Very rarely in American history can we look back and say “increasing regulation would have solved our problems.” While we support sensible regulations, excessive regulation provides little extra protection and allows for bureaucratic organizations to grow larger, more onerous and gain control over those that they are regulating. While the Federal Reserve is not a division of the federal government (although they do work very closely with the Treasury Department), they have been pushing for the Securities and Exchange Commission to regulate the bond market, and bond owners may not care for the results.
According to the Financial Times, the Fed has been discussing whether or not the SEC should institute an exit fee on bond funds. Essentially, the Fed wants you to have to pay a fee in order to sell your bonds. While some funds do have back-end sales loads, we are talking about something entirely different here; this is the Fed attempting to constrain the free market by initiating regulatory fees.
With interest rates held at historically low and unsustainable levels, investors have been flocking to bonds and debt instruments for the little yield that they provide in the form of interest payments. In bond funds, if interest rates fall, the value of the underlying debt instrument rises, and vice versa, which has produced great results as interest rates have dropped. The idea behind the proposed fee is that sellers will continue to hold the investment rather than pay the fee and sell in panic-driven craze like in 2008 when we saw money market accounts “break the buck,” thus providing liquidity to the bond market.
Since 2008 the Fed has effectively pushed interest rates to historically unprecedented levels in an unsuccessful attempt to spur economic growth. After 6 failed years, the Fed has now realized that they have created a bond market supported by phony demand, and that there will not be enough investors on the buy side to accommodate a rush of sellers in the event of an uptick in interest rates, and the bond market would see significant losses.
This concoction of policy and regulation has been engineered by a team of academics at the Fed who have little knowledge of anything more than economic theory that appears in text books and not in real world economies. Many of the actions of today’s Fed have never been attempted and therefore have no basis for success. Our policy makers and regulators are flying by the seat of their pants, and are doing more long term damage by attempting to regulate away another 2008 rather than allowing the free market to pick winners and losers.
We have said before and will say again; regulation is not a bad thing. Not all regulation is bad, but no bad regulation is good. This is an example of a terrible regulation that investors need to be made aware of, and they should be livid. The scary thought is that after the coming market downturn and loss of liquidity in the bond market if exit fees are instituted, policy makers will likely turn to the same incompetent bureaucrats at the Fed and to the SEC to manufacture another misguided solution.