Over the last couple of days I came across two striking articles, one in the American Thinker and the other in the National Review on the destruction of our republic due to the concepts of democracy and progressivism. The authors come to different conclusions. On the one hand, Mark Hendrickson concludes in his AT piece that “The republic they gave us has been corrupted and possibly lost forever.” Alternatively, Matthew Spaulding end his NRO piece: “The American people are poised to make the right decision. The strength and clarity of the Founders’ argument, if given contemporary expression and brought to a decision, might well establish a governing conservative consensus and undermine the very foundation of the unlimited administrative state. It would be a monumental step on the long path back to republican self-government..” These are the two fates we face, and it is the job of conservatives, libertarians and regular Americans to determine which way we go.
On Mark Hendrickson’s piece, there is much fodder for any fan of The Law by Frederic Bastiat. Hendrickson argues that there has grown a dichotomy in the notion of democracies since our founding:
The gulf between the founders and contemporary Americans stems from very different usages of the word “democracy.” Benign “democracy” connotes the empowerment of individuals and a corresponding freedom from tyranny and oppression.
Further according to Walt Whitman, government was to “make no more laws than those useful for preventing a man or body of men from infringing on the rights of other men.”
My interpretation of democracy is simply a system in which 50% + 1 of people can vote away the rights of the other 49% of individuals. While this may be semantics, I would argue that Whitman believes in individual liberty, as opposed to democracy, secured by a severely limited and divided government. Clearly, Hendrickson concurs, and argues that Whitman’s so-called democratic ideal is best served by a:
constitutional republic…premised on the primacy of individual rights. It sought to restrain governmental power in order to protect those rights…Democracy, by contrast, is a theory of power: What the majority wants, the majority gets. The founders — great students of history and human nature — understood that individual rights could be trampled by democratic majorities as readily as by individual tyrants…The founders knew that if America’s constitutional republic ever degenerated into a formal democracy, then Americans’ rights and Whitman’s democratic ideal would be lost.
This is essential. Tyranny by the masses is no less evil than tyranny by a king. Hendrickson rightly notes as I have argued that the socialists encouraged democracy as a means to their end. He argues:
In The Communist Manifesto, Marx wrote that the way to attain socialism was to “win the battle of democracy.” The cold-blooded Lenin taught, “A democracy is a state which recognizes the subjection of the minority to the majority.” The democracy that the founders loathed and that the communists coveted is a political system in which government ceases to protect individual rights and instead annihilates them.
True enough. Further,
In the words of British archeologist and historian Sir Flinders Petrie, “When democracy has attained full power, the majority without capital necessarily eat up the capital of the minority and civilization steadily decays.”
The end result of the push towards democracy has been decivilization, where various interests plunder various other interests overtly. In our current system, the wealthiest financial interests (with all the capital) have stealthily (and sometimes not so stealthily) expropriated the wealth of the middle class in their bailouts and Fed-induced inflation and cartelization, whilst the lower classes have made use of the legislative branch and the courts through the unions and community organizing groups to further bilk the middle class. Those with the most capital and those with the least have feasted on those in the middle. Generally, as I have argued time and time again, the masses have been practicing legal plunder for well over a century. The end result of this system however is that you run out of productive people to rob at the point of the legitimized gun of government.
Ultimately, Hendrickson laments that
politicians and jurists have ignored Washington’s wise counsel and undermined liberty by ignoring or defying (thus, usurping) the clear language of the constitution in pursuit of their ambitions. The rule of law lies in tatters. Our political degeneration has progressed to the point where Speaker Pelosi and Senate Majority Leader Reid write major legislation behind closed doors and order their partisan minions to approve their proposals before they even read them. In the name of democracy, the national government has become blatantly undemocratic.The founders’ misgivings about democracy were spot-on. The republic they gave us has been corrupted and possibly lost forever.
Matthew Spaulding recounts the systematic destruction of our rights over time which has left us in this predicament. There is much worthy of analysis here. Spaulding notes the incestuous relationship between government and society:
Americans are wrapped in an intricate web of government policies and procedures. States, localities, and private institutions are submerged by national programs. The states, which increasingly administer policies emanating from Washington, act like supplicants seeking relief from the federal government. Growing streams of money flow from Washington to every congressional district and municipality, as well as to businesses, organizations, and individuals that are subject to escalating federal regulations.
It makes you question, given the fact that our lives are so heavily regulated; that business seems to serve at the leisure of government – how there is any innovation and advancement…how the human spirit remains free when all around it the walls close in upon it.
Spaulding argues that this system has as its origin,
the theories of Thomas Hobbes, who wanted to replace the old order with an all-powerful “Leviathan” that would impose a new order, and Jean-Jacques Rousseau, who, to achieve absolute equality, favored an absolute state that would rule over the people through a vaguely defined concept called the “general will.”
While true, I might add that given Plato’s view of an ideal society growing not through organic spontaneous order, but under the direction of an elite class, we can trace the roots of the tyranny of elite control back much further. This split is also embodied amongst the founders in the difference between Jefferson and Hamilton.
Progressives were the ones to implement a system completely anathema to that created by the founders. As Spaulding puts well:
American “progressives,” under the spell of German thinkers, decided that advances in science and history had opened the possibility of a new, more efficient form of democratic government, which they called the “administrative state.” Thus began the most revolutionary change of the last hundred years: the massive shift of power from institutions of constitutional government to a labyrinthine network of unelected, unaccountable experts who would rule in the name of the people.
The great challenge of democracy, as the Founders understood it, was to restrict and structure the government to secure the rights articulated in the Declaration of Independence — preventing tyranny while preserving liberty. The solution was to create a strong, energetic government of limited authority. Its powers were enumerated in a written constitution, separated into functions and responsibilities and further divided between national and state governments in a system of federalism. The result was a framework of limited government and a vast sphere of freedom, leaving ample room for republican self-government.
Progressives viewed the Constitution as a dusty 18th-century plan unsuited for the modern day. Its basic mechanisms were obsolete and inefficient; it was a reactionary document, designed to stifle change. They believed that just as science and reason had brought technological changes and new methods of study to the physical world, they would also bring great improvements to politics and society. For this to be possible, however, government could not be restricted to securing a few natural rights or exercising certain limited powers. Instead, government must become dynamic, constantly changing and growing to pursue the ceaseless objective of progress.
This belief in an administrative state in my view is really just a nice way of saying a centrally planned or authoritarian state. As we have seen, the results of states based upon these principles have always failed because central planning fails. This process leads to chaos, bloodshed and decivilization. There is also a major fallacy that somehow because there are rigid principles that confine the spheres that government can influence, and the extent to which it can influence them, that this stifles “change.” In fact, only a system that constrains government and thus maximizes individual liberty, built on bedrock principles can create a fertile ground for dynamic development, technological progress, widespread prosperity and peace. Government’s effort to create these outcomes ensures they can never be reached. The progressives have halted progress, and will push us backwards as a people through moral debauchery and economic servitude due to their subversion of the Constitution through the legislative, judicial and executive branches of our Leviathan central government, with the help of the media and academia in brainwashing the American people into either blind ignorance or delusional belief in the fatherly state. The great advances of man have always been attributable to the individual, never the collective.
Spaulding notes that in the permanent administrative class created by the Progressives,
bureaucrats would address the particulars of accomplishing the broad objectives of reform, making decisions, most of them unseen and beyond public scrutiny, on the basis of scientific facts and statistical data rather than political opinions. The ruling class would reside in the recesses of a host of alphabet agencies such as the FTC (the Federal Trade Commission, created in 1914) and the SEC (the Securities and Exchange Commission, created in 1934). As “objective” and “neutral” experts, the theory went, these administrators would act above petty partisanship and faction.
The progressives emphasized not a separation of powers, which divided and checked the government, but rather a combination of powers, which would concentrate its authority and direct its actions. While seeming to advocate more democracy, the progressives of a century ago, like their descendants today, actually wanted the opposite: more centralized government control.
So it is that today, many policy decisions that were previously the constitutional responsibility of elected legislators are delegated to faceless bureaucrats whose “rules” have the full force and effect of laws passed by Congress. In writing legislation, Congress uses broad language that essentially hands legislative power over to agencies, along with the authority to execute rules and adjudicate violations.
The objective of progressive thinking, which remains a major force in modern-day liberalism, was to transform America from a decentralized, self-governing society into a centralized, progressive society focused on national ideals and the achievement of “social justice.” Sociological conditions would be changed through government regulation of society and the economy; socioeconomic problems would be solved by redistributing wealth and benefits.
On this so-called ruling class of bureaucrats, there are a few things worthy of note. First is the principle that there is a certain elite that should decide things for everyone else; that there are some who by the grace of G-d are preordained to rule, while the masses must follow. This is an immoral and non-progressive principle. Aren’t the progressives supposed to be all about freeing the oppressed from tyranny? Further, the argument that the end goal was more centralized government control in my view merely touches on a means to an end which is power for the elite class. Regardless of what they feel is the proper role of government vis-a-vis the masses, deep down control is about power and stoking one’s ego; the elites lust for power over their perceived intellectual subordinates. Ayn Rand sums this relationship correctly: “where there’s sacrifice, there’s someone collecting the sacrificial offerings. Where there’s service, there is someone being served. The man who speaks to you of sacrifice is speaking of slaves and masters, and intends to be the master.” It is no surprise then that Barack Obama so stresses service and sacrifice, and even seeks to make it a permanent requirement for all citizens.
Additionally, on the belief that “Liberty no longer would be a condition based on human nature and the exercise of God-given natural rights, but a changing concept whose evolution was guided by government,” this again reminds me of Yuri Bezmenov’s video on ideological subversion. He describes a condition in which the people are so numbed to morality, and the sanctity of their natural rights that they support causes completely averse to their livelihood. In addition, as Hans Herman-Hoppe argues in his Democracy: The God that Failed, in a system in which definitions of essential principles constantly sway at the whim of public opinion, it becomes highly difficult for positive human action to occur. Uncertainty and constantly changing rules and regulations again undermines progress. As Spaulding notes, FDR adviser Charles Merrian argued that “The question is now one of expediency rather than of principle.” Expediency over principle is a surefire way to destroy the rights of the people.
Spaulding adeptly notes the changing view that the progenitors of the welfare state like FDR began to take on under policies such as those enumerated in the
“Second Bill of Rights” that would “assure us equality in the pursuit of happiness.” Roosevelt held that the primary task of modern government is to alleviate citizens’ want by guaranteeing their economic security. The implications of this redefinition are incalculable, since the list of economic “rights” is unlimited. It requires more and more government programs and regulation of the economy — hence the welfare state — to achieve higher and higher levels of happiness and well-being.
In other words, FDR, his predecessors and followers believed in legalized plunder to ensure “equality in the pursuit of happiness.” Instead of ensuring a playing field in which all could seek to attain what they subjectively defined as the good life, or the happy one, under the guise of equality, FDR and the others believed that they could socially engineer the American people in order to provide “economic security.” This economic security is nothing more than a system of wealth transfers that create moral hazard and cause the American people to cease to strive to create wealth; rather, it leads people to use politics to grab it. The modern welfare state was an edifice created to make the people parasitic, lazy sheeple dependent upon the facilitator of expropriation of government. If the people understood this they would surely not stand for it.
The genius of the progressives is that once they began to radically expand government, it became almost impossible to stop politically, especially when these expansions often occurred because of crises perpetuated by government that purportedly only government could fix. A politician doesn’t want to alienate one constituency or another by scrapping it of its government-granted privileges. In addition, entitlement programs in particular as laws are difficult to repeal, continuously grow and become politically almost impossible to defeat because the public has gotten so used to them as rightful fixtures of the state. How can you expect the American people to accept at face value that they should no longer expect Social Security or Medicaire, even if you can rationally explain that in the long run a state devoid of these programs will prove better for them. Immediately, opponents will say that you want old people to be broke in retirement, or sick children to die.
Yet again, Spaulding is optimistic. He notes:
There is something about a nation founded on principles, something unique in its politics that often gets shoved to the background but never disappears. Most of the time, American politics is about local issues and the small handful of policy questions that top the national agenda. But once in a while, it is instead about voters’ stepping back and taking a longer view as they evaluate the present in the light of our founding principles. That is why all the great turning-point elections in U.S. history ultimately came down to a debate about the meaning and trajectory of America.
In our era of big government and the administrative state, the conventional wisdom has been that serious political realignment — bringing politics and government back into harmony with the principles of the Declaration of Independence and the Constitution — is no longer possible. Yet we are seeing early indications that we may be entering a period of just such realignment. Perhaps the progressive transformation is incomplete, and the form of the modern state not yet settled — at least not by the American people.
This creates a historic opening for conservatives.
Growing opposition to runaway spending and debt, and to a looming government takeover of health care, doesn’t necessarily mean that voters want to scrap Social Security or close down the Department of Education. But it may mean that they are ready to reembrace clear, enforceable limits on the state. The opportunity and the challenge for those who seek to conserve America’s liberating principles is to turn the healthy public sentiment of the moment, which stands against a partisan agenda to revive an activist state, into a settled and enduring political opinion about the nature and purpose of constitutional government.
To do that, conservatives must make a compelling argument that shifts the narrative of American politics and defines a new direction for the country. We must present a clear choice: stay the course of progressive liberalism, which moves away from popular consent, the rule of law, and constitutional government, and toward a failed, undemocratic, and illiberal form of statism; or correct course in an effort to restore the conditions of liberty and renew the bedrock principles and constitutional wisdom that are the roots of America’s continuing greatness.
The American people are poised to make the right decision. The strength and clarity of the Founders’ argument, if given contemporary expression and brought to a decision, might well establish a governing conservative consensus and undermine the very foundation of the unlimited administrative state. It would be a monumental step on the long path back to republican self-government.
If nothing else, this is an inspiring and hope-filled message. While there are signs that the masses are awakening, I do not believe that a slowdown in the growth of government will set us straight. The man on the street does not realize how rotten our system is to the core — that we require fundamentally transforming America by scrapping the entire welfare state and returning power to the people.
One of the principle institutions symptomatic of our problems both in terms of the increase in government and the diminution of the individual is the Federal Reserve. It facilitates infinite government growth in part through wars, robs people of their income and savings and allows government to stealthily tax. But try to explain to the average person why they should care about the Fed and most Americans (likely with good reason) will probably either stop listening or be unable to comprehend the magnitude of its evilness. Amongst the “elite,” they will default to either Keynesian arguments or ad hominem attacks. They can’t imagine that the foundation of the economy is a mirage. They can’t imagine that a group of unelected Fed governors has such a great effect on our prosperity, liberty and peace. They can’t believe that much of our government is pure fraud.
In general, people do not want to believe that government efforts to help people almost always end up hurting them, and that institutions that have been for a long time may be inherently corrupt and/or cease to be (just look at the investment banking houses). People pray at the altar of the status quo because it is easier to accept things as they are instead of critically questioning and radically reevaluating the world. It took me until these last few years to do so myself.
It is our job if we are to revive the tattered law, refound the relative paradise of republicanism that Hendrickson mourns and realign the country according to the principles that Spaulding espouses to open the eyes of the public to our view. Ironically, progress requires a radical return to “reactionary” principles. Civilization hangs in the balance.
Back in the olden days, people simply bartered products. One might trade a couple of loaves of bread for a fish. In order to ease this process so people didn’t have to bring their produce to market, over time people turned to gold, later paper money backed by gold and ultimately paper money backed by faith in government as currency in trade. Money itself should thus be considered as merely a commodity to be exchanged for other commodities. It only differs from other goods to the extent that it is not consumed like milk or sugar or a house. Its value is in serving as a medium of exchange of other goods and services.
As such, it makes no sense that governments should create money through “quasi-private” central banks, or at the very least impose legal tender laws that prevent others from doing so. If there is consumer demand for facilitating the exchange of goods and services, then there will arise through the spontaneous order of the free market a system of competing providers of currencies. Presumably, those who produce money that will retain its value will drive out of the market those incompetent or unscrupulous competitors producing depreciating money. This is because money that retains its value over time will make the exchange of products easier because businesses will be able to make better calculations in exchange, and because as with any product, a premium will be placed on maintenance of value over depreciation.
One could speak to a host of problems with government currency: that inflation of the money supply unfairly benefits debtors at the expense of creditors and serves as an outright tax on all; that a constantly debased currency allows the government to fund unjustifiable wars in addition to all sorts of social programs and other means of unjust and unconstitutional wealth redistribution; that government naturally will mismanage the money supply just as they do all programs from a purely economic standpoint; that it is absurd that the government should have the power to outlaw monopolies yet grant itself a monopoly on a commodity like money that serves a specific special interest of the banking sector; and finally that government’s record in management of the money supply has been horrendous, with central banks creating a perpetual boom-bust cycle and constantly devaluing the people’s money. Concentrating the monopoly power over the money supply in the hands of a select group of bureaucrats is an asinine, irrational and furthermore dangerous policy.
But without going into these sometimes arcane economic phenomena, the most important thing to understand is that at its core, money supply is just like the supply of any other good or service except to the extent that its value is derived from its use as a commodity in exchange, rather than from the utility we gain in consuming a traditional good or service. If the market can provide other goods and services in the proper quantities and qualities to meet the demands of society, then surely it too can provide the proper quantity and quality of money. To believe that somehow, government provision of money is any more sacred or preferable to government provision of any other good or service is pure folly.
1. The interest rate is a price – the price of credit like the price of any good. In a free market the price would be set like the price of any good at the intersection of the supply of funds (our savings), and demand for funds (businesses’ and individuals’ investing wants). Instead, we have an interest rate that is arbitrarily picked by a handful of economists from the Federal Reserve Banks. To repeat, one committee centrally plans the cost of credit, of which interest rates on all debt are directly or indirectly based.
2. The Federal Reserve has the monopoly power to print or inflate the money supply, thus artificially lowering the cost of money (the aforementioned interest rate). This means that they can (and always do) devalue the money in your pocket as every dollar printed decreases the value of all dollars to come before them. Inflating the money supply may not lead to an increase in prices if an equal or greater amount of goods is produced, but the purchasing power of the dollar will still be reduced because without printing money, your dollars would have been able to buy more goods. Alternatively, if more dollars are printed than goods are produced, prices will increase though not necessarily uniformly across all goods. Inflation may not manifest itself in explicitly higher prices but merely impede prices from falling for certain goods as they would were the money supply to remain constant.
3. When you deposit money in a regular checking account, the bank doesn’t hold onto this money. Banks only keep a small percentage of the money you deposit on hand in their reserves, lending the majority of the money you (or the Fed for that matter) deposit to others who lend it to still others and so on, in the process substantially increasing the money supply. This is known as fractional reserve banking. If everyone in America or even a decent percentage of Americans tried to take their money out of the bank on a given day, millions would be unable to access their cash. Effectively, even with FDIC Insurance, all of the banks are insolvent as they do not hold anywhere near 100% of the money you deposit in their vaults, nor does the FDIC have the funds to cover all deposits. The hypothetical that the Fed could potentially print up money for the FDIC to distribute is beyond the scope of this post.
4. The government’s debt is merely an insidious tax like inflation. Government debt can only be paid down by taxing the people. This tax can occur through direct confiscation by government, or indirectly when holders of our government’s debt demand a higher rate of interest, which in turn signals to markets that our economy is not generating sufficient revenues to pay down the debt, which leads to a perception of economic weakness and thus an increased cost of borrowing for everyone in the economy. If the government prints money to pay down debt (which in and of itself should cause our debt holders to flood the markets with our debt and thus raise interest rates on everyone), this will represent a tax on the people as well.
5. Deflation, or a decrease in the money supply is the only antidote to inflation. If the money supply is decreased, each dollar in your pocket becomes worth more. The concomitant fall in prices will correct the artificial initial rise in prices from government printing of money. In the process, since decreasing the money supply increases the cost of money, unsustainable enterprises with heavy debt loads will be put out of business, cleansing the economy by freeing up unproductive resources. Where debtors benefit from an increase in the money supply because they can pay down their borrowings with cheaper dollars, creditors will benefit from a decrease in the money supply because they are paid back with more valuable dollars, which is one of the reasons why government prefers to inflate as it can lessen its own debt load and that of many of its constituents.
6. Deflation in prices while a symptom of deflation of the money supply is also the natural result of increases in productivity, as goods produced more cheaply in greater quantities (in the absence of money printing) will lead to falling prices which benefits consumers. The so-called “paradox of thrift” that the MSM uses to vilify deflation in prices is wrongheaded, as people will spend on all sorts of products knowing that over time they will fall in price, as we have witnessed with numerous electronics over the years. Even during a depression, when asset prices fall to certain levels there will always be buyers. And if people are paying off their debt and/or saving in a time of falling prices in lieu of spending, this will be good for the economy because increasing the pool of real savings lowers the interest rate and allows businesses and individuals to borrow funds for investment at lower cost, legitimately stimulating the economy.
7. Despite the wishes of President Obama, all taxes are passed on to consumers as companies raise their prices to compensate for the increased cost of doing business.
8. Government cannot create wealth. All it can do is take money from some people and redistribute it to others. Every dollar the government uses must be taken from the private economy. Printing money to pay for things as we noted merely devalues your dollars, effectively taxing you. Government financing through debt represents a claim on your wealth, a tax which as noted may be paid directly or indirectly. Thus, while federal, state and local taxes may appear on a historical basis relatively low, the tax rate is deceptively masked by excluding government bilking through inflation and debt. Government is a wealth killer, not a wealth creator.
9. The real estate problem in our economy centers on the fact that people owe more money on their mortgages than they are able to pay down. The only fix to this problem is for people to either generate more income to service their mortgages, or default. Any intervention to keep people in homes they can’t afford will merely perpetuate market imbalances, propping up the value of real estate and preventing qualified buyers from purchasing homes at fair prices. There will be no true recovery in the mortgage-backed securities market until the forces of supply and demand sort out this mess.
10. Our economic crisis at the most basic level occurred because too much money and credit were pumped into the economy, given that again the interest rate was set artificially low not by supply and demand in the market but by government fiat. The recession signals that we must fix the distortions and malinvestments resulting from the centrally planned interest rate. The healthy path to recovery is to allow prices to fall (aided by debt repayment), liquidate failed enterprises (encouraging reallocation of land, labor and capital to more productive and profitable lines of business) and encourage saving to increase the pool of loanable funds for economic expansion. Any actions to the contrary (i.e. more or less all government policies being implemented or bandied about) will merely prolong the pain.
1. Van Jones – Continuing in the line of moderate, sane czars prudently chosen by President Obama, we have this man:
It’s not as if Obama just surrounds himself with lefties. He goes for the most radical, vitriolic and just plain batty people. There is no real oversight over these aptly named czars, and this extra layer of government allows Obama free rein over the system of checks and balances. It is very telling that the people in our government who he has sole power to pick are the craziest and most destructive.
2. A White House report shows that H1N1 may kill 90,000 – I’m going to come out out right now and say that I don’t know how exactly the White House is going to play this, or what tactics they are going to use, but they are going to try to use this virus as a crisis to increase federal power. They can use it to sell national healthcare, or they can intervene with the states’ handling of an outbreak, or try something far more nefarious like using the flu to declare martial law and subvert our liberties. Right now, they are just releasing these reports to pave the way for increased intervention down the road.
3. NY AFL-CIO head named chairman of the NY Fed – I couldn’t believe this the first time I read it, but then again when you look at the big picture this makes perfect sense. The banking cartel needed to make amends for having their political brethren in important government positions. Labor is gaining inordinate power under the Obama administration and are probably the constituency that he is most banking on for his re-election in 2012. This move follows the strategy of the politicians to a tee – the government will do whatever it takes to bail out the moneyed interests and the union laborer’s interests, while screwing everyone else in-between. They bribe the moneyed interests to keep them paying the taxes to subsidize the poor. They bribe labor at the expense of the real capitalists and entrepreneurs who create labor’s jobs. The middle class and those who create the prosperity around us pay the price.
4. Eric Holder will pursue CIA interrogators – “Holder said that he realizes the move is controversial, but that it was the only responsible course to take. The decision does not reflect a sharp division between the Justice Department and the White House, government officials said, given the limits of the preliminary review and the respect that Obama says he maintains for the role of an independent attorney general.” I mean wow. First, what brilliant politics by Obama. He allows Holder to go after prosecuting members of the CIA because of the role of the “independent attorney general,” so he gets what he probably wanted all along but can always tell the critics that he is merely allowing for the proper separation of powers. Second, WTF is wrong with you Eric Holder. You go after the people that are doing their job to defend our country ex post, threatening the CIA and deterring anyone from ever joining the agency from this point forward, yet fail to go after members of the Black Panthers threatening to bludgeon people at the voting booths.
5. Obama on the Vineyard – The President always seems to come up smelling like roses. While the world goes to hell, and his party is taking bullets at townhalls (sometimes arguing that they should use bullets themselves), Mr. Obama gets to hit the links and sip on cocktails. Now I have absolutely no problem with President’s taking vacations (though it is garbage that they use taxpayer dollars to do so), as I understand that a “vacation” for a President is hardly a real vacation, and that their job is highly stressful all the time. That being said, imagine if a Republican President during a time like this when the country is running $9 trillion deficits over the next ten years (Barry’s guys were $2 trillion off on the math there mind you) and unemployment numbers are high decided to head to a ranch in Crawford or worse some lush pad out in Orange Country for some R&R. The media would be up in arms. But it seems that hypocrisy is the way of the world today. At least Obama should have the courtesy to invite some of his poor community organizing friends out to the 29-acre estate.
We regulate any stealing of his property
And we damn good too
But you cant be any geek off the street,
Gotta be handy with the steel if you know what I mean, earn your keep!
Regulators!!! mount up!
The epic words of Warren G in many respects seem to sum up our government’s regulatory regime. Guys like Barney and Timmy clearly are “handy with the steel,” in their ability to influence businesses. They also in many respects do regulate stealing, ultimately robbing investors and businessmen in creating moral hazard for the bond and shareholders and all sorts of barriers to entry for the firms.
Yet recently amidst the market fallout there have been calls left and right for some sort of even more powerful “super-regulator.” After all, given that our regulatory architecture seems to have failed us this time, why not create an even bigger and stronger one to prevent the crisis next time?
Just like all government attempts to stop future crises, be it in healthcare or food and drugs, regulation always perpetuates the problems, creating greater ones down the road. In the financial system, we see perhaps the greatest case AGAINST regulation. Let us examine my seemingly counterintuitive claim.
The first and most obvious reason against regulation is that it creates a significant amount of moral hazard. If one has the SEC there to ensure that financial institutions are seemingly playing by the rules, or the FDIC there to ensure that even if a bank is insolvent, one will be able to receive his deposits (up to a point), then this encourages one to take far greater incremental risks than one otherwise would. After all, with the seal of approval of a government institution, why would you ever get your hands dirty in analyzing the institutions in which you entrust your money?
This problem is especially pervasive when it comes to the credit ratings agencies, namely Moody’s, S&P and Fitch, who are designated “Nationally Recognized Statistical Rating Organizations” by the SEC. Individual investors and institutional investors alike had become reliant on these agencies to gauge the risk of default of individual companies and securities, only for many of these companies and securities to blow up in their faces during this crisis. Had people actually gone in and done the risk analysis themselves, as opposed to relying on ratings assigned to companies largely by government decree, I would argue that people would have taken far more prudent positions with their capital.
Further, without this pseudo-cartel of agencies, I would imagine there would grow hundreds if not thousands of competing private firms to do independent analysis, greatly benefitting the investor without the time or knowledge to do financial analysis. Sure some of these companies might partake of fraudulent activities themselves, but they would either lose credibility and have to fix up their act to compete, or be prosecuted for the fraud they perpetrated. I admit that in this case, you do need law enforcement when it comes to fraud, but it is far more likely (given all of the times that private companies for example had uncovered the Madoff scheme before the regulators ever did anything) that the authorities would be able to react were market participants able to signal fraud to them. Still, at the very least the consumer would have far more choice in determining which analysis was best.
This brings us to another problem with government regulation – the fact that it is done by government monopoly. Government officials just like businessmen are prone to error. Unlike businessmen however, they lack a profit motive to work efficiently and prudently. To this end, if we see how ineffectual the DMV is, why should the SEC or FDIC or SIPC or any of these other alphabet-soup agencies be any more trusted? Sure, many of the people that work for these agencies previously worked in private industry, but remember that this in itself creates many a conflict of interest. Madoff himself had ties to the SEC, which may have helped him keep his Ponzi scheme alive for so many years.
Government regulators also create problems in that they make costly work for businesses and investors. SARBOX and other forms of compliance cost businesses small and large millions each year, while the regulators’ decisions to allow off-balance-sheet financing in many ways incentivized companies to hide the risks that should have been plain as day to investors. All of this is bad for transparency and efficiency, two things regulators are supposed to encourage.
On the other hand, there is the crazy idea of letting the market serve as the regulator. I would argue that discerning, self-interested investors have the best judgment when it comes to the valuation because they are responsible for their money. For it is the market that assigns a price to securities – riskier ones command a higher risk premium. Companies that make mistakes, be it through poor compensation standards that reward incompetence, poor investment projects, etc will face prohibitive borrowing costs and lower stock prices, and ultimately if the market so chooses be taken under. It is this playing field that ensures regulation. The mercy of the market will hold people accountable. Government regulators, government-empowered ratings agencies and others merely create the moral hazard that stops this system from functioning properly.
When government regulators set a precedent of bailing people out for bad behavior under the guise that a company is “too big to fail,” you further destroy the regulation of the market. You encourage excessive risk-taking; you encourage striving for short-term gains at the cost of long-term sustained profitability. You hurt the investors who are trying to signal through bond and share prices that a firm is in bad shape, and ultimately hurt taxpayers if you make the private problems of some investors into the public problems of all Americans. To let bureaucrats go in and say that a company is stable, often disingenuously, as opposed to letting investors speak with their money is as arbitrary as it is abominable.
The fact of the matter is that government doesn’t want to let the market work as it did in blowing up companies with worthless assets (even if it was the moral hazard built into system and intervention that caused creation and investment in these assets), because it will hurt the interests that prop the elected officials up, destroy their own wealth, undermine their power (wouldn’t want to waste a crisis) and further cause unrest amongst the populace.
But the short-term dislocation versus the long-run fiscal and moral decay of the country is incomparable. The former will lead to an economy and a nation made stronger; the ladder to tyranny. The problem in our nation is that if you are a politician and trying to get reelected, you make this calculation and hope that things don’t collapse at the wrong time, namely under your watch. Interestingly, this sacrifice of long-term sustainability for short-term gain is just the calculation made by many at the banks who played with essentially free house money (courtesy of the Fed), leading us to the crisis today. But let these same government officials who in large part mucked things up the first time around gain even greater control over the economy. I dare you.