The main reason I am so disbelieving of the efficacy of regulatory reforms (some would say cynical) is that I don’t believe that Washington politicians are completely incompetent.  I believe that much of the results that occur are desired, at least by somebody.

When the progressives took power in 2009, they were very clearly going to blame Wall Street for the crash.  The government responsibility for failed housing policies with Fannie Mae/Freddie Mac were nowhere mentioned–at most condemned to minority reports on the crisis.  No, the villain was free market capitalism, especially the big banks.  And its been amazing to watch–on the one hand we bail out the big banks, because “we had to–they were too big too fail,” while on the other hand, the same government (albeit often different regulators) are constantly suing the big banks for malfeasance.  So are we for the banks or against them?

But not to worry–the progressives told us they would end too big too fail.  That was what the massive Dodd-Frank bill was created to do.*  At the time and continuing, most conservatives screamed that this would not lead to the end of too big to fail, but rather entrench the problem.  Democrats took the other side.

Yet the evidence gets clearer every day.  The increasing regulatory burden is significantly impacting small bank’s business, while massively increasing the size of systemically important banks.  As CNBC reports yesterday:

The idea that the TBTF institutions were going to get cut down to size after the financial crisis has turned into a giant myth. If anything, the system has gotten even bigger.

JPMorgan Chase, No. 1 among banks and thrifts in total assets, has seen its base swell to more than $2.5 trillion, according to SNL Financial. The company’s deposit base alone has grown by 29 percent since the end of 2008.

Economic theory on regulation predicts just this result:  regulations will end up being the biggest burden to smaller companies rather than larger ones.  There are economies of scale in dealing with regulation.  This is often called “cost predation,” as larger firms call for regulation that impinges on all firms in an industry, but is more easily handled by the larger firms–who are also the firms with more lobbying influence.

Further, the theory of public choice would argue that increased regulation also creates demand for politicians to work regulatory relief–special favors–for those most able to access the political system through lobbyists.  When you see results that are 180 degrees opposite of what the stated goal is, please don’t think the politicians are simply incompetent. Rather they are crazy like a fox. But maybe I’m just cynical.

* In irony of ironies, two of the biggest government supporters of the crony capitalist system were able to write the bill.  Barney Frank had been the champion opponent of Fannie Mae reforms, while Senator Dodd was getting sweet heart loan deals from Countrywide.  Instead of going to jail, they write the reform bill.