Most people have heard the phrase “chilling effect” in connection with free speech. The idea is that vague laws can cause people to stop speaking out of fear that they might say something that violates the law.
In her 1962 essay Have Gun, Will Nudge, Ayn Rand explains how regulations can have an even worse effect on businesses. Because vague laws make it impossible for businesses to determine in advance what is legal and what isn’t, the laws end up granting vast de facto power to the regulators who interpret and enforce them. Anger those bureaucrats or engage in business practices they don’t like, and they might just interpret and enforce the regulations against you.
A story in the Wall Street Journal gives a recent example of this phenomenon. Apparently many banks are refusing business from certain customers that are doing nothing illegal but “might attract government scrutiny” or “provoke regulators.” The businesses include pay day lenders, check cashing companies, and online gambling companies in states where gambling is legal.
Why might banks be worried about attracting regulatory attention? The article points to J.P. Morgan, which recently had to pay the government roughly $15 billion in fines. Morgan’s “crime”? It failed to relay its concerns about Bernie Madoff to the same government that had ignored warnings about Madoff for years. It also made the mistake of taking over Bear Stearns and Washington Mutual at the government’s request during the financial crisis. Both banks issued bad securities, but Morgan is the one left standing so it took the blame.
We’ve heard a lot of justifiable criticism lately about the President’s use of executive orders. But at least that sort of regulation is out in the open. It’s far more ominous when government can control behavior with the mere threat of regulation.