Time to Ease Up, John & Barack
It’s in many ways a distant memory now, but on June 25, 2002 the communications firm Worldcom failed. The day is presently notable because Worldcom’s failure insured the passage of the much-reviled corporate-governance legislation, Sarbanes-Oxley.
When it came to Sarbox, the press and politicians seemed to join hands in their glee. President Bush described it as “the toughest piece of anti-fraud legislation since FDR.” More broadly, the press and the political class embraced legislation that would make companies more “transparent” for the professional and individual investor alike. Corporate America would “finally clean up its act.”
Happily, stock markets are most useful for pricing in the future, and with Sarbox’s passage a near certainty, the S&P 500 proceeded to fall nearly 175 points over the next three weeks. The markets of course knew what the political class did not, that the “only insecurity which is altogether paralyzing to the active energies of producers is that arising from the government.” John Stuart Mill wrote the latter in the 19th century, and as John McCain and Barack Obama have seemingly found common ground when it comes to their dislike of Wall Street, they would be wise to heed Mill’s words.
Indeed, in the aftermath of the government’s nationalization of AIG last week, McCain and Obama each sought an easy target. Rich and greedy Wall Street predictably served as the punching bag for two candidates whose combined private-sector experience makes them impressively unqualified to comment on anything economic.
But comment they did, and their words were largely interchangeable. Obama said “Washington wasn’t minding the store” while “CEOs got greedy”, whereas McCain said, “We’re gonna fight, we’re gonna fight the greed and irresponsibility on Wall Street.” He added that he’ll “reform Wall Street and fix Washington” since he’s “taken on tougher guys than this before.”
So while there are doubtless many things factoring into the present stock-market malaise, it says here that it in no way helps market psychology that the two men seeking the presidency are in a bidding war over who can be “toughest” when it comes to the regulation of our financial system. Obama backers shouldn’t be surprised by his populist message, and when it comes to McCain partisans, suffice it to say, they were surely warned.
From here, it would be easy to bash government, and correctly point out that from its oversight of everything from the ‘80s S&Ls to Hurricane Katrina recovery to the nation’s budget to banks today, that it is massively unsuited to regulate anything. To state the obvious would be to shoot fish in a crowded barrel. Simply put, “government oversight” is as oxymoronic a term as “virtuous streetwalker.”
More realistically, we should say that government regulation isn’t so much bad for the under-qualified bureaucrats that would engage in such a fatal conceit, but for government possessing all the wrong incentives to do a creditable job. We could attempt to staff Washington’s regulatory bodies with the best and brightest, but even if we did, as government officials working without all-important market signals, they would necessarily do a poor job due to the lack of financial discipline that comes with working in an actual marketplace.
It should also be said that government is shackled with another major disincentive in that unlike private-sector businesses that are rewarded for solving problems and doing more with less, government officials put themselves out of work if they actually solve a problem. With government “success” largely a function of increasing one’s turf, budget and employees, there exist few incentives to make that which isn’t working, better.
So while McCain and Obama promise more regulation despite its impressive record of only discovering problems after the fact, the better answer would be for one or both to recognize that markets regularly do the regulating. Indeed, just as our federal minders were late to Enron and Worldcom, so were they late to the recent crises that some say have the financial world on the brink of collapse.
Markets and the bold people who trade in them discovered Bear Stearns and Lehman Brothers, and they’ll surely expose future mistakes by commercial entities. In short, governments will forever regulate yesterday’s problems in ways that will bring us harm. That is so because economic growth is always and everywhere the result of productive work effort. Taxes and regulation (think Sarbox where innovative CEOs were forced to act as accountants) merely put restraints on the latter, while bailouts will slow any economic recovery for assets not reaching market-clearing levels that will bring the intrepid, value-oriented investor out of the woodwork.
And if we ignore how regulation saps the productive energies of entrepreneurs, we have to also remember that it is the regulated that frequently fail in ways that require taxpayers to come to the rescue. To confirm the latter, ask yourself how many bailouts taxpayers have funded of mostly unregulated Silicon Valley firms versus heavily regulated banks. The contrast is stark, and with good reason.
Indeed, many of the regulatory bodies that exist today do so at the pleasure of established firms. It is regulations that many companies hide behind as “evidence” that they’re conducting business within the guidelines set by the very bureaucrats least qualified to impose rules. The existence of regulation simply allows firms to deploy investor capital in the most risky of ways allowable, and with the regulator ever eager to be seen doing something once problems arise, the existence of that same regulation makes bailouts more likely so that the government in power can save face.
J.S. Mill concluded that “laws cannot be said to afford protection to property,” but that “fear of exposure” will force companies to act in ways we like. In other words, markets will continue to expose economic miscreants as opposed to more regulation that merely insures more of the same.