When it comes to regulation when is enough, enough?

My new favorite metaphor comes from Michael Mandel of the Progressive Policy Institute  who, in a 2010 blog, argued that regulations impact innovation the way pebbles impact a stream.  “ No single regulation or regulatory activity is going to deter innovation by itself, just like no single pebble is going to affect a stream. But if you throw in enough small pebbles, you can dam up the stream. Similarly, add enough rules, regulations, and requirements, and suddenly innovation begins to look a lot less attractive.”

Whether you agree or disagree with how a given regulation is structured it is often difficult to argue against its ultimate goal: Does the federal government really know that a mortgage with a debt-to-income ratio above 43 percent isn’t a qualified mortgage? Or how an APR should be calculated and displayed to consumers? Of course not! The mere fact that these and other regulations are in place establishes a baseline of fair dealing between the consumer and businesses that only government has the power to enforce. Anyway, how much do disclosures really cost businesses? If you can’t afford to comply with basic requirements, than maybe you shouldn’t be in business in the first place.

But  at  some  point does the aggregate weight of well-intentioned, often marginally beneficial and sometimes very helpful regulations,  is  outweighed by the aggregate burden they place on  credit unions and other institutions that are ultimately in business because they help consumers more than government ever could. It is recognition of this stuborn fact that is too often ignored given the premanace regulations play in the current legal framework.

For example, consumer groups look at overdraft fees in isolation and say that they are bad for consumers. But, what these same advocates often fail to acknowledge is that every time fee income is taken away, the ability of credit unions to offer the cost-effective services that consumers prefer,  is also diminished.

The pebbles are getting pretty heavy: By one estimate, since 1993, 81,883 Federal regulations have been promulgated. In 2012, Congress passed 127 laws but a staggering 3,112 regulations were promulgated. It’s as if our legislative process has been put on cruise control with no effective checks and balances about what needs to be done versus what must be done.

I usually love it when New York leads the nation, but this year we lead the nation in credit union mergers. One of the reasons for this trend, but by no means the only reason, is that as the cost of compliance increases, only the larger institutions have the economy of scale necessary to absorb increased compliance cost. Ironically, we end up with better consumer protection, but at the cost of less consumer choice.

Can anything be done?    

The most immediate thing we can do is join efforts to put reasonable constraints on the powers of the CFPB. For the record, the CFPB is one of the most competently administered apolitical agencies I have ever seen. But the simple truth is, that giving one man the power to promulgate regulations and exercise oversight over every Federal consumer regulation without any real fiscal oversight, is too much power. At the very least, the CFPB should be administered by a board as opposed to a single director.

Critics argue that this is just a back door way of letting industry dilute regulations intended to help consumers. They’re right.  And there is no reason to be ashamed of that. Any individual or group of individuals can come up with a bevy of regulatory mandates that will make things better for the consumer. The problem is that each one of those regulations is one more pebble making it more difficult for institutions to do what they are in business to do.

We need more litigation not less. You won’t find federal agencies mentioned in the Constitution. They exist by virtue of Congress, and their power emanates from and is limited by statute. But, as the importance of agencies has grown,  courts have become too lenient in letting agencies promulgate regulations with little or no relationship to the statutes which ostensibly authorize the regulations in the first place.

To be sure, as our experience with the Durbin regulations has shown us, courts having less deference to regulators can have both good and bad consequences for regulated institutions. But Every time a court limits the powers of regulators, it is  placing the onus on our elected legislators to draft clear legislation, as opposed to regulatory to-do lists  like Dodd-Frank.

Finally, there is a proposal by Tyler Cowen, a professor at George Mason University, who argued in a recent Times column that we need a way to incentivize regulators by rewarding them for getting rid of old regulations. In theory I couldn’t agree more. But no one goes into government not wanting to govern. No kid fresh out of law school wants to go home for Thanksgiving dinner and tell his family about the regulation that he didn’t help draft.

Just to be clear, I am not one of those conservatives who believe that all regulations are bad regulations. The mortgage meltdown demonstrated the need for more not less regulation. But we have to recognize that regulations, no matter how well-intended or beneficial,  adds to the cost of doing business. We can’t right every wrong but should instead prioritize and do only those things that most need to be done.

The regulatory onslaught is taking place, not coincidently, as our nation is paralyzed by the inability of our elected representatives to grapple with basic issues like budgets and deficits. Unfortunately, we have made it too difficult to legislate in this country and too easy to regulate. The result is that businesses in general, and all but the largest financial institutions are being nickeled and dimed to death.