QUESTION
I am a former employee of a lender whose president is a hard-core hater of the CFPB. He believes that our government is out of control and the CFPB has been overreaching for years. He is glad that the CFPB is being shut down. I was a paralegal in the legal department. After having to put up with his railing and cursing about the government in general and the CFPB in particular, I decided to resign. Since then, I have been with a law firm and continue to attend law school.
It's not as if his mortgage company has been in trouble with the CFPB. It complies with all the rules and regulations, and every audit by states and the CFPB itself has shown that the company complies adequately. There have been no administrative actions or fines.
From what I can tell, the CFPB is a kind of anti-scam police. They are also involved in protecting consumers' financial interests with respect to financial products and services. I can't figure out why this is such a bad thing that it should be destroyed. I thought regulating on behalf of consumers is what good government is supposed to do. We can debate what overreach and unnecessary regulations are, but destroying the agency that actually helps consumers seems really dangerous.
My former boss takes the position that any government involvement in the free market is an attack on free enterprise, which to him means running his business the way he wants to run it. And, any agency, like the CFPB, that regulates his company is an attack on its survival. I think that's really very extreme. I got tired of trying to convince him otherwise.
I know this is controversial. I want to widen the lens a bit. You have always been willing to discuss controversial subjects. My former president reads every post you've written for years. I'm sure he will recognize me as the questioner, though I didn't tell you his name or company name. It may bother him that I am writing to you. Fortunately, I am no longer an employee.
He often discusses your views and interpretations of the law. I have subscribed for years. I think you are a reliable resource for regulatory guidance. I want to know your view. It would really help!
Is government involvement in free markets justifiable?
COMPLIANCE SOLUTION
RESPONSE
I respond to controversial subjects as they may relate to many aspects of regulatory compliance. I make no apologies. I know they are controversial because we predictably get a small tranche of unsubscribes whenever I discuss a topic that bugs the unsubscribers. Sometimes, the unsubscribers write to me, and we have enjoyable correspondence.
We offer this newsletter as a labor of love. It's free! All are welcome. However, I discuss the regulatory landscape with all its ups and downs, controversies, and wrangling, and always try to ensure that compliance with the law is clarified. My goal is to educate and offer some helpful guidance.
Anyone who does not recognize that the government partners with markets, be it mortgage or any other economic market, exhibits a view that borders on willful ignorance. I have taught graduate classes on market action relating to mortgage origination, and one obvious factor we discuss is the "free market" concept, which is the thesis that markets should not allow government involvement (often framed as "government interference").
"Free market" lingo wears several masks, such as "free trade" and "free enterprise," but the notion that any economic market is free of government involvement is belied by the fact that the government must be involved in ensuring and monitoring its legal and regulatory framework.
Now, for a dose of reality:
There has never been a free market in the history of the world.
Never. Nowhere. Not now. Not ever.
The concept indirectly stems from an economic theory called "laissez-faire" – which, in French, means "allow to do" – which is a financial concept that purports to inform free markets and capitalism. In that scenario, the government does not regulate business, taxes, or tariffs. Instead, it proposes that a market self-regulates through the economic mechanism of supply and demand of products and services. And, it asserts that individuals drive markets through self-interest, which, somehow, leads to social and economic benefits.
There are economists of certain schools who reframe laissez-faire as a "hands-off" approach to market activity. The motto: Let the chips fall where they may, irrespective of the outcome, because, magically, it will all work out for the better!
The attempt at minimal government intervention historically and economically leads, among other things, to income inequality and the lack of protection for workers (i.e., the middle class). In that sense, the free market theory is, by extension, a tool of class warfare. Sure, laissez-faire can promote economic growth, but it can also exacerbate social problems.
Can you guess when laissez-faire was most prominent in the United States? The answer is it was most notable as a policy during the Gilded Age, the age of the Robber Barons, in the late 19th and early 20th centuries. These days, three individuals collectively are worth more than the bottom half of the population of our country.[i] This inequality is obviously not sustainable. Clearly, free market thinking is utopian thinking but does not pertain to human action.
In terms of economic theory, a hypothetical free market leads to monopolies. For instance, a successful supplier tends to get bigger and more powerful. It then buys up smaller competitors or puts them out of business. This tendency is an evolution toward monopoly. Therefore, what might seem to be a theory that can favor small businesses is actually one that destroys them. This is the case in many markets, and governments have had to put in place regulations to avoid monopolistic and predatory practices.
