Topic: Regulation
How Dare You Want To Know What "Your" Government Is Doing! The elites want to take advantage of the current financial crisis to expand their power. We can't let them.by Darren Wolfe
(libertarian)
Saturday, April 11, 2009
In his excellent article "Bad Regulation Drives Out Good" Mr. Richman makes the point that government regulation doesn't work very well. One thing that he doesn't mention is how Sen. Charles Schumer (D-NY) is actually advocating secret government.
While describing regulatory changes on MSNBC's "Morning Joe" the senator states:
There will be a strong, quiet, hopefully more unified federal regulator. And he's gonna be tough–or she. But they're gonna be quiet. So like when Bear Stearns began to run into trouble, they're gonna call the heads of Bear Stearns in and say, "All right fellas, you're getting rid of those two hedge funds; you're gonna raise more capital even if means you have lower profitability. We're not gonna tell anyone you're doing this, but you do it or we're gonna take sanctions against you."
Why does Schumer think we need "quiet" regulators that aren't "gonna tell anyone you're doing this"? Since when is government supposed to operate in the shadows out of public view? This is nothing short of advocating an unaccountable, tyrannical, and corrupt government. Have we really sunk so low that he thinks he can get away with this?
Believe it or not, it gets worse. The senator goes on to say, "You need a tough, strong regulator, unified—no holes in the system— who sees the problem ahead of time, so they have complete transparency, they know exactly what's going on". In Schumer's dream world the government gets to know everything that private companies are doing, "no holes in the system ", while the same "tough, strong regulator, unified" gets to operate in secret! Transparency will only apply to the private sector, not the government.
The real reason for regulation is now nakedly revealed. It's not about protecting the people, it's about controlling them. As Ayn Rand wrote, "We are fast approaching the stage of the ultimate inversion: the stage where the government is free to do anything it pleases, while the citizens may act only by permission; which is the stage of the darkest periods of human history, the stage of rule by brute force."
We can't let this nightmare come to pass.
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Posted By: Jake, the Champion of the Constitution
Date: 2009-04-11 08:44:13
I wonder what Schumer would reply with if asked how many "quiet" regulators we should have? The Mao response was the most effective (that I know of) in history so far - just have all non-elites "regulate" everyone else.
I would think that Schumer's response would be that we don't need to know. Just trust them 'cuz "they know exactly what's going on". Welcome to the world of secret govt.
Daren, you make an important point: You can't have regulators applying pressure in secret.
But there is a consensus in the risk-management community (see, e.g.,Rick Bookstaber's blog) that somebody needs to be able to see across positions to detect critical imbalances that otherwise can't be observed by anyone in the market. Such a privileged entity would have to keep its information and advice secret to avoid front-running and other abuse. Schumer's blow-hard antics aside, I don't think anybody is going to allow such an entity to impose sanctions. Ideally it will alert market players to leverage and risk they otherwise might miss, but leave it up to the free agents to decide what to do with that information.
Granted, this may still be alarming to libertarians, but don't get distracted by Schumer's strawman. Look at something like http://tinyurl.com/dmx22u instead.
Thx for the comment, you bring up a good point. Unfortunately, you cling to the illusion that there is such a thing as good regulation. This myth has been debunked many times over. I would refer you to the article (Bad Regulation Drives Out Good http://fee.org/articles/goal-freedom-badregulation/ ) that inspired me to write about this in the first place.
BTW, are you the David with the same last name as Rick from PA?
And I suppose it's debatable, but I don't personally think a government "Risk Information" office necessarily qualifies as a regulator. For example, Rick emphasizes, "Marching in with a subpoena in one hand and a sixty page questionnaire in the other is not the way forward." Such a risk management function could even be done by an independent nonprofit agency, except that it's unlikely that everybody who needs to participate to make it work would voluntarily submit if not encouraged/compelled by the government.
This is somewhat of a tragedy of the commons problem: The amount that any individual stands to lose is small relative to the cost to the capital markets as a whole of derivative risks that build up across independent market agents. However, when individual agents are alerted to the existence of a systemic risk they will tend to lower their component of the risk.
I.e., it's probably not necessary to compel any market participant to do anything based on government risk information. Enough profit-seeking agents want to control their risk that mere existence of this information, and disclosure to affected parties, may be sufficient.
The problem isn't a tragedy of the commons as much as the govt's interventions. First, they control the money & interest rates by setting up a banking cartel & legal tender laws so we have to use their product. (The cause of the business cycle.) Then they impose licensing to limit entry into the financial field. On top of that people in the financial sector have to follow all the regs the govt imposes. In that scenario an independent nonprofit agency wouldn't work.
In a free banking scenario, with privately issued money & market interest rates for profit companies would rate the financial services providers a la Consumer's Reports. The major benefit is that with sound money there wouldn't be economic bubbles which are the real cause of our problems & are themselves caused by the govt's machinations.
Each of the premises you cite can cause market malfunctions. However it is also possible to have a market "crisis" without those. Elements of both the current and past crises fall into the latter category. I would recommend reading Rick Bookstaber's recent (and prescient) book, "A Demon of Our Own Design," to see how basic characteristics of advanced capital markets like leverage and tight-coupling alone can precipitate a market crisis.
I.e., even if we move to a libertarian utopia with truly free capital and currency markets we will likely continue to experience devastating market crises unless some government-like entity can intervene in the manner I described to aggregate and share information.
It might help to think of the proposed risk information manager as a weather service for markets, with the critical distinction that few of the large market participants will voluntarily allow weather sensors on their territory to share information with others. Weather sensors, when aggregated across large areas, allow us to predict and avert weather catastrophes. Likewise, risk sensors that can be aggregated at the market level will allow people to predict and avert market crises.
You seem to be underestimating the power, effect, & pervasivness of the govt's interventions. I don't see what would cause market crises in my libertarian dream world. Some sectors of the economy would suffer for various reasons, but overall a free economy will grow. For example, the flint arrow head makers would lose their jobs as the technology became obsolete. They might then go out & learn how to make stone countertops. Alternately, they might join the "enemy"& make iron arrow heads. The point being that there is no reason to think that there will be systemic problems.
The weather catastrophe analogy is a good one. The only thing is that the catastrophes are the govt's actions. The idea of a govt agency to protect us from them is very much the fox watching the henhouse.
Leveraging is a good example. It was the govt through its creation, the Federal Reserve, that pumped money, artificially lowered interest rates, & delibarately set out to get people to borrow rather than accumulate their own capital that set that disaster in motion.
"The problem isn't a tragedy of the commons as much as the govt's interventions. First, they control the money & interest rates by setting up a banking cartel & legal tender laws so we have to use their product. (The cause of the business cycle.) "
Actually, business cycles (i.e., bubbles and busts) occurred long before we had central banking. The money supply can expand and contract in the absence of a central bank even when money is based on a hard metallic standard.
Let me give you a simple example. Suppose you have an idea for a new business, but you don't have enough capital. I have money that is just sitting there. So you come to me and ask to borrow it, offering to pay me interest for it. I agree, and lend you the money for a certain period in exchange for your IOU. However, since the future is uncertain -- I could have a need for the money before the note matures, while you need the assurance that the loan won't be called before then -- you make the note payable to "the bearer" rather than to me personally. Now, suppose, sometime before the note matures, I decide to buy something. I don't have any cash, but I do have your IOU, and since you have a reputation for repaying your debts, the seller is willing to accept your note in payment.
What may not be quite obvious here is that the same money has been put to work twice. During periods of optimism, credit is considered almost as good as cash, and this is inflationary. One of the arguments for establishing central banks in the first place was to prevent the overextension of credit during periods of excessive optimism.
When we try to claim that under a free market business cycles will not occur we come across as silly and ignorant. Of course they will occur. The correct argument should be that under the free market, when a bubble inevitably bursts, the ensuing recession/depression will not last nearly as long as it would if the government or central bank tried to tinker with things.
Thx for the comment, though now I will debunk it. The only way for your analogy to work is for the creditor to counterfit IOUs so that one debt generates 2 or more IOUs. This is what happens with fractional reserve banking. A $100 deposit generates $1000 in loans. (The ratio may not be the actual one banks use, but the example works.)
Absent the legal counterfiting (fractional reserve banking) the business cycle won't happen.
Actually, my analogy is an example of "fractional reserve banking". Banks lend money they don't think they'll have an immediate need for. Here's what happens when a loan is made: If I have idle cash on hand, say $1,000, then that cash is an asset to me. Now I lend it to you in exchange for your IOU. Now you have $1,000 in cash -- an asset to you (you also have a note payable, a liability, to balance that asset), and I have your IOU, which is an asset to me. Society's supply of liquid assets has now increased by (approximately) $1,000. Since the IOU is "almost" as good as cash, I can then use it to buy something. The seller now has the IOU. In the meantime, you have spent the cash I loaned you. The people getting that cash now have spendable liquidity which they can lend or spend, and the cycle repeats.
This is how debt gets monetized.
Fractional reserve banking existed long before we ever had central banking. In fact, the big argument for central banking was to prevent it from getting out of hand. During periods of optimism, bankers would come to believe they could safely reduce their reserve ratio. When the bubble burst, and people tried to repay their debts, they would find they had insufficient reserves to meet withdrawal demands.
As long as people will accept IOUs as payment for purchases, the money supply can expand to a multiple of the value of the monetary base. In modern economies, the monetary base consists of bank reserves plus currency in circulation, but the principle would hold even if the base consisted entirely of gold. The money supply contracts when lenders call their loans and when borrowers repay (or default) on their loans.
Fractional reserve banking is as old as the history of banking itself, and we know that business cycles have occurred since at least the time governments began collecting economic statistics in the 16th century. Central banks did not appear until much later.
The only way to absolutely prevent expansions and contractions in the money supply is to outlaw the use of IOUs to pay for purchases.
But this doesn't sound very "free market", now, does it?
Your comparing IOUs to fractional reserve banking is off the mark because the IOU is one to one with the debt in your example.
The real key is "As long as people will accept IOUs as payment for purchases". That's where legal tender laws come in. Without them IOUs won't be accepted, or only accepted at a fraction of face value. The opposite of the multiplier effect & an effective means of keeping things from getting out of hand.
First of all, money is whatever people will accept as money. There are two ways to trade: by trading goods for goods, or by trading goods for a claim to goods. That's what money is. Money, in fact, is itself an IOU of sorts, because by accepting money in exchange for your goods or labor, you are really only accepting a claim to goods in the future. The only requirement is confidence that the money you receive for your goods will be accepted by someone else at a later date.
During the Vietnam War, soldiers serving in Vietnam were not paid in dollars, but in military scrip which, theoretically, could only be used in military exchanges. GIs going on R&R had to exchange their MPCs for real dollars when they left the country, (because the scrip was worthless everywhere else) and then had to turn their dollars back into MPCs when they returned. The purpose of this was to prevent inflation in the Vietnamese economy, which would have resulted from a large influx of dollars.
Now, the interesting thing about this is that MPCs became accepted as currency in the local economy -- i.e., outside the military bases. In fact, Vietnamese merchants preferred payment in scrip to payment in piastres (the Vietnamese currency) because MPCs held their value much better than piastres.
Why did this happen when scrip, theoretically, could only be spent in military exchanges? Because many Vietnamese worked at these exchanges and had shopping privileges there. and could buy stuff for resale in the local economy. Also, there was a thriving black market. GIs could make purchases at the exchanges and sell them in the local economy. So, ultimately, the scrip was redeemable.
A modern economy needs some kind of money. Trading goods for goods -- i.e., bartering -- is just too inefficient. So, whenever you start trading goods for claims to goods, you are opening the door to inflation.
You say that without legal tender laws, IOUs won't be accepted, or only accepted at a fraction of their face value. I beg to differ. A check or bank draft is an IOU, albeit a very short-term one, and it trades at 100 percent of face value. All legal tender laws do is provide a standard that allows a court to rule that a debt has been satisfied. Without legal tender laws, each purchase or sale would require a second contract specifying the medium through which payment would be made.
The problem is not fractional reserve banking or legal tender laws. The problem is that the power to manipulate the money supply has been vested in an authority (the Federal Reserve) that is answerable to no one, and that they use this power to try to control the level of economic activity.
BTW, I haven't said this before, but I thought your main article was right on the mark. Government regulation of the economy is bad enough. But, the thought that this regulation will be carried out behind a veil of secrecy is downright scary.
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