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How regulation created a banking mono-culture

I agree with Mr Quotulatiousness that this, from a posting at the Coyote Blog from July 7th of last year, deserves to be made much of:

One of the factors in the financial crisis of 2007-2009 that is mentioned too infrequently is the role of banking capital sufficiency standards and exactly how they were written. Folks have said that capital requirements were somehow deregulated or reduced. But in fact the intention had been to tighten them with the Basle II standards and US equivalents. The problem was not some notional deregulation, but in exactly how the regulation was written.

In effect, capital sufficiency standards declared that mortgage-backed securities and government bonds were “risk-free” in the sense that they were counted 100% of their book value in assessing capital sufficiency. Most other sorts of financial instruments and assets had to be discounted in making these calculations. This created a land rush by banks for mortgage-backed securities, since they tended to have better returns than government bonds and still counted as 100% safe.

Without the regulation, one might imagine banks to have a risk-reward tradeoff in a portfolio of more and less risky assets. But the capital standards created a new decision rule: find the highest returning assets that could still count for 100%. They also helped create what in biology we might call a mono-culture. One might expect banks to have varied investment choices and favorites, such that a problem in one class of asset would affect some but not all banks. Regulations helped create a mono-culture where all banks had essentially the same portfolio stuffed with the same one or two types of assets. When just one class of asset sank, the whole industry went into the tank.

Well, we found out that mortgage-backed securities were not in fact risk-free, and many banks and other financial institutions found they had a huge hole blown in their capital.

I remember having all this explained to me at the time, although I do not now recall who by. I do recall the word “Basel” coming up a lot.

My title above is in the past tense, but I presume problems like this have since got worse rather than better. What will be the dates of the next financial crisis, I wonder?

56 comments to How regulation created a banking mono-culture

  • Gareth

    A nice and concise explanation.

    What kind of idiot would legislate that mortgage backed assets were risk free?

    Over a long time period and taking the market as a whole this may well be generally true but on shorter time spans and a more individual basis (banks and houses) it is more variable. I guess it is a bit like the difference between climate and weather. In legislating according to house price ‘climate’ banks were incentivised to ignore house price ‘weather’ so were poorly prepared when the storm arrived.

  • Mr Ed

    Well a big factor in the media at the time was the so-called ‘sub-prime mortgage crisis’. If ever there was a clue in the name, it was there. All aided by, iirc, the Community Investment Act or whatever in the US, obliging banks to meet targets for loans to those not able or willing to pay them back…

    The Lefties will say ‘Regulation failed, let’s try harder!’, like an angry ram butting its head against a rock, except it’s someone else’s head every time.

  • Mortgage backed securities insured by the government were risk free. It is just that the risk was transferred. What happened was that the government had not priced those loans (risk premiums to borrowers) correctly in order to eliminate “racism” in the housing market. No credit? No collateral? No problem.

    The real racism of Prohibition they ignored.

  • Mr Ed
    May 13, 2015 at 11:11 am

    Community Reinvestment Act. But otherwise spot on.

    Also what happened was that securities not backed by the government got the same rating as government backed securities. And there were also outfits “inventing” mortgages. Fraud. Lots of fraud. Robo signers.

    Securities and ownership of the mortgages changed hands without notifying the registrar of deeds. That would have added expense and delay. So who actually owned the mortgages was in doubt.

    It is still not fully sorted and a LOT of people are getting “forgiveness” who didn’t deserve it but who were inadvertently caught up in the web of fraud. And that was done to cover up the total failure of the system.

  • staghounds

    Three years from now, when all the subprime cars break down and gas/petrol is back up.

  • PeterT

    The answer is already within your post; government bonds. As events in Greece has shown these are not risk free. This risk is exacerbated if you don’t control your own currency and can’t print your way out of trouble. Since many liabilities are fixed in nominal amounts the real value doesn’t really matter so inflation is not a risk in this sense (obviously not great for pensioners and others who see their real income fall but that is not a systemic risk). You can’t inflate away inflation linked securities, but those are only a small portion of the outstanding stock of UK debt, most of which is nominal.

  • llamas

    One thing the regulators overlooked (as they so-often do) is that a surprising number of people are just blood-curdlingly incompetent when it comes to financial matters, and should not be lent more than the price of a cup of coffee. The regulators were just stunningly-naïve (as they so-often are) in imagining that the ‘sub-prime’ borrowers they were so eager to assist were all prudent, financially-competent and solid citizens, only held back from responsible borrowing within their capabilities by an unjust history of racism. No doubt some of them were. Unfortunately, of course, they crafted ‘solutions’ which were guaranteed to draw every deadbeat and loser to them like sharks to blood.

    I well-recall some of the cr*p-on-a-cracker loans that were being hawked at the height – no money down, 110% LTV, no docs, no income history, no fees, no appraisal, just a steady pulse could get you a mortgage, and all presented with a veneer of solidity and prudence, as though mortgage banking had always been done this way. Even at the time, anyone with an ounce of sense could see that offering this sort of product was bound to end up with a lot of low-information borrowers paying a very heavy price.

    We did a couple of re-fi’s at that time, and I well recall the look on the lender’s face when we showed up at a closing to find that he had written the loan with a healthy chunk of equity out, and we told him ‘No. We don’t want money out of the home. Write it again, as a straight refi, the way we told you to.’

    ‘But everyone is doing this to get equity out, I don’t understand why you don’t want to?’

    ‘Because we can do math. We want to pay less, and be done sooner, not pay more, and be paying longer, just so we can have a jet-ski.’

    (I don’t think that this was a popular answer).

    Case in point, even now – I was listening to NPR this morning, and they had a story about how Uber will finance cars for their drivers. The tale was of some clown who financed a new car with Uber, at a pretty impressive interest rate, something like 22%. The reporter coyly mentioned that this jamoke had some ‘credit problems’, but an interest rate of 22% speaks for itself – this guy had napalmed his credit, crushed the remains to dust, and sowed the lot with salt. And he was crying the blues that Uber had lent him the money for a new car, and was now taking their payments out of his Uber earnings, as agreed. He is being ‘forced’ to go to work for Uber to make the payments, he says.

    Really? Those b*stards!

    There is a significant part of the population that truly believes that money is delivered weekly by unicorns, and totally fails to grasp the most-basic arithmetic of things like car loans and mortgages. There should be a financial-competence test required for every consumer loan, which would at least weed out the merely-incompetent and leave us with only the deliberately-deceptive to deal with. And the test should first be applied to regulators and legislators.

    llater,

    llamas

  • bloke in spain

    “One thing the regulators overlooked (as they so-often do) is that a surprising number of people are just blood-curdlingly incompetent when it comes to financial matters, and should not be lent more than the price of a cup of coffee.”
    So what?
    The paradigm’s property is as safe as houses. It cannot go down in value, only up.
    If the borrower defaults on the loan, the bank seizes the underlying asset, which has appreciated since the loan was taken out. Sells the house but retains a large portion of the profit by way of penalties on the default.
    What can possibly go wrong?

  • There is a significant part of the population that truly believes that money is delivered weekly by unicorns, and totally fails to grasp the most-basic arithmetic of things like car loans and mortgages.

    I remember arguing with an idiotic lefty about this years ago. She was convinced that you needed to be some sort of financial wizard to understand pensions, car loans, and mortgages. She could not get her head around the concept that it boils down to income vs outgoings, and if you can do addition, subtraction, and some multiplication then you’ve broken the back of it. The problem is, even those three simple things seem to be too much for an awful lot of people.

  • Russ in TX

    Another thing they overlooked was willful widespread fraud in the industry – I quit a job with a major bank over my disgust at it. The industry, of course, would NEVER have allowed regulations going through to block the play below, which I saw so regularly I wanted to throw up. (and no, I *didn’t* whistle-blow, because nobody ever put this in print; it was always over the phone and thus even my raising it would result in being sued out of existence for libel)

    Works like this:
    1. Borrower wants to borrow money.
    2. Bank needs an appraisal to justify its underwriting (the due-diligence that will be checked when the loan is “securitized”/sold)
    3. Bank leans on/negotiates with the appraisor to do whatever he has to do to come up with the desired value.
    4. Appraisor does this rather than permanently lose major and irreplaceable clients.
    5. Loan goes through.
    (6. Appraisals are private documents and are NOT provided to third-party investors. Because the investors have no way of telling that the APPRAISED VALUE is a fraud, no amount of due-diligence on their part is going to distinguish an A loan from an A- loan, or even a B+ loan).
    (7. Investment buyers find out that all their risk assessments have gone horribly wrong.)
    (8. Granny wakes up one morning wondering why people are saying her pension fund is no longer any good and she has to eat cat food.)

  • Russ in TX

    I *guarantee you* that this is still business-as-usual for commercial securitized lending, and probably widespread in residential.

  • llamas

    One thing that does surprise me is that technology does not seem to have been harnessed in the cause of making these financial activities more-transparent and less-risky for low-information clients.

    The cost of life insurance has fallen like a hot rock, and a lot of the shenanigans that used to beplague that industry have fallen away like autumn leaves, simply because of the wealth of online tools that sprang up in that marketspace. It’s estimated that the true cost of TLI to customers has dropped by more than 50%, with no loss of quality or service. And it was all done by private enterprise – the government-mandated disclosure documents were so crushingly opaque that even professional freely admitted that they didn’t understand what they were trying to say.

    Surely the same skills and technology could be applied to consumer lending? What am I missing? I’m surely not looking to the government to improve information and transparency – just peruse a Federal ‘truth-in-lending’ disclosure to see what I mean – written by lawyers, to satisfy regulators, who are also lawyers.

    llater,

    llamas

  • PaulM

    Martin Armstong http://armstrongeconomics.com/ who uses a much envied computer model, based on Pi has stated that the collaspe will commence in 2015.75
    Given that a lot (almost all) of his past predictions have been accurate to the week I tend to follow him closely.

    A film has been released in mainland Europe about his trials and tribulations with the US government over the years, they want his source code, the film is called The Forecaster and I’m looking forward to seeing come to the British Isles.

    As far as I can see and understand none of the 2007/2008 problems have been solved so the next crisis will be much worse.
    Happy Daze.

  • Tedd

    llamas:

    Surely the same skills and technology could be applied to consumer lending?

    It has been, it’s just that the demands of customers are very different in the two markets. The shenanigans in life insurance were designed to benefit the insurer, and customers eventually figured that out. But the shenanigans in the mortgage and consumer credit markets are designed to give customers what they want, which is easy credit. No customer says, “I’m only going to take a mortgage from a bank that follows sound capital requirement practices, even if it means not getting a mortgage.” If a customer cares about capital requirements they only care about it in principle, whereas they care in practice about getting the loan to buy the thing they want. So markets (and technology) have provided customers with a wide variety of ways to get credit right up to (and, with regulatory help, beyond) the limit of what they can manage.

  • Toastrider

    Perry, I suspect it translates to ‘third quarter of 2015’.

    I really, really hope he’s wrong.

  • One thing the regulators overlooked (as they so-often do) is that a surprising number of people are just blood-curdlingly incompetent when it comes to financial matters, and should not be lent more than the price of a cup of coffee. The regulators were just stunningly-naïve (as they so-often are) in imagining that the ‘sub-prime’ borrowers they were so eager to assist were all prudent, financially-competent and solid citizens, only held back from responsible borrowing within their capabilities by an unjust history of racism.

    Llamas, I was looking for sarcasm tags but could not find any – so I used the ‘bold’ tags instead where appropriate. No need to thank me.

  • Barry Sheridan

    Llamas hit the magic word, it’s to do with lawyers. Years ago Philip Howard wrote a couple of books (The death of common sense and The collapse of the common good) that exposed the corruption of legalese that has gone a long way to undermining the administering of a well run society. The invasion of legal minds is ruinous, still Shakespeare saw it centuries ago ‘The first part of the contention’ Act4 scene 2 when Butcher utters those immortal words ‘The first thing we do let’s kill all the lawyers’.

  • Deep Lurker

    There is a significant part of the population that truly believes that money is delivered weekly by unicorns, and totally fails to grasp the most-basic arithmetic of things like car loans and mortgages.

    My working theory is that humans are intrinsically hard-wired to believe that piling things up (like money) makes the total amount bigger, so even if they do understand the arithmetic, they also have to overcome their sense that the results are deeply counter-intuitive.

    There’s also the sense that people who are able to overcome their intuitions and benefit from performing accurate financial arithmetic must be practicing some sort of evil black magic.

    “$5000 cash in hand is obviously much more than $100 per month for seven years, so the nice lady offering me those terms must be extending me an act of charity. Wait, she isn’t? After the seven years are over she’ll have more money and I’ll have less? Demonism! Evil witchcraft! Burn the witch! BURN THE WITCH!”

    (This deceptive intuition also leads to a belief that one will never run out of other people’s money if one takes it away only a little at a time. So if it looks like the money’s running out, then it must be because those greedy rich other people are practicing fraud and hiding their money while falsely claiming that it’s running out, not because the money is actually running out.)

  • Laird

    This is a massive topic, with comments ricocheting in all directions, so I’ll confine myself (for the present, anyway) to the original point: thanks to the Basel Accords (we’re up to #3 now) bank capital is inadequate and the regulations encourage risk concentration. All true. But the cited quote could have been a little more clear in what “risk-free” means in this context. (To be fair, he did attempt it, just not too well.) It isn’t that these loans/securities are viewed as being truly “risk-free”, it’s just that for one specific measure of bank capital (“risk-weighted capital”) they are treated as having zero risk. By contrast, other loan types (such as commercial loans) are fully counted (“100% risk-weighted”) and other asset classes are at still different levels. But there are also several other methods of calculating a bank’s capital ratio in which this “risk-weighting” isn’t a factor, and a bank has to satisfy all of these different measures.

    That said, I do agree that assigning zero risk to this specific asset class, even for such a limited purpose, does provide a distorted incentive to banks to hold these assets. The original idea was that residential mortgages had very little risk (this was independent of whether there was any sort of government guarantee on them) and so, by extension, neither did securities backed by them. We all know how that has worked out, but (as far as I know) the regulations remain unchanged.

    But to me the bigger issue is that the Basel Accords (and parallel US regulations) also assign zero risk to all government securities. I suppose it would be naïve to expect any supra-national regulatory body to admit that government bonds carry risk, and even if it did it would be politically impossible for it to risk-rank sovereign governments, but the result of this is that Greek bonds (for instance) held by European banks are carried at full face value and assigned zero risk for capital calculation purposes. This is ridiculous on its face, but there it is. It should also be noted that European regulators permit banks to carry much lower capital levels than do US regulators, so in my opinion European banks, in the main, are dangerously undercapitalized. Major US banks are undercapitalized, too, but their European counterparts are even worse. Any economic hiccup could trigger a cascade of bank failures. I suspect that this is one of the reasons that the Greek problem is being treated so carefully by the EU: the banks are stuffed to the gills with sovereign debt of highly questionable value. And the Basel Accords are the primary reason for this.

  • Laird

    Barry, this is entirely off-topic, but since you invoked Shakespeare I’m compelled to respond to your very common misinterpretation of the line you quoted. That line was uttered by Dick the Butcher in Henry VI, Part II. Dick was a follower of the rebel Jack Cade, who thought that if he disturbed law and order he could become king. Thus it was the evil-doers who wanted to “kill all the lawyers”. Shakespeare (properly) viewed this as a bad thing, and he intended that line as a compliment to attorneys and judges who instill justice in society. It was by no means intended as a model for a better society; quite the reverse.

    I view this canard as being on par with the popular misinterpretation of the Robin Hood legend, who (it is commonly said) “stole from the rich and gave to the poor.” Completely untrue. Robin Hood “stole” from the tax collector (i.e., the government) and returned those taxes to the people from whom they had been unfairly extracted.

    You may believe that lawyers are a scourge on society. You may also believe that it is wholly proper to forcibly redistribute wealth in pursuit some notion of “fairness”. But don’t pervert (indeed, invert) the true meaning of literary sources as authority for your beliefs.

  • Mr Ed

    Thus it was the evil-doers who wanted to “kill all the lawyers”.

    Declaration of interest there, M’Lud?

    attorneys and judges who instill justice in society

    or

    attorneys and judges who instill social justice in society?

  • Laird

    I am not aware that “social justice” was a concern in Henry VI’s time; I’m certainly unaware of any interest of Shakespeare in the concept (although I’m certainly prepared to be corrected on that point). As to a “declaration of interest”? Purely incidental, I assure you; I’m just setting the record straight and correcting a common error.

  • http://finance.yahoo.com/news/video-oils-not-coming-back-052550640.html

    The U.S. government expects global consumption to grow next year at less than half the rate of 2010, when the world was emerging from a previous recession.

  • Mr Ed

    Laird, I was simply updating what lawyers and judges too frequently do. Any incitement to kill is at the least regrettable, lawful and moral defence of self or others is, of course, fine.

  • Barry Sheridan

    Laird, whatever the intent of Shakespeare’s line, that was not the point I was making. The books mentioned along with the on going blogging of Walter Olsen at Overlawyered.com draw out the impact of the legal profession on everyday life. It is not a good outcome. If you reflect on this you might see I have a point.

  • Rich Rostrom

    This is a problem in biology too. When a population is strongly adapted (or artificially bred) for complete immunity to one type of risk, usually because of exposure, that same population may become genetically narrow, a near monoculture, and extremely vulnerable to a different type of risk when it shows up.

    Diversity to guarantee limited vulnerability to any risk usually leads to some vulnerability to all risks.

    IOW, there is no pat answer.

  • Laird

    Barry, I agree with your point (and I’m a “recovering lawyer” myself). I merely object to your inaccurate citation of Shakespeare in alleged support of it. Perpetuating an error doesn’t strengthen your argument.

  • Overlawyered.com draw out the impact of the legal profession on everyday life. It is not a good outcome. If you reflect on this you might see I have a point.

    Sorry Barry, but I disagree. A good name for a website to draw attention to the source of all evil in modern Western societies would not be overlawyered, but overlegislated and/or overregulated. Lawyers are not the disease, they are (some of them, in any case) a mere symptom.

  • I do recall the word “Basel” coming up a lot.

    I have a recollection of talking to you about this in a conversation featuring the word “Basel” at least once, but it may have been a conversation with someone else that you were thinking of. Basically, though, I think a large portion of people who work or have worked in banking and who are of a libertarian bent assume that the large role of the Basel accords in creating the 2007/8 crisis is so obvious that it is barely worth mentioning any more. They should probably keep mentioning it, as people who have not worked in banking tend not to realise this.

    Of course, a large portion of the left thinks that the crisis was brought on by “too little regulation” or “too much deregulation”, which is rather depressing given that the amount of regulation in place in 2007 was vastly greater than at any other time prior to that. Sometimes I suggest that such people look at the number of pages or the number of words of regulation in place, because by that point things were horrendous. (And yes, when you have regulations with that many words and pages, you have handed everything over to the lawyer. I could suggest that such people go and read the Basel II Accord, I suppose, but I don’t think I would wish that on my worst enemy.

  • Paul Marks

    Yes a regulation that mortgage backed securities are “risk free” is clearly insane.

    However, even without such a regulation the whole capital structure was (and is) a mess anyway.

  • Alisa
    May 13, 2015 at 9:09 pm

    Lawyers? Legislators? What’s the difference? Very little. In the US most legislators have this dual identity.

  • I recall a very similar conversation, indeed a talk, with Sam Bowman on the monopoly of credit reference agencies backed by US regulations. That was your first Brian’s Friday in the New Era.

  • The difference is material, M. Simon, and it is one of functionality. Most lawyers who are also legislators, are also parents and sports fans. See what I mean?

  • bloke in spain

    Soon after the creation of the First Law came the spontaneous evolution of the First Lawyer. Who pointed out the areas of discrepancy in the First Law & lobbied for a second law to address them. The rest we know…

  • John B

    One other factor, at least in the USA but maybe generally true, was that regulators stipulated that banks must use one of the three main rating agencies to assess risk of mortgage backed securities in order to book them at 100%. This in effect created a cartel of three risk assessors. As with all cartels, absence of effective competition results in homogeneity of product. Risk ratings for classes of security therefore hardly varied between the three which resulted in bad risks getting rated better than they should.

    This encouraged banks to believe their securities were less risky than they actually were, and worse when the bubble burst, reduced confidence in the status of all mortgage backed securities. Since confidence is the lubricant of interbank lending, confidence dried up and the machinery seized.

    Well done Government… always the problem.

    But in order to confirm there is no situation that cannot be made worse by Government, to recover capital sufficiency in the light of write-downs of mortgage securities, Governments encouraged banks to buy sovereign debt which as everyone knows (!) is ‘no risk’ so can be booked at 100% too.

    And of course banks being banks with an eye to best returns, they bought debt from those Countries giving best returns… like Greece. This of course before the reality of ‘no risk’ sovereign debt emerged.

    The list of reasons why we really need rid of Government just keeps growing. Why do we persist?

  • bloke in spain

    I think, when you look at this, it’s worth going back to what could be regarded as First Cause. The desire of government to create a situation where there’s a steady increase in the money supply & decrease in its real value, balanced by an interest rate enables government to sustain government borrowing at nil actual cost. Taxation without taxation.

  • Paul Marks

    I repeat – regardless of the insanity of this or that regulation, the whole thing (the Credit Bubble finance thing) was, and is, insane anyway.

    When will it collapse?

    I am astonished it did not collapse years ago.

    None of it makes sense – none of it.

    It really does not.

    For example bankers do not lend money they “credit to the account” (which is lunacy).

    Also people who invest money with a banker to lend out are told they have “deposited” the money – as if it was grain deposited in a grain silo.

    Not a small point of language – people who think they have “deposited” money assume it is still in the bank (naturally enough – as that is what the word “deposited” implies).

    Also the difference between a money lender lending money and a banking “crediting to the account” is not just one of language.

    The banking system can lend out vastly more “money” than even exists – because it is based on book keeping tricks.

    And the Central Banks just carry on pumping out credit money to prop up the bankers credit money.

    In the 19th century the Bank of England did not do this (not normally) and banks were allowed to go bankrupt.

    Their were still “boom-busts” but the system had some connection to reality.

    There is no connection to reality now – none.

    The entire capital structure is just ravings – from top to bottom.

    There us no rationality in it.

    BUT.

    There is rationality in the individual players in this mad system.

    Each big “player” is trying to loot as much as they can – before the whole tower of madness collapses.

    Real savings (the sacrifice of consumption) in order to invest in productive industry?

    Do not be so “Victorian” – we do not do that any more.

    The modern world is Credit Bubble world.

  • Barry Sheridan

    In response to Laird’s assertion that I incorrectly quoted Shakespeare. Well, yes in terms of precise context, but this was simply a tongue in cheek comment, one that was handy to a point, there being no real intent to gain import from its role in the play, never mind seriously wish ill on lawyers. The real purpose was to reinforce, or at least extend, the point made by Llamas about lawyers and their role in modern life. Personally, I cannot see how you can create a decent social order by legislative means, enough people must have a collective belief in certain fundamental standards of behaviour, otherwise the ability of small committed numbers may well destroy the good.

    In response to Alisa who feels I erred in pointing at Overlawyered.com, instead believing it is over regulation or legislation that is the real issue. Well yes, this has a germ of truth in it, but not enough to overturn the point. Many years ago I read on interesting article that pointed out there were more lawyers in Washington DC than the whole of Japan. Now that may not be right now, but this formidable body of high intellect all too often serves its own goals more than any other, we see this in action repeatedly in the class actions invented by clever legal minds who rake in the fees leaving little or nothing for the claimants. While this is more of any issue in the US, the growing use of legal sanction in life here is directly encouraged by the legal profession.

  • Patrick Crozier

    One of the nasty aspects of regulation is that once the government has regulated something – and therefore given its stamp of approval – when that thing goes bust it [the government] feels obliged to bail it out.

  • Alisa
    May 14, 2015 at 8:24 am

    2300 page Bills have purpose – supporting lawyers and corporations that can afford LOTs of them. And those thousand page bills? Written by lawyers. To support lawyers.

    And sports? Well yes. That is corrupted as well. Or hadn’t you noticed.

    And the families? Well no congress critter retires poor. It is magic.

  • Laird

    John B’s comment of May 14, 2015 at 10:26 am is spot on. There truly is no problem which cannot be made worse by government (in large measure because legislation is passed by popularly-elected politicians who generally lack any semblance of understanding of the matters in which they have the temerity to meddle, and regulations are drafted by the equally ignorant appointees of such politicians). The ratings-agency cartel is indeed a problem (although their importance has been slightly lessened since the meltdown of 2008), and they certainly have not received anywhere close to the amount of blame they deserve for that disaster. But we’re veering very far from the original topic of this post (i.e., the distortions caused by the Basel capital rules).

    I’ve spent the better part of my career (well over 35 years) in banking and residential finance, and could spend days pontificating about these topics. For everyone’s sanity I’m trying to hold my (virtual) tongue!

    Barry, you might appreciate this old aphorism about lawyers: If there is one lawyer in town he goes broke; if there are two they both get rich. There’s more than a germ of truth in that.

  • Barry Sheridan

    Thanks Laird, I always enjoy the comments on Samizdata, such a good place to visit.

  • Barry, I am in no argument with anything you wrote in your last comment – but I fail to see how any of it is proof that lawyers are in any way the source of any of the particular problems you have pointed out. All of it has its roots in over-legislation and over-regulation. Do lawyers benefit? Of course they do. Do bankers benefit? Duh. Do executives of large corporations in any other area of business where government happens to meddle benefit? Ditto. So what? This is not a chicken-and-egg kind of thing, as we know full well where it begins: it begins with government. The fact that there are very many former (and future) lawyers/bankers/big-business executives in government does not change the fact that it is when all these people are wearing their government hats is when they are causing the most long-lasting damage.

  • Laird

    Alisa, Barry’s point is a fair one. We’ve had lawyers for as long as we’ve had laws (although some societies referred to them by other names), and in general they serve an important and useful function. But too many lawyers upsets the ecological balance of a society, and the United States today has a surfeit of lawyers. (I won’t say this is a western problem; it seems to me that it’s a quintessentially American one.) All those lawyers have to do something, after all, and while some of us manage to escape from active practice for many that “something” involves bringing spurious lawsuits, inventing novel legal theories which push the boundaries of the law, and generally exacerbating (if not directly causing) the expansion of government. It’s not so much the lawyers sitting in legislatures who are the issue (our legislatures have always been dominated by lawyers); it is those outside of government, in litigation practices, activist organizations, leftist think tanks and law schools, as well as those who find employment in regulatory agencies, who are the real problem.

    I’ll finish with the closing words from one of my favorite little articles, Bayless Manning’s “Hyperlexis and the Law of Conservation of Ambiguity”. It’s ostensibly about some fairly arcane tax regulations, but in reality it’s about the philosophy of law and why it expands. (The article is very difficult to find online so I’ve posted a copy here):

    “It is always instructive to enquire with regard to any society in any era: “What activities and pursuits engaged the creativity and energies of the best and brightest of the time?” In some societies and eras, the answer would be a military career; for some others, the answer would be the priesthood; in some others, the answer would be political office; in the history of China, the answer would be the bureaucrat schooled in classical philosophy and poetry.

    “As one contemplates American society today, one wonders whether we will be proud to have future historians say that, in this era, America’s best and brightest were lawyers, and they dedicated their creative energies to the production of great works like 110 single-spaced page regulations defining the distinction between equity and debt.”

  • it is those outside of government, in litigation practices, activist organizations, leftist think tanks and law schools, as well as those who find employment in regulatory agencies, who are the real problem.

    Laird, all of these organizations are either products of laws and regulations, or are very heavily subjected to the same. As such, lawyers do not really act outside of the government. Just as there are no bankers who truly act outside of it. Or teachers, or doctors. In principle, lawyers are no different from any other group of professionals in a heavily regulated industry. In practice, they and the bankers (and the teachers, but we seldom discuss them for some reason) are more directly connected to government than other such groups. But the principle remains the same: the trouble begins with government, not the lawyers or the bankers.

    BTW, this phenomenon had probably originated in the US, but it has been adopted by the rest of the Western world quite some time ago.

  • Laird

    “all of these organizations are either products of laws and regulations”

    No, in large measure they are the proximate cause of those laws and regulations, as I tried to explain in my previous post. While in some respects “government” does act like an independent organism, in reality it is only people*. You can’t blame “government” for problems, you can only blame the people who make it up, and who influence its actions. And unfortunately that’s mostly lawyers.

    * RRS will probably take me to task over this!

  • Of course I can blame government as a set of institutions that constitute a mechanism which generates and implements policy. People who generate and implement policies are by definition part of that mechanism – i.e. they are part of government, whether formally or not. As I tried to hint earlier to M. Simon, each one of these persons also wears other hats, like the rest of us – some are lawyers, some are bankers, some are teachers. Etc.

  • Rich Rostrom

    Barry Sheridan May 14, 2015 at 1:49 pm:

    In response to Laird’s assertion that I incorrectly quoted Shakespeare. Well, yes in terms of precise context, but this was simply a tongue in cheek comment, one that was handy to a point, there being no real intent to gain import from its role in the play, never mind seriously wish ill on lawyers.

    Many years ago, the English Shakespeare Company came to Chicago and performed Shakespeare’s entire history cycle in an integrated production. I remember that when that line was spoken, the audience cheered.

    we see this in action repeatedly in the class actions invented by clever legal minds who rake in the fees leaving little or nothing for the claimants.

    The class action was created a long time ago to fill a real need. There have been many valid and important class actions. Heck, last year I got some money from a class action settlement related to a bad investment I’d written off years before. I knew nothing about it till the lawyers who brought the case notified me. I returned the forms they sent me, and got about $100. (I’d lost about $3,000, so it wasn’t real compensation, but it was a nice piece of change.)

    The class action form has been abused by corrupt attorneys. However, it should be noted that except in rare instances, the attorneys don’t actually collect most of the proceeds, only about 1/3. The dirty trick is when the attorneys’ lump-sum share is substantial and far exceeds their costs, while the remainder is trivial when divided among the entire plaintiff class.

    Another dirty trick found in class action suits has less to do with the class action form than with selling a bogus case in court. The infamous breast-implant class action is the worst example. The class action aspect allowed the plaintiff attorneys to multiply the fraudulent claim by tens of thousands of plaintiffs.

  • Midwesterner

    Perhaps relevant to Laird’s and Alisa’s discussion, my two cents.

    Alisa said:

    all of these organizations are either products of laws and regulations

    Laird said:

    No, in large measure they are the proximate cause of those laws and regulations, as I tried to explain in my previous post. While in some respects “government” does act like an independent organism, in reality it is only people*. You can’t blame “government” for problems, you can only blame the people who make it up, and who influence its actions. And unfortunately that’s mostly lawyers.

    Far down the discussion thread to the linked article, I said:

    Since the the random outcomes that these chaotic systems generate does not arise in any of the individuals participating in them, but originate entirely in the structural nature of the institution, and because they select for a particular outcome (perpetuance of the ruling body) it is appropriate to acknowledge that extra human origination of purpose by attributing the will to achieve some purpose, not to the participants (who are not the source of the purpose), but to the institution itself.

  • Yes Mid, that article crossed my mind when I was trying to make my point here, only I had no idea were to look for it.

  • Laird

    Guys, you’re losing sight of the point that this discussion is not about whether “government” sometimes acts like an entity independent of the individuals who make it up, but whether (in the US, anyway) a surfeit of lawyers creates a societal problem by causing the expansion of government. I maintain that it does, for the reasons I’ve already stated.

    (And FWIW, I reject the proposition that government [even government “writ large”, to include nominally extra-governmental elements] is a “chaotic system” in the customary sense of that term.)

  • Midwesterner

    You’ll need to define what “the customary sense of that term” is. I made clear in the article/thread I linked to that I am using “chaotic system” in the mathematical sense which is (approximately) that inputs are not predictive of outputs. You are claiming that enforcement is consistent. IOW, either every single time or never at all will a person traveling with large sums of cash have it confiscated. To defend that opinion you will need to address the entire randomness of reporting/enforcement of victimless ‘crimes’. Basically the ‘crime’ is to turn up in the wrong government officer’s field of view at the wrong time.

    In the non-chaotic system, the one you say exists currently, events calling for the interdiction of the government are consistently brought to the attention of the juridical process. I will stipulate that government involvement is fairly consistent for certain crimes like murder and robbing banks (for example the FBI crime lab was quite consistent about falsifying crime scene hair analyses) but clearly defending a “not chaotic system” characterization of all of government would require reliably consistent enforcement of all laws, regulations, procedures, etc. Considering that there isn’t a person on the planet that even knows a quarter of the government stuff we are obligated to comply with, your argument against a chaotic system of enforcement is unsupportable.

    You’ll note how I haven’t even delved into your implied assertion that everybody who applies for disability will be held to the same terms, or that everyone who applies for a zoning variance will receive the same treatment. I was at a meeting of a local government body where a retired couple applied for permission to keep their three house dogs. They were denied and ordered to get rid of one. Later in that very same meeting, a number of cases of people were brought up for review because they did not have kennel licenses for their third dog. Yup. The second group was granted. Only the couple that was trying to comply with the regulation was denied.

    Seriously Laird. If you are using the term “chaotic system” in its correct mathematical/modeling sense (as I went to great lengths to explain in that linked thread), you haven’t a hope of defending against the charge. It requires you to refute the overwhelmingly obvious chaotic nature of government enforcement. Not. Remotely. Possible.

    And FWIW, you’ve reversed it. The proliferation of lawyers is due to the proliferation of government. When the Constitution was broken, both the chaos and the lawyers were the consequence. Not the cause of the broken Constitution, the consequence of it. The cause was the delimiting of democracy in pursuit of utility.

  • Laird

    “Chaotic” and “random” are not synonymous. And for that matter, “inconsistent enforcement” isn’t “random”.

  • Midwesterner

    Laird, in the linked thread I made quite clear that “chaotic” and “random” are entirely different things. W/O rereading the thread I can’t be sure, but I think I even discussed that distinction with a commenter. And I do not and did not say inconsistent enforcement is random. What I did say is that inconsistent enforcement provides the structural environment that forms a chaotic system.