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2009-05-06

Don't overdo it or stuff up when tightening regulations

Comments on “Having a lend of us”, by Janet Albrechtsen, on The Australian, 6/05/2009, http://blogs.theaustralian.news.com.au/janetalbrechtsen/index.php/theaustralian/comments/having_a_lend_of_us/

The author is right to a degree in the sense that if there are asymmetry responsibilities between the two sides of the parties, you will likely to have what economists often call the moral hazard problem. The side with lower responsibilities than they should have is likely to act a little more recklessly and this is likely to generate some problems. In this sense the announced changes by the minister can be potentially very bad. A serious consequence is increased costs of financing and much tightened accessibility by low credit-worthy borrowers, mostly are likely to be the government’s backers as the author says.

However, as some commentators argued, one of the main causes of the subprime mortgages problems in the US was mortgages marketers to promote and sell them to borrowers who were very likely to default in payments with little or no check on their ability to pay the interest charges when the honey moon period was over or when there was a rise in interest rates. In this sense, there is a need to tighten regulations to make some people in the lending side to be accountable. So while the minister and government may have got the details wrong and need to change them, they do need to do something to get the balance right.

The main problem concerning this and some other issues is that the market may not be working perfectly all the time and if completely unregulated can from time to time cause serious problems, with low income people bearing the main brunt. Having said that, market forces can generally produce great good and government should not overreact and over regulate the market either to be populist or due to inexperience or ideology driven, especially during the time of a serious recession. From the essay of the PM in February this year, there is a serious danger that the current labour government will overshoot the regulation needs by a very large margin. That is not what Australia needs, but it is sad that may happen.

Further, I acknowledge that regulations may need to be dynamic and be responsive to reality and its changes. Constant and invariant regulations can equally cause problems. In this sense, there is a need for fine-tuning, although there might be a cyclic bias in terms of regulation and deregulation. In this regard, the name of the federal department of finance and deregulation is a very useful and interesting remind, irrespective whether it has past its used by date. The name came during the previous Howard government era to catch up with the populous international trends.

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