Saturday, December 12, 2009

Who's Ready for Stagnation!??

ME! Hooray !!!!!!!!

Oh... Wait. No, that's actually not good, is it? Oops.

So why stagnation, you ask? Here's what happened:

Yesterday, the U.S. House of Representatives approved a measure (HR 4173, "Wall Street Reform & Consumer Protection Act of 2009"[1]) which provides "sweeping" new powers to the Federal Government - and the Federal Reserve - to control the American economy. An article written in the BBC[2] breaks down a number of these new powers, which I shall discuss & comment upon here.
1. The bill aims to create a new agency to monitor consumer banking transactions and give the government powers to break up companies that threaten the economy.

First off, we have dozens of agencies and literally tens of thousands of pages of regulation that currently effect the United States economy, the major players include:

  • Securities & Exchange Commission (SEC)
  • Federal Trade Commission (FTC)
  • Municipal Securities Rulemaking Board (MSRB)
  • Commodity Futures Trading Commission (CFTC)
  • Financial Deposit Insurance Commission (FDIC)
  • Financial Industry Regulatory Authority (FINRA)
  • Office of the Comptroller of the Currency (OCC)
  • National Credit Union Administration (NCUA)
  • Office of Thrift Supervision (OTS)
  • U.S. Treasury - Which controls fiscal policy... And most significantly, perhaps...
  • The Federal Reserve System - Which controls the money supply & interest rates.
...So, the idea that we need an entirely new agency is patently absurd to begin with (as is the idiotic claim that there was a problem with "lack of regulation" in financial markets anyway). But beyond that, the true absurdity lies initially in the idea that yet another agency will do better than all the existing agencies at preventing financial collapses... I'm oversimplifying, of course, but most collapses happen largely as a result of the last agency on the list; the Federal Reserve. But we'll get to them later...

The second point here, is that no single firm should ever be able to "threaten the economy"! The only reason that some firms did do that last year is twofold:
  1. Previous government interventions into the market are *precisely* why the firms were as big, and as risky as they were: Consider - All of the biggest losers in investment banking (Lehman Bros., Morgan Stanley, Goldman Sachs, Bear Stearns & Merrill Lynch) had special exceptions from the SEC to leverage their assets up as much as 40:1[3] :: The housing explosion was fueled by a perfect storm of the Federal Reserve's "record low"[4] interest rates starting essentially in 2002 and the constant push towards "affordable housing" including a great number of tax & rebate incentives to home builders & buyers, creating a bubble which, contrary to popular opinion, was recognized early on by a few good economists[5] :: And... Most big companies - for example, those in the auto manufacturing or airline industries - have spent literally decades losing money and being bailed out by the American taxpayer (thus allowing them to continue losing money at our expense).
  2. Bailouts: Instead of allowing the poorly positioned companies (GM, AIG, Goldman Sachs, etc.) to go out of business, the government has instead decided to intertwine these companies with the economy through bailouts, and various "insurance" policies such as the FDIC or FNMA/FDMC. By doing this, the risks of over-leveraging and other bad business decisions are the taxpayer's problem, and thus DO jeopardize the entire economy.
Number 1 enables companies to get rich and grow fat off of the taxpayer's dime, and encourages them to make risky decisions - and number 2 ensures that the consequences of those decisions never actually have to adversely effect their businesses, again at taxpayer's expense.

It's great for these favored firms because not only do they get the taxpayers to subsidize their existing business as well as getting other special deals and artificially limited competition, they also get the taxpayers to cover their losses when they screw up... All the while operating with absolutely 0 incentives to produce products that accurately meet true consumer demand.

What people consistently forget though is that within a free enterprise situation (in this instance, corporate) greed is balanced by fears of loss - yet when the government steps in and eliminates need for that fear, greed is no longer balanced by anything.

The system of profits & losses can keep businesses in check both in size and in aggressiveness because the risk of leveraging your assets at 30:1 for instance are very real, and the losses would be catastrophic. It's simply too great a loss to take to justify the risk. Unless, of course, the loss won't actually be taken by you, but by the taxpayer, which is exactly what's happened with respect to Goldman Sachs, AIG, GM, Chrysler, and so many others.

And that's only possible when government has a major hand in the economy - so the kind of legislation the House just passed is going to prove disastrous... But let's explore more of what this is going to mean - So, back to the BBC's list:
2. The legislation would give regulators the power to dismantle the companies in a way which ensures shareholders and unsecured creditors, not taxpayers, bear the losses.

After all that I just said, this sounds great right?

Except that it's the market and bankruptcy proceedings which should be determining the break-up of companies and it needs to be private contracts that determine which shareholders & creditors get what proceeds from liquidation. The taxpayer should never be involved!!!


The "taxpayer" has no stake in a private company... And they shouldn't! It's completely and utterly against every bit of sane reasoning for anyone to be forced to invest in a private company. Only individual investors who *voluntarily* risk their own money should have stake in private companies and thus reap the rewards & costs of each and every decision made by the company... Taxpayers have no choice but to pay taxes, so to force people to funnel money into businesses they have no voluntary interest in supporting is not only an economic disaster, but is one of the most ridiculously immoral concepts imaginable. As Thomas Jefferson once put it:

"To compel a man to furnish funds for the propagation of ideas he disbelieves and abhors is sinful and tyrannical."

As I recently noted, the average taxpayer is now on the hook for $12,200 for each vehicle[6] sold by General Motors, and $7,600 for each vehicle sold by Chrysler - because each company has lost so much money over the years and government power in this sector has allowed exactly what the "new" laws say won't happen in the future. In this case, even if the taxpayer is never on the hook ever again for a single company in the U.S. (which will not remotely be the case), giving government agencies the power to control liquidation proceedings does exactly what we saw this year with the GM bankruptcy...

Instead of the money going to shareholders based on their contracted positions as preferred or common stock-holders, the majority shares went directly to President Obama's political supporters[7] in the United Auto-worker's Union.

Assuming this legislation gets made into law, which we have little reason to assume that it won't, politicians will now have the power to simply modify the structure of legally binding contracts post hoc in favor of their constituents. At this point, private contracts are entirely meaningless and the only thing that matters is who you know in government and how good friends you have in politics. Notably, this is likely going to break the U.S. Constitution's protection against Ex Post Facto legislation as well - as it already has.

So what else does the bill do?

3. It also hopes to strengthen the powers of the Securities and Exchange Commission to detect irregularities that could provide an early warning of fraudulent investment schemes.

The SEC - which failed repeatedly to catch such a massive scam as Bernie Madoff's $50 Billion ponzi scheme - needs more power? Guess what... Sarcasm aside, the SEC has more than enough power to regulate their part of the financial industry, the fact that they repeatedly fail to do an adequate job should give us reason to question their function... Only in the bizarro world of government does a failing organization warrant even more authority.

4. Plans to regulate the vast $600 trillion market in products called derivatives are also included.

Because some random government officials - likely mediocre graduates of business schools in finance who couldn't find work at actual investment banks - are going to be able to understand and regulate such an incredibly complex realm of investment as derivatives markets. Right.

5. The Federal Reserve would be given powers to oversee large firms at risk of collapse.
This does nothing but politicize the process of bankruptcy and rewards friends of those working at the Federal Reserve. The board of directors of the Federal Reserve and the chairman Ben Bernanke himself are either investment bankers or are tied closely to all the major investment banks and other large firms. So yet again, we have a situation where the economy simply becomes more politicized and favored firms will get good deals, and non-favored firms will be eliminated.

6. The Government Accountability Office, the investigative arm of the US Congress, would also be given more power over the Federal Reserve.

If only this mattered at all... The Federal Reserve is notoriously secretive and even Ron Paul's "Audit the Fed" bill has virtually already been de-fanged before it's even gotten off the ground, and in spite of public outcry, the Fed controls some of the most crucial aspects of any economy: Money Supply & Interest Rates.

What's more, the Fed is "technically" not even a part of the US Government (isn't it great that a secret cabal of private bankers have control over the nation's money supply?), so I'm guessing that the "Government Accountability Office" will be as ignored by the Federal Reserve as it is by the US Congress.

At any rate... Prices, Profits & Losses, and Property Rights are the cornerstone for any economy to function properly. Each of these things play a crucial role and are completely linked with each other. And yet each of these things are being systematically destroyed and inhibited by the government in the not-so-capitalist United States.

Profits & Losses help producers determine whether or not their businesses are succeeding or failing based on customer demand... Yet the government has mitigated that by bailing out favorite firms. This legislation pays lip-service to protecting the taxpayer from such things, but the entire bill will wind up politicizing the economy to such an immense degree that just about the only incentive for big companies will now be to influence politicians & regulators.

Once upon a time, companies had to compete for customers' business - but with the government taking an ever increasing role in picking winners & losers and allocating market outcomes, they now have to compete for the ears and legislative pens of law-makers. I think it's particularly hard to understate how bad this is.

Prices (including interest rates and wages), provide signals about supply & demand which the government and its various regulatory agencies simply cannot fabricate out of thin air. When they do so, as the Federal Reserve does every day, artificially created shortages & surpluses result and we get bubbles because assets are improperly priced thus leading investors & producers towards industries & products that they wouldn't otherwise get into. Housing is the recent example, obviously. "Green energy" is my best bet for the next one... This causes misallocation of resources and ultimately a highly unstable economy which will come crashing down. Likewise, prices are greatly effected by the supply of money itself - so giving the Federal Reserve more power is insane... They not only need to have less, they need to simply not exist.

Of course, without a Federal Reserve there to print money, where would our government find the dollars to fund every rent-seeking, vote-buying program and special project politicians want to support (not to mention approaching 8+ year long wars with foreign nations)?

Property Rights have an important corollary and that is contract enforcement... But these new powers completely destroy property rights by allowing government bureaucrats the ability to simply ignore contracts and the voluntary arrangements people make with their own property, and instead control the destruction of various companies in whatever way is politically expedient. When this happens, the incentives to be an investor - especially a major investor - in United States based companies drops to nothing... Unless the company is one of the chosen few.

And ALL of this results in one highly destructive problem: Big, well-connected firms, will grow ever larger, and their competition will be squashed out of existence.

...You'll note that this is completely the opposite of the expressed and, I will generously assume, intended result of this legislation.

I'm frankly quite sick of watching the government usurp more and more power, not only because it's immoral and a complete bastardization of liberty, and not only because it's radically unconstitutional and shouldn't exist in America - but mostly for one really practical reason... This kind of regulation does nothing but destroy wealth & prosperity. And the more they do that, the longer states like California will have over 12.3% U3 unemployment rates... And the fewer capital there will be for development...

But hey, maybe there will be more government asshats running around. That's good news - especially when, the average Federal government employee is earning $71,206, compared with just $40,331 in the private sector.[8] Oh right, no it isn't good news, since that $71,206 each year is coming directly off the backs of members of the private sector working in productive positions, actually adding value to the economy.

The fact of the matter is, this is the very same path FDR headed down in the early 1930s, and the result was predictably disastrous[9] to the American economy, which remained stagnant until 1946.

What depresses and angers me personally is that I am capable of understanding the consequences of this kind of thing, and all it will do is continue to kill off hundreds of thousands of national opportunities during my prime development years. I'm 26 years old. Conservatively speaking, unless there are some massive shifts in public policy and the direction we're headed as a nation with regard to the economy, I wouldn't be surprised at all to see another 10 years at least of serious mediocrity and with the national debts and trade deficits as they are in America currently, perhaps that prediction becomes "indefinite". I want - and feel that I deserve - to simply have an opportunity to use these years to develop a meaningful career and to earn the kind of living that is capable of supporting a family, paying the debts I've incurred in school and establishing a wealthier future.

Yet with this legislation, and the many other aspects of the post 2008 financial crisis America, I doubt very much I will have that chance.

* * * * *


  1. Wall Street Reform & Consumer Protection Act of 2009, H.R. 4173, 111th Cong., <> (2009). Online.
  2. "BBC News - US House of Representatives backs financial reform bill." BBC NEWS | News Front Page. 11 Dec. 2009. Web. 13 Dec. 2009. <>.
  3. Satow, Julie. "Ex-SEC Official Blames Agency for Blow-Up of Broker-Dealers." The New York Sun. 18 Sept. 2008. Web. 13 Dec. 2009. <>.
    "This alternative approach, which all five broker-dealers that qualified — Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs, and Morgan Stanley — voluntarily joined, altered the way the SEC measured their capital. Using computerized models, the SEC, under its new Consolidated Supervised Entities program, allowed the broker dealers to increase their debt-to-net-capital ratios, sometimes, as in the case of Merrill Lynch, to as high as 40-to-1. It also removed the method for applying haircuts, relying instead on another math-based model for calculating risk that led to a much smaller discount."
  4. Fogarty, Thomas A. " - Mortgage rates at another record low." News, Travel, Weather, Entertainment, Sports, Technology, U.S. & World - 14 Nov. 2002. Web. 13 Dec. 2009. <>.
    "Mortgage investor Freddie Mac said Thursday that the average interest rate for the benchmark 30-year mortgage is 5.94%, down from 6.11% last week and the lowest in more than three decades of tracking. The average 15-year rate is 5.32%, also a record low."
  5. Thornton, Mark. "Housing: Too Good to be True." Ludwig von Mises Institute - Homepage. 4 June 2004. Web. 13 Dec. 2009. <>.
  6. "Study: Every GM Vehicle Sold Costs Taxpayers $12,200." National Taxpayers Union & National Taxpayers Union Foundation. 18 Nov. 2009. Web. 13 Dec. 2009. <>.
  7. Kellogg, Alex P., and Kris Maher. "UAW to Get 55% Stake in Chrysler for Concessions -" Business News & Financial News - The Wall Street Journal - 28 Apr. 2009. Web. 13 Dec. 2009. <>.
  8. Cauchon, Dennis. "USA TODAY: For feds, more get 6-figure salaries." News, Travel, Weather, Entertainment, Sports, Technology, U.S. & World - Web. 13 Dec. 2009. <>.
  9. Spitznagel, Mark. "The Man Who Predicted the Depression -" Business News & Financial News - The Wall Street Journal - 6 Nov. 2009. Web. 15 Dec. 2009. <>.

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