It's flu season and yet the vaccine for ORD has yet to be developed. The virus is spreading. Our health system is inundated. What is a Nation to do!
The disease is ORD or Obsessive Regulatory Disorder. It appears to have started in our Nation's capital and is spreading more quickly than the black plague or the swine flu.
Economists and CPA's often discuss the macro-economic impact of fiscal and monetary policies on business. The macro issues and micro issues and their impact on business plans and growth have been well documented.
Less well documented are the impact of an explosive regulatory policy on our citizens, businesses and the resultant impact on financial health of a nation.
The Dodd-Frank financial services bill and the health insurance reforms recently passed in 2010 have changed the landscape for two of the largest industries in our nation.
With the regulatory changes paralyzing our nation, it is tantamount to economic suicide for legislators to change so much so quickly with little indication of what the final regulations will do. To paralyze one industry in the middle of a recession let alone two is economic folly of a scale seen only in the last depression.
In business, the COSO standards (Committee on Sponsoring Organizations) provide a framework of risk management. One of the major tenets of risk management is that in periods of uncertainty organizations need to properly evaluate the risk and take appropriate steps to mitigate that risk.
When there is significant uncertainty caused by a rapidly changing regulatory environment such as in health care and financial services, economic activity will be severely curtailed until that uncertainty is removed. The final regulations, if too cumbersome, may be the final blow to an already fragile economy.
The regulatory delay of both bills by allowing the secretaries of the respective governmental agencies to enact the enabling regulations is destructive to our economy.
In the banking industry, regulatory uncertainty is frustrating efforts on the part of bankers to provide loans at a time when such loans are needed. The increasing capital requirements, while considered prudent by some, should be viewed in the context of the already higher loan loss reserves due to reduced asset values particularly for real estate. Additionally, the depressed stock prices for bank stocks is likely to cause most banks to achieve higher capital requirements by getting smaller rather than further diluting shareholders. Neither are the kinds of message that legislators should be sending in a recession/depression. Should you even consider higher capital requirements to be a good idea, it is only prudent legislators try to time the regulation so that the economy is not further weakened by the very regulation it was designed to correct.
In health care, physicians, hospitals, other health care providers and insurers are absolutely stymied by the myriad of regulations that the bill will require but have yet to be promulgated. The absence of clear direction is causing the entire industry to take a wait and see attitude. Insurers are rapidly exiting lines of business where it is clear that risks of remaining in the business line far exceed the potential benefits.
The unintended consequence of a government enacting legislation that is unclear as to its final form is to further slow down an already slow economy.
To add insult to injury, the delay in providing clarity to the markets and the economy of extending the tax code of the Bush tax cuts will only further complicate the recovery and planning on the parts of all citizens. While Congress may be in recess, none of our citizens are! The uncertainty of what will happen with the tax cuts for income, dividends, and capital gains/losses will cause further instability in the market.
When I would take over a new command in the Marine Corps Reserve and as a young Lieutenant, I was always told that the mark of a good leader is to instill confidence. The unknown creates instability and a lack of confidence in a leader. Markets are no different.
An economy can handle good news. It can handle bad news but it cannot tolerate surprises or uncertainty. But then true leaders know that.
Frank Ryan, CPA specializes in corporate restructuring and lectures on ethics for the state CPA societies. Frank is a retired Colonel in the Marine Corps Reserve and served in Iraq and briefly in Afghanistan. He is on numerous boards of publicly traded and non-profit organizations. He can be reached at FRYAN1951@aol.com