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The Pendulum Swings - Knee Jerk Reactions and Over Regulation

Anita Campbell Founder, Small Business Trends Recent Posts

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March 30, 2009

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Whenever you have a big dust-up like the financial crisis this past fall and winter, and the biggest ponzi scheme ever (thank you, Bernie Madoff), it is inevitable that bureaucrats will look around to start laying blame. Some on Wall Street may fear the finger-pointing.

But I have an even bigger fear — one that every citizen should have: the knee-jerk reaction.

That knee-jerk reaction will come in the form of overzealous regulators. Unless calmer heads prevail, regulators and government officials will go overboard with regulations. And then the public and small businesses will pay another price: the stifling of businesses that are well run and didn’t need interference in the first place, leading to worse scenarios down the road.

Liz Ann Sonders, chief investment analyst for Charles Schwab, made this very point about regulatory overreach in yesterday’s Washington Post:

“History is littered with post-crisis regulations,” she said. “If there are undue restrictions on the operations of businesses, they may view it to be their job to get around them, and you sow the seeds of the next crisis.”

We are already seeing the pendulum swing — from regulation that was too lax in a few areas, to proposals for too much regulation in far too many places where government has no business sticking its nose.

The problem with crises is that they are not normal circumstances. A number of the situations we’ve just lived through in the past 6 to 9 months have been unprecedented — unique, one-of-a-kind situations. Reacting to public outcry (in many cases justified) over these outrageous and unique situations, what we now have are lawmakers with their feathers singed. To deflect the public ire, they go overboard and use those unique situations as an excuse to regulate everything under the sun.

However, shouldn’t we expect legislators and regulators to be able to distinguish between situations truly requiring more oversight, and situations where they just need to leave well enough alone? And explain that to the people?

Some will say, “That’s tough to do.” Maybe so. But so is governing a country. We pay lawmakers to use their judgment, distinguish bad from good, and make choices everyday.

In the law, there’s a doctrine known as “distinguishing a case on the facts.” Basically, what that means is that you shouldn’t draw an overly broad conclusion based on an earlier case that may have dealt with a unique set of facts. Often they are bad facts … facts that draw outrage. Instead, a judge will “distinguish” the earlier case. The judge will say it doesn’t apply. Why? Because the facts were so unique and unusual.

That’s what we need here: distinguishing the facts.

Just because we had some bad situations that need fixing, let’s not throw the baby out with the bath water. Because … to use another cliche … we’ll snare dolphins in the tuna net. Some of those dolphins will likely be small businesses that will get burdened with unnecessary regulation. They will also be consumers who get burdened with higher costs. And speculators will find the loopholes anyway, leading to who-knows-what crisis a few years from now.

Regulators and Congress and President Obama: fix ONLY what needs fixing. Stop the pendulum from swinging too far and overregulating. And have the courage to make choices.