It has worked its way into our cultural gestalt that every problem deserves a solution, created, crafted, implemented and enforced by our increasingly paternalistic government. Our government, for its part, endlessly tells us that indeed, yes, it is the solution to…pretty much everything. We, in the finance community writ large, are often the object of the government purporting to “fix” something. It often turns out badly. As we have limited resources to fight bad law and regulation, both limited in terms of treasure and political credit, we need rules of the game to pick and choose about where we mount the barricades and where we let something pass. I’ve got some thoughts here.
Let’s begin with a recognition that, indeed, not every problem deserves a solution, not every problem is really a problem and moreover, not every solution is a solution. Not every problem should be grist for our lawmakers’ meat grinder. I wish our mandarins in the heights would take this on board. Couldn’t we require everyone in government to take an anti-hubris vaccine (we’ll give a pass to Mr. Kennedy)? Over the past 100+ years here in the United States and across the western democracies, we’ve gone from the notion that a government should do little to a notion that our government should do more, if not all. Somewhere along the way, we blew through the boundaries of diminishing returns where government agency often does more harm than good. We’ve lost track of any awareness that many problems are best solved by non-governmental actors and that some problems are best simply left alone. The Black Plague didn’t end because of royal decrees, did it? Do you remember Y2K? Festering problem on Tuesday, non-issue on Wednesday.
For many in our political class (which, to be clear, for our purposes includes the senior cohorts of the administrative state), ignoring a problem these days often seems to be ignoring an opportunity; an opportunity to grab that 15 minutes of fame, to elbow their way into an interview under the klieg lights and to remind the folks back home that they are at least…well, doing something. Luckily for them, it’s become received wisdom that all problems are of equal weight and of equal dignity, regardless of how small the risk of occurrence, no matter how modest the “harm” that might ensue and no matter how few are affected. Plenty of scope to preen and posture ensues. The result is that we often get annoying, non-productive, counterproductive, and often silly legislation and regulations, you know, bad.
We need a plan. “We” here, for my purposes, are the denizens of the commercial real estate finance community, but really these thoughts apply to any and all who have exposure to government activism (and that’s actually pretty much everyone today, isn’t it?). The first step in our plan is to bucket the fevered beaverings of our government into two categories. The first is the performative. Indeed, sometimes, the “work” of our elected representatives and their acolytes in the regulatory state in producing studies, holding hearings, publishing proposals and exposure drafts is rather more performative than goal-oriented. In their little lawgiving heart of hearts, they know that often, the main chance is not getting legislation passed or regulations advanced, but the pageant of the proceedings. In the last Congress, 12,000 bills were dropped in the hopper and never got to the floor. 12,000. If my math is right, that’s 27 bills for each man, woman (or whatever gender they may elect to choose from time to time) elected to the United States Congress. This is the greatest gift a politician can receive, an opportunity for visible enterprise without risk. They get credit for the striving and have no risk of blame for bad outcomes.
Some of this is plain silly. (I promised you comedy, didn’t I?) A profusion of examples comes easily to mind. One of my favorites is the Kansas statute (still on the books) that makes it illegal to import a live whale into Kansas. Then, there is the Orlando, Florida ordinance that prohibits the parking of elephants in metered parking spaces. I’m sure there’s a really good story behind both (apparently the whale died, but what did the elephant do?), but again, that’s really not the point, is it? Thundering on from the podium about how saving Kansas from live whales was the point.
Also good fun is that sub-species of silly: bills that are drafted just to get a cute acronym. How about the ZOMBIE Act (Zeroing Out Money for Buying Influence after Elections) or CECL (Conserving Ecosystems by Ceasing the importation of Large Animal Trophies). Really? Coming up with the acronyms first and then figured out some law that could pasted against it might be hard, but apparently it’s a core competency of legislators. These little beauties are not expected to become law, but it’s kind of fun to say ZOMBIE Act.
When we sense this is happening, we should just let the nabobs have their fun. Perhaps we make pro forma objections just to stay in the game, but we don’t need to invest time and energy fighting this stuff. Be careful though, what might appear performative in the first instance might morph into something we need to pay attention to later; the distinction might not be obvious on first blush. We need to keep an eye on this stuff.
The other bucket requires real attention. In this bucket are laws that are decisively bad on their face, you know, preventing mortgage bankers from wearing khaki pants and blue blazers and the like.
Then, there is law which, on its face, appears to be benign or only moderately annoying, but actually contains a hidden flaw to which the lawgivers in their initial enthusiasm and overly simplistic world view, did not pay sufficient attention to. Both are worth a trip to the barricades.
Almost all law, both bad and good, has significant unintended consequences. Why? Because the world and its underlying substructure, its architecture, is too complex, too interdependent, too tangled for any easy fix. Our world is not sufficiently mechanistic for the lawmakers to be able to pull lever A and confidently expect to only get outcome B. Everyone, lawmakers included, perceive the world as simpler and more straightforward than it really is, but regrettably, that’s not the world in which we live.
No one likes to be told they screwed up. Most politicians and regulators live in the echo chamber of confirmation bias, talking only to their friends and allies and can be shocked, shocked by any criticism. How dare you derail, improve or even tweak my obviously brilliant and totally well thought out completely perfect initiative! This gets considerably harder when a bit of legislation or regulatory magic bubbles up into visibility in the public arena, when the clerisy begins to stake out a position. Galvanized by an unduly simplistic view of how the world works, a breathtaking confidence about the power of the state to do good and with ownership of a megaphone, lawmakers’ ideas often rapidly ossify into certainty. Moreover, in the cauldron of our current political environment, criticism is often viewed as entirely politically motivated. Suggestions to improve, amend, tweak or table are seen as merely a proxy in a political opponent’s war. Demonization ensues.
This means that a frontal assault rarely works. We can affect change, however, by pushing on the unintended consequences door. Here, engagement and dialogue can be achieved and progress towards fixing or at least mitigating downstream negative impacts of new legislation or regulation is possible.
Channeling my inner Captain Obvious, when confronting a rent control ordinance, it’s pretty hard to argue, with any hope of success, that it’s a bad idea because it reduces my profitability. On the other hand, an argument to eliminate or ameliorate the impact of a rent control ordinance because it will have a negative impact on the housing stock and will force landowners to actually withdraw rental properties from housing stock and to defer cap X because of the owner’s inability to recover his/her costs can be effective.
Effective advocacy requires thoughtful analysis, the ability to distill that analysis into compelling advocacy, credibility and early intervention in the legislative or regulatory process.
This all begins with a very thorough and thoughtful analysis about a new law’s likely impact on us. It’s not always initially obvious. We need to spend the time to suss out second, third and fourth level impacts. Sometimes these impacts are not immediately apparent (apparently, they were not to the lawgivers), but by engaging all elements of our industry, taking onboard input from all affective constituencies, we can often develop the full picture necessary for us to be successful advocates.
Remember, too, that this analysis should not be limited to law we initially don’t like. Negative externalities can lurk in even the best intended and facially reasonable proposals. Everything deserves our attention that might change the calculus, change the regulatory landscape in which we operate.
We, as market participants, are really in the best position to understand the knock-on legal and economic consequences of law or rule, to look beyond its intended consequences and discover the unintended consequences in a way that can actually result in a positive outcome. We need to remember that neither the legislature nor much of the regulatory state has the same deep knowledge about how financial markets really function than we do. They simply cannot achieve our level of expertise because they don’t do what we do every day. They simply look at it from the sidelines. (You no playa da game, you no maka da rules). The remit of our gloriously elected representatives and those who sit in senior seats in the regulatory estate is just too wide; they can’t be experts at everything. They actually need our help and the industry’s government relations folks and market participants can and do provide a tremendous service to the legislative and regulatory branches of our government. This help is often very much appreciated.
In addition to good, solid analytics (and the ability to distill that into excellent advocacy), we need credibility. We in the commercial real estate finance market have that credibility because CREFC (and some others) have done an excellent job of establishing and nurturing that credibility. CREFC’s GR function and member outreach and engagement with the lawmakers, regulators and their staffs is effective and has created a deep reservoir of trust and good will which helps us break through any cynicism about our good faith in trying to help the legislatures or the regulators make good law. This credibility needs to be nurtured and protected. We need to continue to be proactively helpful and honest on a wide range of issues, even if some are not “man the barricade” types of things. This continues to validate our expertise in our utility and the importance of engagement with us. Preserving credibility often means staying away from rabbit holes and places where we can’t make a difference and sometimes means being careful about leaving our lane to advocate at the urging of other market segments.
Finally, we need to enter the fray before our lawmakers have staked out positions which, from public repetition, often become rigid and increasingly inflexible. We need to enter the fray before our grandees have invested personal capital in positions that, on reflection (after our effective advocacy), they might wish they could revisit. Public statements are hard to walk back and in a world where all your mutterings on hot mikes, in a public arenas, private meetings (or in some cases, your bathroom), may be captured and haunt you always; this is particularly hard.
There’s lots of examples we can bring to the table about dysfunction resulting from ill thought through law and regulation which did more damage that good, to sort of pregame our lawgivers and remind them that second thoughts are often best thoughts. We can remind them of Prohibition, Nixon’s price controls, our brilliant COVID strategy, tariffs (although perhaps that assertion is still controversial in some circles), Basel III, (closer to home) SEC Rule 17g-5,…I could go on (and I will if asked by government type scoffing at our assertion that there may be wee little tiny flaws in their proposed law or regulation).
While a cynic might say that some of our grandees in the legislature or regulatory estate understand the risks of downstream dysfunction and ignore it, as the tubthumping and pontificating about a great wrong to be righted right now takes precedent over the risk that tomorrow one might be held responsible for a benighted outcome. Such a cynic may also observe that it’s a time-honored tradition in government to fix problems that they themselves created so they’re largely okay with downstream problems bubbling up later. But I am a stranger to cynicism (no, really!) and will continue to believe that our lawgivers are largely well intended folks who are trying their best to do right and who don’t want to take ownership of something that will ultimately turn out to be horribly wrong.
We in the financial markets sometimes do seem to be a favorite pinata for politicians, from the both left and the right. When governmental function becomes highly performative (it has), a place where how you look while you’re doing something can matter more than the thing you do, where getting it right is subordinate to something that could birth a simplistic soundbite, looking for villains is a part of the day job. That’s often us. We can blame the always hungry maw of the 24/7 news cycle for some of this and the ease in our online world of saying things out loud without much reflection. This is our reality today.
We’re smart enough and capable enough to play the game in our political arena (no choice) and, with a particular perspective that can be sort of fun. Indeed, there is some merriment to be had here. Do your best to find the upside while defending the interests of our industry. And remember, those words sung by that great mid-century philosopher, Zero Mostel, singing Sondheim:
Something familiar, something peculiar.
Something convulsive,
Something repulsive,
Something frenetic,
A comedy tonight!
Now, back to more serious stuff.