Posted by: Debby Durkee | April 21, 2010

An economy of liars.

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An economy of liars.

Instead of reining in those who do bad things in the financial industry, Gerald P. O’Driscoll says this latest financial regulation bill only continues to cement crony capitalism where only those protected by government and those “regulators” themselves have anything to gain. This is from the Wall Street Journal.

Free markets depend on truth telling. Prices must reflect the valuations of consumers; interest rates must be reliable guides to entrepreneurs allocating capital across time; and a firm’s accounts must reflect the true value of the business. Rather than truth telling, we are becoming an economy of liars. The cause is straightforward: crony capitalism.  Snip—

…While protecting citizens against force, both at home and abroad, is the government’s most basic function, protecting them against fraud is closely allied. By the use of force, a thief takes by arms what is not rightfully his; he who commits fraud takes secretly what is not rightfully his. It is the difference between a robber stealing brazenly on the street and a burglar stealing by stealth at night. The result is the same: the loss of property by its owner and the disordering of civil society. And government has failed miserably to perform this basic function.

Why has this happened? Financial services regulators failed to enforce laws and regulations against fraud. Bernie Madoff is the paradigmatic case and the Securities and Exchange Commission the paradigmatic failed regulator. Fraud is famously difficult to uncover, but as we now know, not Madoff’s. The SEC chose to ignore the evidence brought to its attention. Banking regulators allowed a kind of mortgage dubbed “liar loans” to flourish…  Snip –

The idea that multiplying rules and statutes can protect consumers and investors is surely one of the great intellectual failures of the 20th century. Any static rule will be circumvented or manipulated to evade its application. Better than multiplying rules, financial accounting should be governed by the traditional principle that one has an affirmative duty to present the true condition fairly and accurately—not withstanding what any rule might otherwise allow…

Public choice theory has identified the root causes of regulatory failure as the capture of regulators by the industry being regulated. Regulatory agencies begin to identify with the interests of the regulated rather than the public they are charged to protect…  Snip –

Congressional committees overseeing industries succumb to the allure of campaign contributions, the solicitations of industry lobbyists, and the siren song of experts whose livelihood is beholden to the industry. The interests of industry and government become intertwined and it is regulation that binds those interests together. Business succeeds by getting along with politicians and regulators. And vice-versa through the revolving door.

We call that system not the free-market, but crony capitalism. It owes more to Benito Mussolini than to Adam Smith.  Snip –

In the U.S today, we are moving away from reliance on honest pricing. The federal government controls 90% of housing finance. Policies to encourage home ownership remain on the books, and more have been added. Fed policies of low interest rates result in capital being misallocated across time. Low interest rates particularly impact housing because a home is a pre-eminent long-lived asset whose value is enhanced by low interest rates.

Distorted prices and interest rates no longer serve as accurate indicators of the relative importance of goods. Crony capitalism ensures the special access of protected firms and industries to capital. Businesses that stumble in the process of doing what is politically favored are bailed out. That leads to moral hazard and more bailouts in the future. And those losing money may be enabled to hide it by accounting chicanery.

If we want to restore our economic freedom and recover the wonderfully productive free market, we must restore truth-telling on markets. That means the end to price-distorting subsidies, which include artificially low interest rates. No one admits to preferring crony capitalism, but an expansive regulatory state undergirds it in practice.

Deregulation is not some kind of libertarian mantra but an absolute necessity if we are to exit crony capitalism.

It is going to take some principled Americans to take this system apart. Do we have anyone with principles available and willing to tackle this outrageous systemic failure in our government and financial institutions? Read it all here: http://online.wsj.com/article/SB10001424052748704508904575192430373566758.html

Senator Obama and Freddie/Fannie.

The above story can definitely serve as the reason for this one. “Regulators” captured by those they’re supposed to regulate. Peter J. Wallison of the American Enterprise Institute has found just a wee bit of hypocrisy in the exhortations of our current president. With the president consistently blaming the failure of our financial system on the Wall Street banks, he conveniently leaves out the failures of Fannie Mae and Freddie Mac and those who were “regulating” them (or should I say failing to regulate them). Perhaps he does that because he voted against a bill in 2005 presented by Republicans that would have at least reduced the mess we currently find ourselves in. This is from the Wall Street Journal.

One chapter in this story took place in July 2005, when the Senate Banking Committee, then controlled by the Republicans, adopted tough regulatory legislation for the GSEs on a party-line vote—all Republicans in favor, all Democrats opposed. The bill would have established a new regulator for Fannie and Freddie and given it authority to ensure that they maintained adequate capital, properly managed their interest rate risk, had adequate liquidity and reserves, and controlled their asset and investment portfolio growth.

These authorities were necessary to control the GSEs’ risk-taking, but opposition by Fannie and Freddie—then the most politically powerful firms in the country—had consistently prevented reform.

The date of the Senate Banking Committee’s action is important. It was in 2005 that the GSEs—which had been acquiring increasing numbers of subprime and Alt-A loans for many years in order to meet their HUD-imposed affordable housing requirements—accelerated the purchases that led to their 2008 insolvency. If legislation along the lines of the Senate committee’s bill had been enacted in that year, many if not all the losses that Fannie and Freddie have suffered, and will suffer in the future, might have been avoided.

Why was there no action in the full Senate? As most Americans know today, it takes 60 votes to cut off debate in the Senate, and the Republicans had only 55. To close debate and proceed to the enactment of the committee-passed bill, the Republicans needed five Democrats to vote with them. But in a 45 member Democratic caucus that included Barack Obama and the current Senate Banking Chairman Christopher Dodd (D., Conn.), these votes could not be found.

Recently, President Obama has taken to accusing others of representing “special interests.” In an April radio address he stated that his financial regulatory proposals were struggling in the Senate because “the financial industry and its powerful lobby have opposed modest safeguards against the kinds of reckless risks and bad practices that led to this very crisis.”

He should know. As a senator, (Obama) was the third largest recipient of campaign contributions from Fannie Mae and Freddie Mac, behind only Sens. Chris Dodd and John Kerry.

So, when the president gets on his high horse, please remember this: he and his fellow Democrats could have helped to prevent at least a huge portion of the difficulties this country has gone through over the past couple of years, but partisanship and the Democrat money pot of Fannie and Freddie were more important than the solvency of the American government. Read it all here:

http://online.wsj.com/article/SB10001424052748704671904575193910683111250.html?mod=WSJ_newsreel_opinion

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Responses

  1. Barnie Frank (D) lied to Congress about Freddie and Fannie financial health at least 4 times and he wasn’t even in the top 3 recipients.

    • And yet, he was re-elected in MA in 2010.


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