More Regulation; Fewer Firms

Chidem Kurdas

Financial crises almost invariably lead to more regulation. No matter how bad the track record of regulators, they are given more powers and resources. Thus the Sarbanes-Oxley law came after the bursting of the 1990s bubble and Dodd-Frank Act followed the collapse of the credit and real estate bubbles. Bureaucrats are still in the process of creating thousands of specific rules based on the Act.

The result: New and small firms have less chance of surviving because of the legal and other costs of complying with endless, arcane rules.

Fixed costs have increased almost exponentially, says Karl Dasher, asset manager Schroders’ chief executive for North America. The cost of complying with new regulation and other rules has gone up more than three-fold, he said at a press conference.

Large operations have the scale and scope to spread the regulatory cost of business, although asset managers in general face sluggish revenue growth. But small firms are especially squeezed. It is very hard to be a boutique firm now, Mr. Dasher says. As for starting new firms, that has never been more difficult.

For a company like Schroders, this means potentially attractive opportunities to acquire boutique asset managers. “Expect continued consolidation in the industry,” he said.

For the economy as a whole, it means fewer and larger firms—and probably fewer jobs. And yet politicians often pay lip service to small businesses.

Such posturing aside, the regulatory state has been tamping down on competition in the financial industry for a long time. By discouraging new firms, it also discourages job creation.

The current regulatory onslaught is the latest chapter of a story that started in the early 20th century, when lawyers and social scientists made a powerful case for financial regulation. This statist vision owed its genesis to the great Progressive lawyer and Supreme Court justice, Louis Brandeis. Put into practice, it has ended in debacle after debacle of unintended consequences, of which destroying small business is one.

Sadly, Brandeis helped create a regulatory state that continues to kill what he wanted to protect, namely competition. To understand the regulatory vision and how it went wrong, click for Ponzi Regulation

The current consolidation among asset managers has its counterpart among banks. When the advocates of greater regulation criticize too-big-to-fail banks, they are speaking in part about their own creation—a Frankenstein boosted by government fiat.

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