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A Free Market Is Not Possible Without Strong Laws Against Fraud
Many economists are now starting to question long-held assumptions that
bubbles don't matter, that huge amounts of leverage are good, and that
the Federal Reserve has mastered monetary policy. They are starting to
read Minsky and other forgotten economic theorists. And Austrian economists are gaining a wider audience.
As I wrote in March 2009:
The
Austrians have been saying for well over a hundred years that big
bubbles lead to big crashes, and that - if you want to avoid depressions
- you have to avoid the bubbles.
In today's article, entitled "Ignoring the Austrians Got Us in This Mess", Barron's agrees:
The
credit crisis and the ensuing global economic contraction have failed
to make an impression on academe, where free-market orthodoxy still
reigns supreme, the New York Times asserted in an article in arts
section recently ("Ivory Tower Unswayed by Crashing Economy," March 4.)...
What
definitely is ignored in academe is the Austrian school of economics,
especially for baby boomers brought up on Samuelson's economics text,
which was pure Keynesian orthodoxy. I did not learn the names von Mises
and Hayek or their ideas until a decade or more after graduation (with a
degree in economics, by the way.)
The
Austrian view is a mirror image on the right to Minsky's from the
left. The economy, if left alone, is self-correcting, say the
Austrians. But central banks' inflationary expansion of credit produces
booms and malinvestments, which inevitably lead to a crashes and
depressions.
The only prevention
for boom and busts are sound money, which is impossible with
government-controlled central banks. Once the bust comes, the only cure
is to let it run its course; allow the malinvestments go bankrupt and
let the market reallocate the capital to productive uses....
But
the Austrians were the ones who could see the seeds of collapse in the
successive credit booms, aided and abetted by Fed policies, especially
under former chairman Alan Greenspan. ...
Greenspan
always contended that monetary policymakers can neither predict nor
prevent bubbles in asset markets. They can, however, clean up the
after-effects of the bust -- which meant reflating a new bubble, he
argued.
That had a profound effect
on risk-taking. Knowing that the Greenspan Fed would bail out the
markets after any bust, they went from one excess to another. So, the
Long-Term Capital Management collapse in 1998 begat the easy credit that
led to the dot-com bubble and bust, which in turn led to the extreme
ease and the housing bubble.
Austrian
economists assert the current crisis is the inevitable result of the
Fed's successive efforts to counter each previous bust. As the credit
expansion pumped up asset values to unsustainable levels, the eventual
collapse would result in a contraction of credit as losses decimate
banks' balance sheets and render them unable to lend. That sounds like
an accurate diagnosis of the current problems.While
Barron's acknowledges that the Austrian school is right about how to
avoid depressions, it doesn't agree with the other main tenet of the
Austrians: that the quickest way to get out of a depression is to let
the bad investments clear themselves out of the markets by letting the
companies which made dumb decisions fail. (The sub-title for the
article is "Their ideas warned us of the bubble; their prescription for the bust is too harsh, however"; and the article ends with the phrase "Make us non-interventionist, but not yet.")
Readers
have written to me saying the same thing: the Austrians might be
right, but their remedy for an economic crisis is too draconian and we
have to do something to help the people.
So what can we do to help people and to improve the economy?
Well, as I've repeatedly pointed out, the economy cannot recover until trust and the rule of law are restored (and see this).
Imposing
accurate accounting standards, stopping high-frequency trading,
quote-stuffing and front-running, and prosecuting fraud to the fullest
extent of the law are prerequisites to restoring trust in our economy.
Indeed,
America has a long tradition of using fraud, antitrust, conspiracy and
racketeering laws to rein in the worst economic abuses. These laws are
an important part of American history, and our recent abandonment of
them must be reversed.
Austrian Economics Does Not Require Abandoning the Law ... In Fact, Laws Are Necessary for a Functioning Free Market
Just as neo-conservatives are not really conservative and neo-liberals are not really liberal, a fake, neo-Austrian legal argument has sprung up trying to excuse the criminal fraud and manipulation of the big banks.
As William K. Black - professor of economics and law, and the senior regulator during the S&L crisis - pointed out
last week, Austrian economics has been twisted by the powers-that-be
and bastardized into a basis for arguing that there should be no prosecutions for fraud or criminal conduct:
Yves
[Smith] noted that the Chamber of Commerce was leading the effort to
elect CEO-friendly judges. The Chamber is one of the points of
intersection in the discussions about electing judges and whether law
and economics has played a perverse role in causing catastrophic policy,
regulatory, and judicial blunders. The Chamber distributed a plan for
a hostile takeover of university departments of economics and finance
(and the courts and the media) proposed by Lewis Powell (the soon to be
Supreme Court Justice). Extremely conservative “law and economics”
proved to be central to this effort. The law and economics movement
began as a non-ideological approach to explaining and aiding judicial
decision-making. The scholars leading the movement had diverse views.
The Olin Foundation transformed law and economics into an ultra
ideological field dominated almost exclusively by passionate opponents
of government “interference” in “free enterprise.” Olin specialized in
creating well-funded positions in academia for scholars that had an
“Austrian” approach to economics. Austrian economics has, generally,
become more extreme since its formative years when Hayek warned that
mixed economies (e.g., the U.S. and Europe) were inevitably consigned to
the Road to Serfdom. Here is how the National Review praised the
Olin’s takeover of the field:Law and Economics: The
John M. Olin Foundation has devoted more of its resources to studying
how laws influence economic behavior than any other project. The law
schools at Chicago, Harvard, Stanford, Virginia, and Yale
all have law-and-economics programs named in honor of Olin. “You
should not forget that without all the work in Law and Economics, a
great part of which has been supported by the John M. Olin Foundation,
it is doubtful whether the importance of my work would have been
recognized,” said Ronald Coase, who won the 1991 Nobel Prize in economics.In
addition to these centers specializing in law and economics, Olin
created scores of endowed chairs at a wide range of universities. Some
of these are in economics departments and others are in law. Olin also
indirectly funded the “boot camps” at which U.S. judges were taught
Austrian economics as if it were undisputed science. The academic
journals in law and economics are dominated by virulent opponents of
regulation. The textbooks used to teach law and economics treat
economic theory as having demonstrated conclusively the folly of most
government actions purportedly designed to help the public. (I say
“purportedly” because Austrians almost always claim that the government
intervention was really designed to benefit a special interest rather
than a substantial portion of the public.)
Here are two
examples that illustrate how false, but so influential and harmful
these Austrian nostrums have become through teaching falsified
economics to thousands of lawyers. Austrian law and economics is based
on suppositions that have long been known to be false. Dickens
famously had Mr. Bumble (in Oliver Twist) respond to being informed
that the law supposed him to be responsible for his wife’s behavior by
remarking that if the law supposed such an absurdity then “the law is a
ass.” The dominant law and economics text on corporate law for years
was by Easterbrook and Fischel. Judge Easterbrook is a colleague of
Judge Posner on the 7th Circuit and Fischel was for a time Dean of the
University of Chicago’s law school. They assert that “a rule against
fraud is not an essential or even necessarily an important ingredient
of securities markets” (1991: 283). Their book was written after
Professor Fischel, as a consultant to three of the most notorious
control frauds of the 1980s, tried out their theories in the real world –
and found that they failed catastrophically. Fischel praised the
worst frauds. Fischel & Easterbrook did not disclose to their
readers that their theories were falsified in the real world. Note how
extreme their claim was, the utter certainty of the claim, and the
lack of any data supporting the claim – a claim they knew to be false.
The taught students that, in the context of securities, we did not
need:1. Any laws against securities fraud
2. The FBI and the Department of Justice
3. The SEC
4. Any rules against fraud
5. Any ability to bring civil suitsFraud
is impossible because securities markets are “efficient” and act as if
they were guided by an “invisible hand.” Markets cannot be efficient
if there is accounting control fraud, so we know (on the basis of
circular reasoning) that securities fraud cannot exist. Indeed, when
Easterbrook and Fischel try to explain why the securities markets
automatically exclude frauds their faith-based logic becomes even more
humorous. They claim that honest securities issuers send one or more of
three “signals” of honesty to guide investors to purchase their
securities – and that only honest firms can send any of these three
signals.1. Hire a top tier audit firm
2. Have their CEO own a substantial amount of stock in the company
3. Cause their firm to have extreme leverageIn
reality, accounting control frauds “mimic” each of these signals and
each signal aids their frauds. Easterbrook and Fischel’s ideas are not
merely wholly ineffective against accounting control fraud – they are
outright criminogenic. That is why Fischel praised the real world
accounting frauds when he was a consultant. Each of the three massive
accounting control frauds that Fischel praised sent each of these three
signals – and they sent them years before Easterbrook and Fischel wrote
their book and made claims they had seen repeatedly falsified by
Fischel’s fraudulent clients without warning their readers.
Note
the continuing damage that these three law and economics dogmas about
“signaling” honesty had in the current crisis. Regulators continued to
treat professionals as if they were “independent” and provided expert
judgments on which regulators should rely. Basel II, for example,
reduced capital requirements dramatically if the rating agencies gave a
high rating to a toxic mortgage derivative. Economists,
criminologists, and reality had long falsified the claim but
theoclassical law and economics never challenges its foundational
dogmas.
Easterbrook provided a classic example of faith-based
law and economics’ misplaced faith in private professionals in a
decision that prompted Robert Prentice’s wonderful article: The Case of the Irrational Accountant: A Behavioral Insight into Securities Fraud Litigation
(2000). The plaintiff alleged that he was the victim of a securities
fraud that the outside auditor had aided. Easterbrook’s opinion stated
that the plaintiff should not be allowed to engage in discovery
designed to support this claim because it would be “irrational” for an
audit firm to aid a securities fraud. Easterbrook’s logic is so
irrational on so many different levels that it proved a treasure trove
for Professor Prentice. In the interest of space, consider only four
aspects of why Easterbrook’s logic fails. First, Easterbrook is the
one who co-authored the textbook claiming that serious securities fraud
cannot occur. That makes him someone that cannot admit that fraud
exists. He certainly doesn’t want plaintiffs finding facts
demonstrating fraud. Second, the same textbook claimed that only
honest corporations could hire a prestigious audit firm. He premised
this (long falsified) dogma on the claim that it would be irrational
for an audit firm to give a clean opinion to a control fraud. If the
plaintiff had been allowed discovery and demonstrated the falsity of
this dogma it would falsify Easterbrook’s entire thesis. Third,
theoclassical economics rests on even more fundamental dogmas –
economic actors are supposed to act rationally and almost entirely to
maximize their self-interest. Empirically, even economists have long
known what non-economists have always known – these dogmas are often
false. Why should a plaintiff not be permitted to discover evidence
that accountants act irrationally? Fourth, Easterbrook assumes away
reality even if we assume rational behavior. The “auditor” acts
through humans called audit partners. Audit partners gain income,
power, and status within the firm primarily by bringing in large
clients. Accounting control frauds understand this and select audit
partners that will give them clean opinions. They also put prospective
audit partners in competition with each other to intensify the
“Gresham’s” dynamic that turns market forces perverse and causes bad
ethics to drive good ethics out of the profession. Top economists had
explained why this dynamic explained why S&L accounting control
frauds had consistently hired top tier audit firms and been able to get
clean opinions from them despite the fact that their financial
statements were fraudulent.
As James Pierce, Executive Director
of the National Commission on Financial Institution Reform, Recovery
and Enforcement (NCFIRRE) explained:Accounting
abuses also provided the ultimate perverse incentive: it paid to seek
out bad loans because only those who had no intention of repaying would
be willing to offer the high loan fees and interest required for the
best looting. It was rational for operators to drive their
institutions ever deeper into insolvency as they looted them.The
National Commission on Financial Institution Reform Recovery and
Enforcement (NCFIRRE) (1993), reported on the causes of the S&L
debacle. It documented the distinctive pattern of business practices
that lenders typically employ to optimize accounting control fraud.The
typical large failure was a stockholder-owned, state-chartered
institution in Texas or California where regulation and supervision
were most lax…. [It] had grown at an extremely rapid rate, achieving
high concentrations of assets in risky ventures…. [E]very accounting
trick available was used to make the institution look profitable, safe,
and solvent. Evidence of fraud was invariably present as was the
ability of the operators to “milk” the organization through high
dividends and salaries, bonuses, perks and other means.The
top tier audit firms knew that the “typical large failure”
“invariably” involved fraud by senior S&L executives, who used
“every accounting trick available” in order to create fictional income
in order to aid the executives’ looting of the S&L. These lenders
followed a distinctive pattern – deliberately making bad loans – that
was rational only for accounting control frauds. The unique pattern
that optimized fraudulent accounting income was simple for an auditor to
spot. The S&L accounting control frauds always hired top tier
audit firms and virtually always succeeded in getting clean opinions for
fraudulent financial statements. That was supposed to be impossible
under Easterbrook and Fischel’s theories. NCFIRRE explained the
“agency” problem that Easterbrook and Fischel missed.[A]busive
operators of S&L[s] sought out compliant and cooperative
accountants. The result was a sort of “Gresham’s Law” in which the bad
professionals forced out the good.Theoclassical
law and economics scholars continued to chant the second signaling
dogma – though falsified throughout the S&L debacle and Enron era
accounting control frauds – throughout the nonprime mortgage era. They
asserted endlessly that modern executive compensation “aligns” the
interests of the CEO with the shareholders’ interests. The reality was
that it frequently magnified the long-standing misalignment of those
interests. That is the key point of Akerlof & Romer’s classic
article – the CEO profits by using accounting fraud to loot the bank
that he controls. He arranges his executive compensation to be
extremely large and based primarily on short-term reported accounting
profits. Akerlof and Romer explain why accounting fraud is a “sure
thing”— mathematically guaranteed to report extreme (albeit fictional)
profit in the short-term. The combination of accounting control fraud
(“blessed” by a top tier audit firm’s clean opinion) and deliberately
misaligned (anti) “performance pay” is that the CEO is guaranteed to
become wealthy – immediately. Moreover, by using seemingly normal
executive compensation bonuses to become wealthy he coverts large
amounts of firm assets to his personal benefit while minimizing the
risk of prosecution. The result of a strategy that employs deliberate
adverse selection in lending is typically a bankruptcy that wipes out
the shareholders. No greater misalignment of the interests of the CEO
and shareholders is possible than that caused by modern CEO
compensation. Modern executive and professional compensation are often
criminogenic, yet theoclassical economists strive even now to preserve
the ability of CEOs to loot through perverse executive compensation.
The third “signaling” dogma, however, is never discussed today
by theoclassical law and economics scholars. The Austrians generally
ignore the endemic accounting control fraud (their heroes have always
been business cowboys) in their explanation of why we suffer recurrent,
intensifying financial crises. The Austrians love to blame the Federal
Reserve and “easy money” for producing low interest rates. The
Austrians claim this led to excessive leverage, and blame the global
crisis on extreme leverage. It is inconvenient to this new meme to
recall that the extreme law and economics scholars used to light candles
to leverage and chant its praises as a unique signal of honesty.
Accounting control frauds do optimize fictional accounting income by
engaging in extreme leverage. The leverage is a tactic of the
accounting control frauds that drive modern crises, not the cause of the
crisis. Because accounting control fraud produces exceptional
reported income it is easy for the frauds to borrow enormous amounts
(lenders virtually break down the frauds’ doors in their eagerness to
lend). The more money an accounting control fraud borrows, the greater
the sums the CEO can loot.
Michael Milken was the original
high priest of the extreme leverage dogma and the claim that it
signaled honesty (Fischel was his acolyte). Milken was, of course, an
expert at signaling honesty while practicing control fraud. His time
in prison only increased his hate for U.S. government “interference” in
“free markets.” The Milken Institute, therefore, now commissions
articles about the ongoing crisis that emphasize (in huge fonts):From Main Street to Wall Street, one common thread runs through all facets of this story: excessive leverage.
http://www.milkeninstitute.org/pdf/Riseandfallexcerpt.pdf (p. 9)
That’s
right – the fraud whose entire junk bond business model at Drexel
Burnham Lambert rested on the dogma that corporations had too much
capital and needed to massively increase their leverage (e.g., through
LBOs) is now running an institute whose scholars claim that (far
lesser) leverage that modern U.S. banks employ is the primary cause of
global catastrophe. Of course, there’s no mea culpa by Milken admitting
that his earlier dogma was false.
The fact that, empirically,
accounting control fraud is a severe problem is no barrier to
theoclassical law and economics ignoring control fraud. I invite
readers who have taken law and economics and corporate law classes to
inform me whether their textbooks discussed Akerlof and Romer’s
article: Looting: The Economic Underworld of Bankruptcy for Profit.
Akerlof was awarded the economics version of the Nobel Prize in 2001
and Romer is also a brilliant economist. Neither Easterbrook nor
Fischel is an economist. Akerlof and Romer’s article explains how the
managers that control a firm use accounting fraud to create a “sure
thing” of fictional profits. The managers get rich, the firm dies.
Akerlof & Romer provide theory, data, and real world examples. The
lawyers that seek jobs at the financial regulatory agencies are the
lawyers most likely to have taken law and economics and corporate law
courses in which Easterbrook & Fischel’s claims were treated as
objective science. In my experience, it is vanishingly rare for them to
even be aware of Akerlof & Romer’s work or the work of
white-collar criminologists documenting and explaining accounting
control fraud.
When regulators believe that control fraud is
impossible – they make control fraud certain by eviscerating regulation
and supervision. The most infamous recent example of this is Alan
Greenspan (like Fischel, a former consultant to the most infamous
S&L control fraud – Charles Keating’s Lincoln Savings). Greenspan
refused to believe that fraud could occur in financial markets. He
refused to take any effective regulatory steps against what the FBI had
warned him (in 2004) was an “epidemic” of mortgage fraud even though
they correctly predicted that it would cause a “crisis.” The Fed had
unique regulatory authority under HOEPA to regulate all mortgage
lenders.
Law and economics has, for over two decades, been
dominated by theorclassical economic dogmas that have proved false.
These dogmas are premised on an ideological hate for regulation – even
by democratic governments. The Olin Foundation did not buy the souls
of the economists and lawyers to whom it provided fellowships and
endowed chairs. It simply selected true believers for its largess. It
knew how desperately eager universities were to raise funds. There
are now tens of thousands of law and economics graduates that have
taken a class in theoclassical law and economics. They were taught
that theoclassical economic assertions (often falsified decades ago)
were objective facts devoid of ideological content. They have been
taught that economics has proven that regulation is unnecessary,
hopeless, and harmful. Some students accept this dogma as revealed
truth, but many reject it. (If your goal as a professor is to
indoctrinate students you should prepare for a life of disappointment.)
Few economics, business school, or law students have been introduced
to effective regulation or economic/finance theories that have proven
to have predictive strength. It is the non-ideologues we need to reach
and inform them about the reality-based alternative to the faith-based
version of economics they were taught.
In
truth, the leading Austrian theorists were big supporters of freedom
and liberty. You can't have freedom if a handful of oligarchs are
manipulating the economy without any checks and balances from the law.
See this.
More importantly, you can't prevent bubbles unless you crack down on the fraud which helps to inflate bubbles. As I pointed out a year ago:
Everyone knows that the Fed blows bubbles.
But William K. Black ... says that fraud by many other companies also contributes to the bubble-and-bust cycle.
In a talk Black gave in June entitled "The Great American Bank Robbery" ... he gives the following examples.
Initially,
during the S&L, Enron and subprime crises, outside audit firms and
appraisers gave their seal of approval and a clean bill of health to
the companies, allowing them to commit fraud and blow a giant
speculative bubble in toxic assets.
And the three credit rating
services also committed massive fraud which helped blow the bubble.
For example, an analyst at Standard & Poors was assigned the job of
giving a credit risk rating for derivatives backed by subprime loans.
He wanted to review a sample of loan file to assess credit risk. His
boss (a high-level officer at S&P), gave him the following written
response:Rating Agencies as Vectors.
Any request for loan level tapes is. TOTALLY UNREASONABLE!!! Most investors don't have it and can't provide it.
[W]e
must produce a credit estimate. It is your responsibility to provide
those credit estimates and your responsibility to devise some method for
doing so. [S&P 2001](capitalization and punctuation
in original). In other words, he was told to make it up, and then to
make up a rationalization.So the S&P analyst ended up giving AAA rating - i.e. zero credit risk - on something that had immense credit risk.
So the bubble was partly blown because, as Black says,"This was a trillion dollar industry based on don’t ask, don’t tell."
This
is nothing new. Black points out that the official investigation into
the S&L crisis found that in the typical large failure, fraud was invariably present.Black
also points out that the guys covering up fraud in S&L were
promoted to head regulators in the 2000's. These regulators gave a wink
and a nod to massive fraud and insane amounts of leverage. So the
regulators helped blow the bubble and sow the seeds of the current crash
as well.Fraud By the Banks, Lenders and Financial Service Companies
But
the most interesting portion of Black's talk was the role of fraud by
numerous businessmen in blowing and then bursting bubbles.Black explained that fraud by a financial company usually involves the company:
1) Growing like crazy
2)
Making loans to people who are uncreditworthy, because they’ll agree
they’ll pay you more, and that’s how you grow rapidly. You can grow
really fast if you loan to people who can’t you pay you backand
3) The use of extreme leverage.
This combination guarantees stratospheric initial profits during the expansion phase of the bubble.
But it guarantees a catastrophic subsequent failure when the bubble loses steam.
And
collectively - if a lot of companies are playing this game - it
produces extraordinary losses (more than all other forms of property
crime combined), and a crash.In other words, the companies
intentionally make loans to people who will not be able to repay them,
because - during an expanding bubble phase - they'll make huge sums of
money. The top executives of these companies will make massive salaries
and bonuses during the bubble (enough to live like kings even even if
the companies go belly up after the bubble phase).And since honest regulators would stop this fraudulent activity during bubbles, the corruption of regulators ensures wild bubbles and the subsequent crashes.
Of
course, the types of fraud described by Black in the S&L, Enron
and 2007 meltdowns are not just for the history books. Unless stopped,
they will continue and will be the cause of the next crash.
Indeed,
Austrian economists stress the need to minimize "malinvestments"
(investments made in response to faulty signals). The Austrians
stress that artificially low interest rates can send false signals to
investors. That is obviously true.
But criminally dishonest
behavior by private corporations and traders - such as high-frequency
trading, quote-stuffing, front-running, control fraud and accounting
fraud - does the exact same thing. If there is rampant fraud, collusion
or book-cooking, faulty signals will be sent.
Moreover, the type of radical concentration of wealth which comes from criminally manipulating the system itself destroys democracy and makes a mockery of our legal system.
Freedom of the market versus basic regulation of fraud is a false dichotomy. A free market and laws against criminal fraud are both necessary. Indeed, they are interrelated and mutually self-reinforcing.
Even Richard Posner - probably the leading proponent over the course of
many decades for removing the reach of the law from the economy - has
now changed his mind.
Whether you follow Keynes, Friedman, Mises and Hayek, or other economists, we all need to implement a little of the Austrian economic wisdom about preventing bubbles, and of the American legal wisdom about cracking down on fraud, breaking up the too big to fail banks using antitrust laws, and imposing accurate accounting and full disclosure requirements (see this, this and this).
The economy will not recover unless we do.
- advertisements -
I don't want to implement my "better world" at the point of a gun more than you do.
All I am saying is that if you want a society without a state it will also have to be a society without property rights.
What corrupts voluntary arbitration in a society without a state are the property rights, or better the disequilibrium that result from them.
Rothbard talks about the wonders of private arbitration in the past when they weren't even enforced by a court of law. But they were never between the rich merchant and the starving employee. They were only amongst peers, merchants against each other or shippers amongst each other. He just basically forgets that conflicts can arise between merchants and starving employees.
I don't want to implement my "better world" at the point of a gun more than you do.
How will the regulations you desire be enforced?
Exellent post, thanks.
You're welcome. If you haven't done so already please consider folowing the link to the full article. In addition to arbitration Rothbard discusses anarcho-capitalist implementation of defense and protective services.
http://mises.org/daily/2429
Crockett
Private arbitration requires honor and integrity for all parties. It works with many people but our criminal banking class (if you were stupid enough to believe me then you deserved to have me rape you) is not going to arbitration when they own the courts and the politicians.
Justice in America is not affordable.
In the scenario presented by Rothbard there are no politicians to own and arbitration is offered by competitive entities in a free market.
You are correct in saying that criminal bankers are currently in league with politicians and that they use the power of government to perpetrate and conceal fraud. What you need to realize is that that is the sole purpose of government and it is only toward that end that government exercises its tools of legislation, regulation and enforcement.
Government is the problem. Only the individual is sovereign.
The idea of private volontary arbitration between the rich merchant and his starving employee is a sick joke
't worked well in the middle ages, especially for the merchants
Your Dickensian pathos ignores the fact that "A Christmas Carol," is purely a work of fiction. Anyone who uses Tiny Tim as a political platform will find he has no legs on which to stand (pun intended).
When you're ready to discuss reality come around and try again.
You mean Scrooge can't exist in your brave new Rothbardian dystopia?
If Scrooge didn't exist then Bob Cratchit would have no income at all and Tiny Tim would go belly-up in a matter of days.
But that's what you want, isn't it? The more misery that exists in the world, the easier it is to lure innocents into your spider web of a safety net.
Rothbard simply forgets that conflicts can arise not only amongst merchants, but also between merchant and starving employee. The former can be resolved through private arbitration (and are being resolved in such way in today's statist construct). The latter obviously not.
What about conflicts between employees and starving merchants?
When someone starts a business they must lay out a lot of cash before they see a penny in profit. Sometimes this process takes years. And all during that time the business owner must pay the expenses which include wages paid to the employees.
But I guess that doesn't fit your melodramatic storyline. Should the government crack down on these greedy employees? Or should the employer and the employee simply be allowed to come to a voluntary arrangement which is mutually agreeable to the participants involved? What makes you so interested in bringing a third party into such an arrangement other than a desire to make a cut off both sides of the transaction while contributing absolutely nothing to the productive output of the enterprise in question?
Thanks, very insightful passage ... well worth reflecting on ...
My pleasure; credit for any insight going to Mr. Rothbard, of course.
I enjoy reading your posts as well.
Very nice work. Thank you, especially, for pointing out the false dichotomy.
GW, love your work.
Just a correction to your first paragraph - Steve Keen is NOT an Austrian economist. He's actually a Post-Keynesian economist:
http://en.wikipedia.org/wiki/Steve_Keen
http://en.wikipedia.org/wiki/Post-Keynesian
His major influence was Hyman Minsky
http://en.wikipedia.org/wiki/Hyman_Minsky
Thanks, fixed ...
You're most welcome!
Free and Freedom are meaningless unless you answer free from what? Fairness? Prosecution? Consequences of deception/cheating/stealing?
Perhaps your view communicates better as:
A transparent market is possible only with vigilance and active monitoring from above, [as in effective regulation].
Therein, the free/freedom nonsense is bypassed. And so is "nation of laws" silliness.
Can transparent be improved upon?
The astute Wm. K. Black [Best Way To Rob A Bank Is To Own One] explains it well at:
http://www.nakedcapitalism.com/2010/08/william-black-theoclassical-law-a...
Free and Freedom are meaningless unless you answer free from what? Fairness? Prosecution? Consequences of deception/cheating/stealing?
Perhaps your view communicates better as:
A transparent market is possible only with vigilance and active monitoring from above, [as in effecive regulation].
Therein, the free/freedom nonsense is bypassed. And so is "nation of laws" silliness.
Can transparent be improved upon?
Not really, we just need to return to a gold standard.
Once obligations need to be repaid, rather than rolled over, fraud will not 'pay'.
Very nice work George. The real problem is enforcement. This is across the board now. Well, unless you run counter to the establishment in power, then you get hammered. I am not sure this is a solvable problem, but keep after it. Someone has to take the bastards on.
LINES OF THE HAND (THE BANKER)
http://williambanzai7.blogspot.com/2010/09/lines-of-hand-banker.html
Judge Posner said this last year ""If you're worried that lions are eating too many zebras, you don't say to the lions, 'You're eating too many zebras.' You have to build a fence around the lions. They're not going to build it."
Quite a change of heart by the true believer.
As for the bankers, like the scorpion who stabbed the frog, it's in their nature.
The American Chamber of Commerce is a nest of cronyist Taliban.
If the lions eat too many zebras and have recourse to no other food supply then the population of lions will dwindle allowing the population of zebras to rebound.
yeah, but WHO is left to "crack down on the fraud" and enforce "the law" that is not already working for the criminal oligarchy? That's what I want to know.
if public sentiment was not hijacked by the likes of Fox news which says all govt is all bad all the time, the concerted will of the people could root out corruption.
If your country was corrupted by the Mafia, do you think you can clean it up without some sort of democratic movement/govt/state control exerting itself...all we have to do is elect people the pledge to fight corruption and hold them to it, but instead we flip back and forth between Dems and Repubs, both of which are bought off. Until we wake up and fight it in an united manner, we will be ruled by crony capitalism and a corrupted state.
What would you do if your local police force was corrupted by the biggest business in town or corrupted by a drug cartel? Its not easy, but a population can fight this.... but the solution is not reliquinishing power to rich businesses....We simply have to elevate people from both sides of aisle that are committed to equal enforcment of the laws and who are not bribable and have proven this by their actions, like William Black who was a good regulator in Reagan admin.
Government courts and the SEC are not part of the free market.
Consider that if no courts or SEC existed in the beginning, then various banks, exchanges, etc. would not have been considered safe by those without inside information, and thus the average person would not have participated in the stock market for example. Therefore, the various financial institutions would have said to themsleves, "Hey, if we all jointly formed an independent consortium to maintain transparency, stability, and accountability by regulating, investigating, auditing, prosecuting us, etc., then far more people will be willing to trust us and do business with us."
The reason the government version doesn't work is because we all thought that it was maintaining transparency, stability, and accountability - but it wasn't.
Unlike private consortiums, government can hide its fraud because it has a monopoly on the money supply, but if financial institutions could market competing currencies ...
Unlike private consortiums, government can hide its fraud because it has a monopoly on the court system, but if there were competing court/arbitration systems ...
If we have to live with a government solution - and we do - I am beginning to think that only a really huge increase in transparency will work - perhaps something like requiring every Congressman to wear a device that sees and hears everything he hears and sees and everything he says and does.
and if there were no democratically controlled policing, your private consurtiums would never get bought off and corrupted, only govts can be bribed? Its a bit like saying the local police are corrupted, so we should all hire private security guards and when there are disputeds amoung citizens, the private guards can duke it out...a strong clean govt with checks and balances along with a strong clean private market is our best chance, weak goverment or no govt means someone other than the people rule, someone with the most money, someone with the most physical power, they will form cartels and monopolies, and bribe the private consortiums....its all about exerting checks and limitiations and balances and having a population comitted to the equal protection under the law and all living by the rules of a democratic deteremined constitution
and if there were no democratically controlled policing, your private consurtiums would never get bought off and corrupted, only govts can be bribed? Its a bit like saying the local police are corrupted, so we should all hire private security guards and when there are disputeds amoung citizens, the private guards can duke it out...a strong clean govt with checks and balances along with a strong clean private market is our best chance, weak goverment or no govt means someone other than the people rule, someone with the most money, someone with the most physical power, they will form cartels and monopolies, and bribe the private consortiums....its all about exerting checks and limitiations and balances and having a population comitted to the equal protection under the law and all living by the rules of a democratic deteremined constitution
The SEC protected frauds like the Big Banks, Corps and Made-off and prosecuted small business. Now Atlas Shrugged...
give george washington his 3d term!
I've said it before and I'll say it again, you don't play a football game without rules, regulations and referees. Why should the capital markets be any different...
All this will begin to change when every court in the land says, "We do not accept cash in payment for crimes and misdemeanors. Time only to be tendered."
Pah. Free markets and the 'rule of law' and 'democracy'? PLEASE.
Democracy is gang rape: those who do not wish to fund the pet projects of one or other arm of the political class, are forced to do so under pain of expropriation, incarceration and - in extremis - death. 50%+1 (of those who vote - not of the population) means that you get to ass-rape everybody. I never signed up for that (I don't vote - because gang rape is wrong and I would always prefer 'none of the above'. Every dollar taken from me is taken without my consent, and is thus a dollar stolen.)
The 'rule of law' is the use of the State's armed goons and robed apparatchiks to enforce the current whim of the aforementioned political parasites: if they outlawed redheads tomorrow and told their droogs to shoot all redheads in the face, the droogs would be 'enforcing the rule of law'. They might decide later that they changed their minds (as they did with alcohol prohibition and countless other things). Don't pretend that it's anything other than a fiction.
A 'free market' includes a non-zero amount of fraud; reputation mechanisms ought to naturally limit the extent to which a fraudster can make hay... but in a MANAGED market, the fraudster can make hay in perpetuity if he has bought political protection.
People who keep bleating 'there oughta be a law' are begging the State - the collection of the most parasitic and power-hungry of our species - to act in loco parentis ... protecting we poor lambikins from the naughty man. The primary reason that the naughty man has the reach and scope to commit fraud on a mind-boggling scale is because he is part of an OLIGOPOLY... granted by the very scumbags who make the laws.
A free market does not require laws against fraud; all that is required for fraud to become a suboptimal strategy, is for consumers to perform adequate due diligence (buying a house with no money down and 105% mortgage based on lies about their income ... well, that doesn't count as 'due diligence'; nor does buying GS's 'Conviction Buy' list). If that due diligence is beyond their ken, they ought to keep their cash in their pocket or seek advice.
FFS.
Cheerio
GT
PS... I know this will invitge the usual chorus of 'anarchy=chaos' numpties; nobody pretends that anarchy=utopia, but you could afford to insure against the putative "bands of marauders who will get you under anarchy" if you were getting to keep $1 of every dollar you produce (instead of 50c, less the requirement to set aside for future government debt payments).
Boy, GW served you up a meatball, and you smacked that sucker out the park.
Good article, GW, as usual--exposing the maggoty underbelly.
But how can anyone have any faith in anything top-down? You made a great case that in spite of every regulatory safeguard, the system will find a new oriface to blow a bubble out of.
The more we endow some singular, central authority with the powers to fight fraud, the fraudsters corrupt, contravene, and covertly subvert that authority.
Black brought prosecution against thousands during S&L, and yet this last uber-fraud-laden mega-debacle has yielded a big, fat goose egg.
And billions and billions in hush, er. . ., bonuses. Going only on political contributions disclosed, we already know the fraudsters have two of the three branches in their pockets, and now even the Supreme Court didn't want to be left in the cold, granting corporations full-tilt purchasing power over our government. We just as well set up an exchange, so we can watch our representatives get traded like equities.
Yeah, don't think bolting down the deck chairs is going to do anything to steer the ship.
+10 Well said Geoff.
part of the problem with your regulation "free" market is that it makes the only rational response to do whatever is necessary for the individual to profit, i.e. the CEO works in the CEOs best interests, not necessarily the companies. Fraud becomes the only rational response to the market itself: the fraud is self-reinfircing, and a market crash is inevitable. The only issues are when, and how large?
This makes no sense. Why would a typical CEO commit a fraudulent act which crashes the enterprise by which he makes a living in an effort to enhance his own self interests? Is losing his position beneficial to him? Would his reputation for crashing companies lead other companies to hire him in the future?
People do have the ability to measure long term gains against short term gains. Sometimes people fail in this regard and kill the goose that lays the golden eggs or in a more pedestrian fashion some guy will hold up a liquor store for 50 bucks and get 7 to 10 years in the pokey. But most people are smarter than that. If they weren't you'd already be dead.
The typical CEO probably doesn't want to commit fraud, but what about the many that do? When there are no consequences for your actions then what happens? Most people don't want to rob banks but what about the ones that do, should they not have consequences. This is a common sense principle, and I think most economists lack this character. When a CEO is in a situation where the company is going to take a big loss while his competitors are making huge profits and expectations exceed reality then the reality is hard to face. Shareholders will be disappointed and he will be viewed as a failure. Maybe he is thinking well just this one time I can hide the losses or overleveraging and next quarter I will make it back. Then next quarter is worse and it goes on. Another scenario is AIG and Lehman when they sold CDOs which was viewed as a safe investment, and probably figured they would never have to pay out. They insured some garbage (MBS) and were overleveraged.
What if the CEOs were facing prison sentences and actually accountable for their actions. After all they do get paid an exorbitant amount of money with bonuses and benefits. This is what is missing in the financial and political world. Accountability! How do you have accountability with no consequences? Instead of individuals being accountable we have corporations being held accountable then paying fines after all you can't put a corporation in prison.
The government has too many useless policies and regulations on this I agree, but there is good regulation which isn't enforced. If everything is left to the integrity of the market or the people running it, then others will suffer the consequences instead of the culprits.
What if the CEOs were facing prison sentences and actually accountable for their actions. After all they do get paid an exorbitant amount of money with bonuses and benefits. This is what is missing in the financial and political world. Accountability!
...there is good regulation which isn't enforced.
Regulations exist for no other reason than to protect the very people whom you (and I) would like to see held accountable. It is no accident that rather than being held accountable almost everyone whose actions led to the continuing economic crisis have benefited from that very crisis.
Banker bonuses and more power for the Fed were (some of) the goals all along. That is what government does.
So what would be your solution? No government or regulation. BTW I think the politicians need to face prison sentences more than the other sectors because without them none of it would be possible which is your point in a way. Having said that, there are no consequences for the politician's and government's fraud and treason and when that happens greed and pride rule. There is a fine line between government and too much government. IMO
Rick64 said: So what would be your solution? No government or regulation.
Government is a solution to no problem other than how to delight and amuse sociopaths. There are forms of regulation which supersede government and do not require the individual to surrender his sovereignty to some supposedly better and smarter master.
Rick64 said: Having said that, there are no consequences for the politician's and government's fraud and treason and when that happens greed and pride rule.
Show me an animal the exhibits no greed or pride and I will show you somebody's lunch. The individual's desire for one's own success and his resolution to defend himself are his only shields against a world of predators, human or otherwise. Looking out for one's self interest and the needs of one's friends and family is a virtue. Those who would try to encourage you toward self sacrifice are not your friends.
Show me an animal the exhibits no greed or pride and I will show you somebody's lunch.
Thats why we need consequences.
It is precisely through the peaceful co-operation of the market that all men gain through the development of the division of labor and capital investment.
You've got to be kidding. Ok what about when the stockmarket wasn't regulated before the Great Depression. There was no SEC ect..
So the government regulation is the jungle, and the market with no regulation isn't a jungle. That analogy just doesn't make sense to me.
In the free market, on the other hand, one man gains only through serving another though he may also retire into self-sufficient production at a primitive level if he so desires.
Totally idealistic. You can gain by taking advantage too as is often the case.
On the market, the charitable can provide aid, a luxury that cannot exist in the jungle.
Whether its a jungle or an unregulated market this can and does happen. Foundations are created to protect the elites wealth and they provide aid for tax deductions or personal favors. I guess this market presently would be labelled a jungle and this is happening. No regulation means no consequences which would be more representative of a jungle to me.
You've got to be kidding. Ok what about when the stockmarket wasn't regulated before the Great Depression. There was no SEC ect..
But without regulation there could be no corporations. Corporations only exist because the government grants them fictitious personhood. Don't you see how government regulation is designed specifically to support and protect the powerful special interests from which you expect government to protect us?
So the government regulation is the jungle, and the market with no regulation isn't a jungle. That analogy just doesn't make sense to me.
As individuals we control our own lives and can come into voluntary agreements with others which enhance our ability to feed, cloth and defend ourselves. Government control exists solely through a monopoly on violence and at the point of a gun. Your continued existence in such a situation depends entirely on your place in the food chain. Your individual needs or desires are not considered.
No regulation means no consequences
This simply doesn't have any basis in fact. Do you believe that if someone jumps off a roof and this activity is unregulated they will not break their legs?
All of this has been said before (and better) by Mises, Rothbard, Hoppe, Paul and Rockwell. Check them out at http://mises.org/
I will read it and discover what their solution is? From what you are saying I gather that there should be no government only free standing business with no laws or regulation. People wouldn't be dishonest or fraudulent nor would they take advantage of each other. It would be Utopia. I guess this would work until someone gathered enough wealth or power to control things, this is just the way things evolve. IMO
This simply doesn't have any basis in fact. Do you believe that if someone jumps off a roof and this activity is unregulated they will not break their legs?
You are using an analogy for the law of gravity. You don't have to regulate the law of gravity and the consequences would be broken legs.
Regulation without consequences doesn't work and if there are no real consequences then you might as well have no regulation. If there is no regulation then we are assuming that the good will overcome the bad and it will root out the problems by itself. Due to human nature I don't believe that would play out too well. There is a fine line between too much gov. and too little . The citizens should be more vigilant in fighting against too much gov..
I will read what you recommended.
Do you think it is realistic to assume that consumers can perform adequate due diligence or even distinguish a trustworthy adviser from a crook? How many "consumers" out there do you know even understand the most basic financial notions such as compound interest?
Oh I forget, the invisible hand of free market competition will always ensure that crooks and fraudsters eventually loose their business. True, but our ponzi economy is testament to the fact that the crooks and fraudsters can thrive and dominate for a very long time until the whole Ponzi collapses. Oh but I know the usual counter-argument : that absent govt interference and (non) enforced regulations, the crooks and fraudsters would have run out of business much faster. Well don't just say it, prove it. And No, just saying "in the 19th century" is no evidence when "in the 19th century" there weren't even computers nor the alphabet soup of financial instruments that have been developped freely from the inventiveness of man. Or should we just forbid the use of computers and complex financial instruments so that it may look like the 19th century? Talk about freedom.
There is no "easy solution" to this problem, and simply claiming that all will be fine as long as we have "sound money" and no Govt interference nor strictly enforced regulations (with ZERO evidence to support such claim but a string of logical deductions from axiomatic principles cooked by monetary elephants stuck in their ivory tower and myths about their own country's history ) is one of those "easy solutions" you should be wary of. Heck, they can't even agree on what that "sound money" should be. From Rothbardians and their 100% Gold based system to Feketians and their real bills doctrine, maybe we should flip a coin to decide? Oh that's gonna help...
Every day that goes by I am reminded of how Huxley was right : that those who are always on the alert to oppose tyranny systematically fail to take into account man's almost infinite appetite for distraction.
Do you think it is realistic to assume that consumers can perform adequate due diligence or even distinguish a trustworthy adviser from a crook? How many "consumers" out there do you know even understand the most basic financial notions such as compound interest?
People are not as stupid as you seem to think they are. Most folks have the understanding and ability to work hard and save for a rainy day. Before the Fed, that was all which was required of folks and by the Miracle of Compound Interest both rich and poor alike grew their nest eggs in this way.
With the advent of the Federal Reserve and its wealth destroying policies simply saving money was no longer an option as that saved money evaporates over time. Today folks are forced to seek investments which will grow their money at a rate which is greater than the rate of inflation. Recent history shows that most folks fail in this quest as could be expected.
By supporting the government and the Federal Reserve which feeds the politicians' rapacious appetites you put working men and woman into a position where they must sacrifice their hard earned savings to the twin dangers of monetary inflation and speculative investment.
Scylla and Charybdis presented less of a threat to Odysseus than your beloved government and banking cabal presents to widows and orphans. Set them free and let them return to home, hearth, a sound nights sleeps after a good days work and the security of a golden nest egg.
All they have to do is get rid of FINRA, when someone sues someone for fraud to go to a court of law so people can actually go to jail and get fined some serious coin.
Not to sound cynical, but do you mean a fine like the Goldman Sucks fine of $500 million after the taxpayer bailout of $21 billion ?
So long as the criminal banking class own all the politicians then all the laws will favor criminal activity, all the legal apparatus (including the judges) will acquiesce in the crimes, and the dying private sector middle class will continue to be gang-raped.
Another home-grown business (Caterpillar) is lobbying to keep the American government from insisting the Chinese yuan is undervalued. So how many jobs has Cat created in America lately ?
This country is so fucked. Even controlling the "message of all's well" in the Media is so bad I have stopped watching "news" on any TV Channel.
Bravo.
Too many strong laws and regulations by the oligarchy
selectively enforced by corporate government mafia monopoly thugs to destroy freedom and meritocracy.
Have you tried to open a lemonade stand lately?
GW, please listen to/read http://www.infowars.com/
long enough to praise freedom and refute corruption...