Lawmakers can dismount from their soak-the-rich hobby horses. Reality curtails business excesses; no need for help from Congressman Barney Frank.
The free marketplace has chastised hedge fund managers more effectively than any taxes or regulations Congressional socialists might have concocted.
The Wall Street Journal in its July, 27, 2007, edition reports:
As flagging debt markets bring the private-equity boom to a halt, the likelihood that Kohlberg Kravis Roberts & Co. will have to postpone its initial public offering is increasing.
Jeff Arricale, who runs a financial-stock mutual fund for T. Rowe Price Group Inc., said he doubts KKR will be able to find enough investors to pull off an IPO if current market conditions continue. "Sure, at some price it is possible to do it, but I'd be shocked if they end up doing this IPO."
Five blocks south of KKR's New York headquarters overlooking Central Park, rival firm Blackstone Group LP is learning just how tough this market has become. Shares of its own initial public offering — priced just over a month ago — are now 17% below their $31 debut, and closed yesterday in 4 p.m. New York Stock Exchange composite trading at $25.70, up 19 cents, or 0.7%.
In recent weeks, news articles have described the decline in home sales and the back-up effects on other sectors of the economy: junk bonds, LBOs and hedge funds investing in those securities and various forms of derivatives. Heading a very lengthy list of troubled entities was Wall Street brokerage firm Bear Stearns, whose two hedge funds, with $10 billion in funds under management before the blow-up, are now worthless.
Led by Massachusetts (where else?) Congressman Barney Frank, lawmakers have been imitating a pack of hyenas on the prowl, eagerly surrounding hedge funds and circling for the kill.
Stirring their populist, class-warfare hormones was the huge personal profits made by hedge fund managers like Blackstone's Steve Schwarzman. At the IPO price for Blackstone when it recently went public, Mr. Schwarzman's net worth ballooned to a reported $7.5 billion. Many other hedge fund managers also ranked among the most highly compensated individuals in the country.
This display of income inequality was too much for Congressman Frank. Under the Keynesian and socialist economic doctrines of the liberal-Progressives, business profits can only have been made by stealing from the workers. Thus the Feds had an obligation to snatch those profits from hedge fund managers and return them to the labor unions. In a good socialist state, everybody is equally poor. (See "Economic Class Warfare."
In the real world, the capitalist free-market works far more decisively and effectively than ham-handed government regulation and taxes. As I wrote in "The Economics of Liberal Values:"
The critical point is that the capital necessary to start and to run a business is separated from the business people. Businesses want money to expand. Lenders and investors want to lend money to businesses only when they can be reasonably sure of getting it repaid, plus a profit reflecting the risk incurred in lending and investing. Capitalism thus has a built-in regulator, a system of internal checks and balances.
To get money, businesses must first convince hard-eyed lenders and investors that a market exists for their products and that they can satisfy that market’s demands. Lenders and investors have strong incentives to avoid bad loans and investments: they lose their jobs and their own money if they don’t.
Contrast this with the never-ending torrent of Federal spending to buy voters' loyalty.
. . . Businesses approved by the state-planners don’t have to compete with rival businesses to get funds. They get funding directly from the National State, in accordance with a master plan for the economy. Individuals play no role at all in the process, since their product preferences have no effect. Planners make all the decision about what is produced, how much of it, and where it is to be delivered. Grossly inefficient and outmoded business enterprises, for that reason, survive decade after decade in a socialist economy.
viewfrom1776@thomasbrewton.com
http://www.thomasbrewton.com/
Read more articles by Thomas E. Brewton
Normally, as a conservative, I would agree with the whole "free market polices itself" philosophy. But, as 19th century railroad barons and 21st century oil companies are proving, that pie-in-the-sky-with-rose-colored-glasses thinking needs some revision.
There are times when government needs to intervene into business affairs. I don't think, like liberals, that it needs to be constant, but at times it needs to be done. Because when businesses start hedging on a monopoly, such as with oil companies, and they provide a necessary commodity to the public (like health care), business tends to be, shall we say, over-self-endulgent.
Comment by daverock | August 3, 2007
Dave,
Admitting there are instances when government is necessary to 'regulate' the abuses of commerce is not the same as establishing a general principle whereby government has a ‘right’ to regulate all commerce, even as to ‘how much profit’ can be taken. As between citizen's, government's function is to tame the fights that go on between business and business, business and its customers, and business and its employees; arbitrating no more than is necessary to maintain good order, not to deciding what is most equitable. The objection to Frank and his ilk is they set themselves up as judges over what constitutes a ‘fair’ profit and what unfair.
Large profits signal the entrepreneur he is doing the right things, those that are best rewarded. Frank’s demand that government intervene to restrict profits is ruinous to business; it kills the incentive to market a superior product because it deprives business of the extra profit a greater effort brings. Hillary too, of late, has been demanding we seize the “unfair” profits of big oil. Brewton alludes they want to return these ‘ill-gotten gains’ to labor, but they really mean to pad government coffers with them the better to peddle their own influence. We won’t see one penny of it ‘returned’ to the employees of companies directly involved, as none of those are sufficiently ‘poor’ or ‘disadvantaged’. If any of it does manage to make its way to labor unions, it still will not reach to the level of actual workers.
For a long time, our government sided with business against labor. Beginning with Hoover and Roosevelt, government has sided with labor against business. Both exceed government’s mandate. For a better take on the extent of this mandate, read Locke’s “Second Treatise of Government” and Hayek’s “The Road to Serfdom”. Also see http://www.mises.org/rothbard/mes/chap12a.asp#4._Ultility_Ex_Post.
Comment by Robert W. Stapler | August 3, 2007
Bork & Troy: http://www.constitution.org/lrev/bork-troy.htm
“…the purpose of the Commerce Clause was to remove barriers to interstate commerce … created by discriminatory or inconsistent state laws.”
Meaning it and similar clauses were not included with the purpose of making the federal government all powerful or to get into the business of regulating business itself. They were granted to overcome some of the problems associated with merging thirteen independent, sovereign, and mutually suspicious states into a stronger association. The commerce clause, specifically, was included to enable business to operate freely across the breadth of the union, without intruding on internal operations of the states. The entire argument on which its inclusion rests, therefore, was the need to reduce barriers to commerce, not erect new ones or exert controls; and it is this which defines the intent of the provision, if not its operation.
http://www.home.earthlink.net/~zappo/apgov/fism.html (interesting discussion of the growth and stages of federalism in U.S.)
https://www.cato.org/testimony/ct-tl051199.html (an argument for limiting commerce clause to its original scope)
http://volokh.com/posts/1166801183.shtml
http://www.econlib.org/library/YPDBooks/Lalor/llCy1011.html (commerce clause as applies to tariffs; regulation of foreign commerce is an enumerated power)
Some [flawed] arguments supporting Congressional power to regulate: http://www.llsdc.org/sourcebook/docs/CRS-RL32844.pdf (Congressional self-justification, depends heavily on the authority of the courts and practices government has gotten away with - as if getting away with something makes it valid)
http://www.law.uc.edu/lassiter/antitrust/handout04.pdf (re: trust busting)
Comment by Robert W. Stapler | August 4, 2007
It is obvious that legislators who want to redistribute wealth are operating right out of the Karl Marx handbook. Without question they are supporters of the socialist or communist agenda and anti-capitalist.
The joke is that they leave the door wide open to exclude themselves and their friends from the same rules they demand everyone else abide with. That is one of the reasons you have a tax code in this country riddled with loopholes and exceptions for certain favorite people. Certain tax reform proposals, such as the Fair Tax, will never get off the ground exactly because they are fair; the loopholes and exceptions would disappear and the anointed ones would be in the same boat as we serfs.
The US government has extended itself into areas it was never intended to. Don't expect this to change. In fact expect to see this trend continue because that's the nature of government. It is only through a vigilant and vocal citizenry that government is limited.
As for government involved in business there are only some areas where such involvement would seem necessary.
The first of course is an industry that is involved in national defense.
The second is monopolies in public utilities. But this has to be watched closely to avoid chicanery by the government itself in the awarding of the monopolies.
The third area would involve food and drug monitoring. The reason here being simply the health and safety of consumers. However, we have seen how corruption and politics have negatively impacted this area. The FDA has both overstepped its bounds for political purposes and also failed to do its monitoring job properly by loosening standards for the same reasons and also corruption.
The free market generally takes care of itself. This is not to say it is perfect nor to say chicanery doesn't occur. But it certainly does a better job of self-regulating than government ever did. Regrettably, government only serves in most instances as a bad example.
Comment by NHGrouch | August 5, 2007
Exceptions to the Rule?
NHGrouch makes an exception for national defense and I am inclined to agree, but only up to a point. In the case of a bona fide defense contractor there is no question the government must have a say in the running of its business, because, if it were otherwise, lives would be lost and our enemies handed victories. However, there is also a tendency by government to define industries it wants to control as ‘strategic’ when their defense capacity is, at best, supportive or marginal.
Roosevelt gives us the classic example of this when he nationalized all means of production during WWII. He set up control boards to monitor and meddle in the day-to-day affairs of production. Companies as diverse as Ford Motors (jeeps and tanks), food packaging, and news media came under direct government control. His administration set quotas and controlled prices for many items never before or since regulated. In fact, the war gave FDR carte blanche to enact programs and policies he’d only argued for during the Depression. Much of this national mobilization became enshrined after the war in the form of closely regulated and/or monopolistic industries that include transportation, power-generation and transmission, utilities, higher-education, and trash-collection; and persisted until Reagan got deregulation moving. Many of these were administered at the state or municipal level, but it was FDR and the war that gave government the opening to co-opt these businesses into what proved a mutually ‘beneficial’ yet ultimately stagnant and insular arrangement.
(cont.)
Comment by Robert W. Stapler | August 6, 2007
(cont.)
The case for medical drug regulation is all together different and far less clear it should be regulated; at least at the federal level. The argument made for this regulation was for the protection of the public against snake-oil salesmen who were, literally, selling poison or ‘watering’ their product to get a better price. There are other ways for dealing with snake-oil salesmen than regulation. Regulation has little effect on legitimate, competitive drug-makers other than to increase the cost of their products and delay the development of better drugs. It also creates opportunities for corruption and for restricting the market to players already in the business. Regulation tries to preempt any bad drug (product) from ever reaching the market. This is a virtual impossibility given all drugs have side-effects, and some, that are nonetheless approved, have such high risks associated with them as are indistinguishable from poison. They are given approval anyway because there simply isn’t anything else that works and the need to survive outweighs the risk. As regulation tends to retard the development of better product with fewer risks, this means patients must keep taking these toxic drugs. The history of the FDA screening program has been shown to be grossly ineffective in preventing harm because the FDA is geared to preventing bad drugs from reaching the market far more than it is to bringing better ones to market. The FDA has been hotly criticized for a) excessively restricting the number of available medications, b) delaying development and approval for many years while patients suffer, c) increasing the cost of the best drugs, sometimes prohibitively, d) artificially inflating the cost of name brand over ‘generic’, e) discouraging development of new drugs, f) discriminating against foreign products without regard for quality, g) being ridiculously slow in granting OTC status (helps drug companies keep price obscenely high), and, h) unnecessarily and unconstitutionally restricting advertising (free speech, sometimes resulting in deaths because doctors and patients are kept unaware a ‘ not yet approved for use’ drug might be available that could save them). Despite all this, Milton Friedman has noted FDA is given little credit for lives it has saved or may have saved. Unfortunately, this is difficult to prove.
To give just one example, Schering-Plough began making Claritin, its premier allergy drug in 1993 and had a patent for it that expired in 2004. S-P lobbied the FDA for approval of the drug, but lobbied against granting it Over-The-Counter status. By making it a ‘by prescription only’ drug, S-P and the FDA artificially restrict its availability without restricting demand; making it easier for S-P to demand a high price. There was no logical reason for the FDA to not approve this drug for OTC use because Claritin has no more side-effects or risks than, say, aspirin. Yet, Schering-Plough succeeded, against enormous public disapproval, in maintaining the prescription-only status until 2003. Once this restriction was lifted, the price per 10mg tablet plunged from over $10/unit to $1.00/unit and is now available from competitors at less than $0.80/unit. Some of the additional cost went to middlemen (repackaging, pharmacists, insurance companies, &c), but this only means others played a part and had an interest in maintaining Claritin’s artificial status. S-P did have a legitimate interest in recuperating development cost before its patent ran out, but made many times that amount and could have satisfied this need by pricing their product somewhat higher than its competitive price would have been, yet still well below the prescription-only price. They could have also petitioned for a patent extension, if necessary to recoup this cost. Instead, S-P abused FDA procedures and FDA’s function to serve its own interests over those of the public. FDA’s job is not making sure drug companies turn a profit (that’s the drug companies’ job), though it is FDA’s job to see to it they keep the approval mill moving. I have serious allergies and chronic sinusitis, so I willingly paid the higher price demanded of a prescription drug for many years. However, that does not mean I think it is great our government was participating in an abuse or misuse of its mandate or that the ‘good’ outweighs the bad.
More critically, the FDA has been accused of improper financial dealing between its board-members and drug companies they are charged with regulating. The FDA has also been responsible for legitimizing numerous food and drug scares, some of which cost lives (DDT) or raises the price of food (ALAR). Once FDA bans a substance, it is barred from reinstating it unless naturally-occurring. Thus, although the hazard to public health is very real, the attempt to regulate has been a decidedly mixed blessing.
The standard I use (and wish more people would) when granting government power to regulate is: a) is it comfortably within the Constitutional margins and principle of limited ‘self’-government and b) is it absolutely necessary we surrender this power to government. Even where conformable to the Constitution, I see no reason to simply hand over power when there is no vital reason to do so. I figure it is safer risking my health or wallet than it is putting an unlimited power to regulate into the hands of government, no matter how well-intentioned or well-guarded against abuse.
Comment by Robert W. Stapler | August 6, 2007
Excess liquidity in the hands of the lenders is driving the bying spree that has gotten us into these bubble and bust cycles. The collapse of the funds that were heavy in the sub-prime market will soon be tomorrows news while the fed prints money to be lent in the same "closed to the public" network that will fuel the next run-up somewhere else in the market.
Normal market influences no longer control the flood of money the Fed has been and continues to print. Those like Barney Frank who see easy prey can be counted on to sharpen their knives.
The American people will ultimately pay the price to take back control of their government and the greater the reluctance the steeper the payments will be.
Comment by endlesea | August 12, 2007