line between "regulating an industry" and "picking winners". Codifying existing industry best practices as regulations tends to have the effect of entrenching existing institutions in that space, in proportion to how difficult compliance with those regulations is (either in complexity or cost).

There's another fine line between regulating desired outcomes vs. regulating _towards_ desired outcomes. Using regulations to "nudge" towards a social good often means that the market, wiggly customer that it is, uses that nudge to push in directions that are not the desired outcome, or that achieve the desired outcome only in a technical sense.

The negative examples are rampant; the good examples are harder to find, because a good regulation is nearly invisible. Take building codes as an example of good regulations, although if you've ever done a remodel or been involved in construction, you know that they're not _actually_ invisible. But for the most part they just make sure that buildings are safe and support certain common conventions that make future maintenance and upkeep a little easier. The goal of the regulations is to make sure that new construction adheres to certain standards of quality, and so that is what they do.

They also increases the price of real estate since you can't actually build smaller homes, IIRC.

Nothing's perfect. It's generally possible to amend laws and regulations if a compelling use case comes up. Does anything prevent having one code for residential buildings over a certain size, and another for smaller buildings?

> Does anything prevent having one code for residential buildings over a certain size, and another for smaller buildings?

The building codes aren't the way they are because you need different rules for smaller buildings. It's because existing residents don't want smaller buildings. If you can build smaller buildings then people will, and then you have a bunch of new students in your school district whose education is paid for from local property taxes, only their parents aren't paying a proportionate share because they have a smaller house with a lower property value. Which means the existing residents would have to make up the difference, which they don't want to do, so they have the building code prohibit building smaller homes.

It's basically regulatory capture by existing homeowners of larger homes.

I think that's understating the complexity of the IBC. The nice thing about building codes is that the regulators are local, but the regulations are very widely (voluntarily) adopted by those independent jurisdictions.

Local jurisdictions will usually have addenda to the code, for local fire requirements, etc., but a lot of that flexibility is baked into the standards themselves. In here there may be regulatory capture from local builders, and at higher levels (state-wide) there may be some capture from larger construction companies, but there's very little in the way of a feedback loop to allow homeowners to significantly change the building code.

Rather than debate in abstracts, I'd be curious if there is a particular section of the code that you feel is a result of this sort of capture. The IBC is available for browsing online [1], and Chapter 5 has the base restrictions on building size, with some notes on justification (largely about at what size you require additional fire suppression, which is a cost that most builders want to avoid in residential settings).

[1] https://codes.iccsafe.org/content/IBC2018P3

You mean zoning codes and not building codes? Zoning codes have indeed primarily caused the lack of small buildings. Also a lack of understanding of property values and induced traffic. If I have a 40ft wide lot in a city and I want to build on it (I may not even be able to because of 'minimum width' requirements on lots), but if I do, I might only be able to build a tiny house on it in the very middle of the lot because of 10ft setbacks on either side. What do people do in this case? The lot gets purchased along with the one next to it by some rich people and then they build a massive house on it. The total value of the house may actually be less as a single house than two houses, but the zoning codes have forced it to a less valuable land use that is more spread out.

Both.

Zoning can explicitly set lot size minima or density maxima.

Building codes with specifications for door and corridor widths, accessibility ramps, minimum room sizes, bedroom counts, bath-bed ratios, height limits, basement exclusions, attached vs detached dwellings, "in-law" units, with or without seperate entrances and/or cooking facilities, etc., all indirectly efect housing size and density.

> Codifying existing industry best practices as regulations tends to have the effect of entrenching existing institutions in that space

In the long run, I'm not sure that's actually true. It really depends on the kind of regulation you're talking about (e.g. not so much with anti-trust regulation).

Ultimately, most people want some form of quality control. When I buy milk, I don't to have to inspect the dairy farm myself. In the end, you still have industry regulations and winner pickers, it's just that the decisions and processes that control them are behind closed doors. Trying to navigate that as a small player can be very difficult.

Regulations are a racket, but at least with government regulations, that racket is democratized.

> For instance the financial crisis. One big reason for this was regulations forcing banks to make awful loans in Bush’s “ownership economy”.

No, it wasn't. Regulations didn't force credit rating agencies to give AAA ratings to securities backed by subprime mortgages[1]. Greed did.

[1] https://en.wikipedia.org/wiki/Credit_rating_agencies_and_the...

But you can't "fix" greed. Even punishing greed doesn't make people less greedy. That's a bit like thinking that the war on drugs will make people want drugs less, or even seek them out less. Constraining an inflexible market only moves it to places you no longer control.

You don't have to fix the greed, you have to add oversight and accountability with things like mandatory reporting that make it not worth doing these activities on any profitable scale.

>But you can't "fix" greed. Even punishing greed doesn't make people less greedy. That's a bit like thinking that the war on drugs will make people want drugs less

Or that punishing robbing banks makes people do it less?

Cant fix murdering people either, even punishing them dosen't stop it. We just have to accept that sometimes people get murdered. /s

Drop the /s and you’re right! We can’t fix people’s desire to murder other people. We punish harshly as a deterrent but unfortunately someone who’s in a place where they’ll murder someone usually isn’t weighing the risk or making a list of pros and cons. So people get murdered. It’s inevitable and there’s very little we can do to prevent it in general.

The point it is isnt a justification to let people go around murdering others.

Punishing bank robbing doesn’t make people want to rob banks any less. It just changes the incentive structure such that it’s not worth it to most would-be robbers with normal risk tolerance.

Bank robbing is an activity where punishment actually moves the needle on the risk of doing it. When you try punishing marijuana use you find out that the risk of getting caught is so low that even extremely steep punishments don’t affect people’s willingness to do it. Same with jaywalking.

>That's a bit like thinking that the war on drugs will make people want drugs less That might have been possible if that was the actual goal

But regulations did force companies to accept credit ratings from and use rating agencies that, under other regulations, had explicit immunity from liability for bad faith ratings. Even if companies knew the credit ratings were fraudulent, they were required to use them per regulation.

The regulatory framework for credit ratings created a serious moral hazard out of whole cloth, and then actively shielded bad actors from scrutiny. It was a clear and obvious case of regulatory malfeasance, and while the subprime mortgage issue was a manifest consequence of that malfeasance, they did not cause it.

The government allowed this regulatory capture by credit agencies to occur because it directly benefitted the government as well, as they are required to rely on these same credit agencies for their own debt instruments.

So, the government benefited from the creation of the housing bubble in its own debt instruments, the same debt instruments that would go into the hands of the people who were being swindled by the banks that were the original cause of the bubble.

Saying "greed" caused X is surely just another way of saying that X was profitable?

So if regulations made X profitable, I'd blame regulation for X.

In my mind, greed is a human character trait that exists regardless of the political environment, much like breathing.

To people like OP, it seems to be... something else. I can't quite understand what.

Greed is a trait we dislike in humans. Rewarding it is a mistake.

One of my favorite interpretations of why capitalist/free markets have been so successful is that it channels human greed into productive use that benefits society.

So I think it's fine to reward greed when it does good things - even though it's not from the noblest motive.

> Regulations lead to lobbying. And lobbying leads to corruption. I think one of our biggest problems is we have tried for years to have a pseudo free market while tampering with it so much to create the situation we are in now.

I guess it all depends on how you define "pseudo free market" but the government has been intervening in the economy since the birth of the nation. It's just a bit of a myth that the market is a free market.

It's also a myth that lack of regulation necessarily makes the market freer. There are many tactics that a huge company or monopoly can carry out that suppress free market dynamics. Antitrust regulations are one example that promote free market dynamics.

As an example, only strong regulatory intervention opened up the EU telecoms market.

I don't understand the mindset that believes that a poor regulatory environment helped cause the financial crisis and sees that as an indication that we should have less regulation. That is like seeing your deadbolt was broken when someone robbed your house and instead of investing in a better lock, an alarm system, or a security camera, you just decide to leave your front door open 24-7.

Yes, bad regulations exists. However the recipe to fix bad regulations is not no regulations, it is good regulations.

I think its more like suggesting you can't jump half-way across a muddy ditch. You either go for it with everything or you stay put. Anything in the middle is going to be a bad time.

Here's the mindset explained:

We think regulation will always be strongly influenced by the regulated entities, since they have by far the biggest skin in that game, and in the end, regulation will always end up "bad", much like a dropped $20 bill will always be taken.

This concept is called "Regulatory Capture" by economists, it has been extensively studied, and I'm sure you can find reading material by googling.

I am familiar with regulatory capture. I am not familiar with any well-respected economist who has argued that regulatory capture is a forgone conclusion of regulation. But either way, regulatory capture is not a symptom of bad regulation. It is a symptom of a corrupted political system. Putting stronger restrictions on lobbying and reforming campaign finance law would be a much better step to fix regulatory capture than widespread dumping of regulations.

I also want to point out that regulatory capture is completely counter to the example that nemo44x mentioned above in which they stated that regulation forced banks to make loans they wouldn't have ordinarily made. The idea that the banks didn't want to make those loans and only did it to meet regulatory standards is incompatible with the belief that the regulation was co-oped for the benefit of the banks.

> Putting stronger restrictions on lobbying and reforming campaign finance law would be a much better step to fix regulatory capture than widespread dumping of regulations

To me that's a naive view of how fundamental the problem is. Consenting adults who stand to gain a lot at the expense of a third party will always find a way to help each other out.

Just my personal feeling, of course. I have no proof to offer.

Besides, I think the main mechanism for Regulatory Capture is influencing the regulator directly, not the legislators. At least in the US, the law behind the regulation mostly just says that the new TLA agency is to issue rules that it deems are in the interest of some lofty vague goals.

> The idea that the banks didn't want to make those loans and only did it to meet regulatory standards is incompatible with the belief that the regulation was co-oped for the benefit of the banks.

Keep in mind that there is more than one lobby group. A big force behind "give more loans, everybody should own a home" is the National Association of Realtors.

So the banks don't want to give the loans (because they know there will be defaults) but the Realtors want them to; the "compromise" is to move the risk away from the banks.

The law was a moral hazard -- move the risk from doing something stupid risky onto somebody else and of course the banks are going to do it then. It was what we "wanted" them to do, which is apparently why the people enacting it didn't think too hard about why they didn't want to do it on their own.

Is that better or worse than allowing all sorts of unregulated crazy behaviour via free market incentives?

I'd rather imperfect regulation and tweaking lobbying rules than toxic waterways etc.

The better alternative in my mind is that you can sue for damages if some activity harms you or your property.

This is fundamentally different from regulation in that there is no regulator to influence.

The system also has a multi century track record that is pretty darn good. Certainly compared to the more recent regulatory system.

You're talking about two completely different categories of problem.

Companies polluting waterways is an externality. Many customers prefer the company that doesn't spend money abating pollution, because it allows them to have lower prices. To address that you need some kind of rule against polluting, or a property right by the people downstream to not have toxins dumped in their river.

The problems with tech companies are rooted in a lack of effective competition. If there was a company that provided the exact same services as Google or Apple except that it respected your privacy better or had lower prices or didn't leverage their platforms into monopolizing ancillary markets, customers would choose that in the market. The people being negatively impacted by their behavior are their own users, which means that all you have to do is make a better alternative available and that alternative would win out in the market. Which means that in this context, any rules that impede new competitors are counterproductive, as are the existing rules that caused the lack of effective competition to begin with.

Even before the lobbying step, regulations are barriers to entry. Established companies can afford them whereas small companies can not.

Houses have gotten bigger and therefore less affordable and the government has had policies to increase home ownership such as mortgage deductions. In addition, local policies such as zoning have helped perpetuate urban sprawl, which helped lead to people building bigger houses (bigger lots on cheaper land).

If regulating a large bad actor ends up making it stronger, that is a sign that it needs to be broken up, not merely regulated.

Are you seriously claiming the 2008 financial crisis is an instance of _too little_ regulation?

Lobbying will always exist. Are you advocating ruthless anarcho-capialism?

>Regulations lead to lobbying. And lobbying leads to corruption.

Capitalism is a prerequisite for lobbying. Regulations are not.

>For instance the financial crisis. One big reason for this was regulations forcing banks to make awful loans in Bush’s “ownership economy”.

This is bank propaganda. It's been debunked countless times:

https://www.forbes.com/sites/eriksherman/2018/05/06/the-lie-...

>This led to a situation where free market products (mortgage backed securities and derivatives) were corrupted with so many bad loans.

The bad loans were made by people who knew exactly what they were doing. It was a form of control fraud (sometimes called "bankruptcy for profit").

>Capitalism is a prerequisite for lobbying. Regulations are not.

I strongly disagree, or am missing your point.

Is not the purpose of lobbying to get favorable treatment from those in power? What does capitalism have to do with it? Or do you mean specifically registered corporate lobbyists in Washington DC?

The U.S. government sits on top of one third of the world's GDP, the largest military by far, dominating all corners of the globe, etc. Of course this attracts every type of corrupting influence possible. hardly nobody bothers lobbying the Somali government, right?

I wonder how do you protect the system from so many selfish interests...

> Capitalism is a prerequisite for lobbying. Regulations are not.

In order for lobbying to be effective, there must be a large and powerful government which can be lobbied to. The reason the farm lobby spends millions of dollars is because they get billions in subsidies in return. It would be more accurate to say that big government is a prerequisite for lobby, since a small government that merely enforces property rights wouldn't be worth lobbying to.

> This is bank propaganda. It's been debunked countless times

It's an empirical fact that Fannie and Freddie, which are government sponsored entities that buy the largest share of mortgages, lowered their standards significantly leading up to the crash in order to make artificially cheap loans more accessible to people who would otherwise be considered too risky to lend to.

> The bad loans were made by people who knew exactly what they were doing.

Lenders originated subprime loans because the government guaranteed to buy them via Fannie and Freddie. If Fannie and Freddie hadn't existed, these bad loans would have never been made in the first place.

> Regulations lead to lobbying. And lobbying leads to corruption.

So instead we just give companies what they want in the first place to eliminate corruption! That "fixes" it! No, that's stupid reasoning.

> "We all blame the banks but it wasn’t entirely their fault."

I personally blame the people who thought it would be a good idea to buy a $350-400k home with a predatory mortgage, when their gross annual income was like $25k/yr.

Granted the banks made the instruments available for people to get into this mess, but I always come back to personal responsibility:

"Just because you can doesn't mean you should".

Because they were told over and over again that buying a house was a good investment, and that the value was going to increase so much they could sell it and make money later.

Why do you hold the people who took the loans responsible but not the people who have them? How can they not have at least as much responsibility? Can't you say "just because you can doesn't mean you should" to people pushing predatory loans?

The banks also turned around, repackaged those same predatory loans, and marked tranches of them as AAA-investment quality. Where was the responsibility in that activity?

"Just because you can doesn't mean you should"

Indeed.

There are many, many people who deserve some blame for the housing crisis. Certainly, the people who took out loans they couldn't afford, but also:

- the loan underwriters who assured them they could afford the loans, because they had no risk, because they could turn around and sell the loans to:

- the banks who bought up the loans and repackaged them into mortgage-backed securities, which they could sell easily, because they were highly rated by:

- the credit rating agencies who gave those securities AAA ratings, which they did by completely ignoring systemic risk

- And we haven't even gotten to credit default swaps

In short: yes, there was a lack of personal responsibility on the part of buyers, but they were heavily encouraged to believe they could afford these houses, because the market conditions created an enormous demand for new mortgages, by convincing itself it could make money off of them with zero risk.

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