By now, the financial crisis has been regurgitated
by countless analysts, pundits and policy-makers. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 addressed
many structural issues, but it also added a lot of redundant provisions doing little to reduce the risk of future crises.
In fact, bank regulators could have prevented the financial crisis in the early 2000s without additional legislation, but
chose not to. It was in that context that I had an eye-opening 45-minute telephone conversation in June 2007 with a member
of the Board of Governors of the Federal Reserve Bank.
I had grown deeply concerned, especially with the exponential
growth of credit default swaps (CDS) since the beginning of the century. They were no longer used to insure bonds held by
the purchasers of these derivatives, but instead to speculate on defaults without taking the risk of holding any of the insured
bonds. It was much like taking out homeowners insurance on your neighbor's house and then burn it down.
raised my concerns about the equally exponential rise in asset-backed securities, then bundled in collateralized debt obligations
(CDOs) and their evil siblings CDO's-squared and CDO's-cubed. I shared my worries that many of the underlying assets were
the same and that they were of extremely poor quality. They were mortgages with teaser rates, interest-only (for a few years)
and many loans without income documentation.
To each and every one of my interventions the member of the Board had
a standard reply: "The Federal Reserve will not do anything to limit the access of the private sector to credit."
In other words: We will not regulate. It was shocking to me because anyone of these excesses that I raised as concerns could
have been stopped cold by regulators. No new law necessary.
Fast forward to 2015. In January, the Swiss National Bank
(SNB) decided that it would no longer keep its currency from appreciating against the euro. The SNB abandoned its 2011-peg
to the euro. This action sent shock waves through financial markets. What was most breathtaking was, however, that borrowers
throughout the EU had been allowed to be highly exposed to so-called "carry trades", whereby they had borrowed in
Swiss franc with low interest rates and invested in domestic assets with high returns.
Polish banks alone hold $40
billion in Swiss franc loans or the equivalent of 8% of the country's GDP. One third of Polish mortgages are denominated in
Swiss franc. Of course, the sudden appreciation of the franc after the action taken by the SNB means that many of these mortgages
will be under-water and cannot be serviced. As usual, lenders and borrowers acted highly irresponsibly.
regulators, who are to safeguard the system, and the regulators in many other countries were clearly not meeting their mandate
by allowing these unsavory practices, when they could have been stopped through regulatory intervention.
learn, would be the standard shoulder-shrugging response. But some do. After its banking crisis in 2002, Turkey re-regulated
its financial services industry. Among other things, mortgages in Turkey can only be extended in Turkish lira. The result?
Turkey's banks did not blink during the financial crisis of 2008 and they surely were not exposed to the SNB action of 2015.
But let us not just blame financial regulators because sadly the problem is systemic. Take for example telecommunications.
In early 2014, Verizon introduced FiOS services in my neighborhood. By sheer coincidence, my DSL services sharply deteriorated
at that time. It was often impossible to understand the caller on my landline.
I did not do much about it. Then,
in early 2015 another problem arose. My phone would ring once, then the call would be dropped and the caller received a busy
signal. It was time to take action. I battled Verizon for three weeks and had to listen to endless sales pitches to migrate
to FiOS, a service I do not want. My key reason: Safety. Traditional copper wires transmit electricity. So, in case of a power
outage you will still have your all-important phone service. Hurricane Sandy was a vivid reminder how important that can be.
FiOS or other cable services depend on backup batteries of fairly short duration.
Technicians came and went and finally
I was told by Verizon that they simply refused to fix the problem. In sometimes belligerent tone, I was told: Migrate or else!
So, I filed two complaints: One with the Federal Communications Commission (FCC) and one with New York State regulators, the
Department of Public Service (DPS). Two business days after filing my complaint with the DPS, they informed me that my complaint
had been escalated at Verizon and I should expect a call.
Indeed, Verizon called half an hour later, scheduled another
visit by a technician and conceded that I could not be forced to migrate to FiOS. The day after, my problems were fixed within
30 minutes. No more dropped calls and crystal-clear reception.
I was impressed and grateful for the expeditious action
by the DPS. However, it should be noted that Verizon's practices of trying to force customers to use FiOS are well-known and
widespread. Many complaints have been filed with the FCC from across the country. To the best of my knowledge, Verizon has
not been fined for its outrageous practices.
But let us not stop here. Over the Christmas holidays, my wife and I
bought our son a 2015 Dodge Dart GT. His dream car. On Christmas Day in looking at the car, we discovered to our dismay that
the car did not have a spare tire. Instead it had a little repair kit. Small problem is that the puncture cannot be greater
than ¼ inch and cannot be on the outside wall of the tire.
Now, I thought this clearly had to be illegal. Ever
since the first automobiles hit the road, a spare tire was standard equipment. So, I searched the internet. Turns out that
it is NOT illegal for cars to be sold without spare tires. Also, turns out that car companies started this practice of not
providing spares in 2011 and for one major reason: Dropping the spare tire reduces the weight of the vehicle and is one component
of making it easier for car companies to meet fuel efficiency requirements.
There are two things wrong with
this. First, a spare tire should be considered a safety feature. Imagine being stranded somewhere at night without cell phone
service with an irreparable tire and no spare. The life-threatening scenarios that might materialize for such a person are
Secondly, and maybe even more upsetting is that regulators allow car companies to skirt fuel efficiency
requirements by eliminating features that any car owner five years ago would have considered standard and required. Why not
eliminate backseats in a sedan and make them optional? It would sure lower the weight of the standard version of the car.
I could go on with other examples. The key lesson is this: Regulatory agencies in all kinds of sectors do not make effective
and appropriate use of their regulatory powers. This lack of regulatory fortitude raises the risks that consumers and systems
are facing. New laws are rarely necessary. What is necessary is that regulators implement existing laws with strong regulatory
frameworks and enforce those rules to the fullest. Citizens should expect nothing less.