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Archive for the ‘Free Markets’ Category

There is little more lawless than changing the rules of contracts in the middle of the game. Chrysler’s creditors entered into deals with one set of expectations (including their known benefits and risk in bankruptcy) only to have them changed by Obama in order to benefit a politically connected group. Obama has strong-armed secured creditors (even threatening to ruin one firm’s reputation) into signing off on a deal in order to “save Chrysler” and benefit unions, the latter of which gave up little in this process and whose pension benefits are largely unsecured obligations. This is true Bannana Republic territory, where the risk of nationalization and confiscation has long created major premiums on the cost of capital and dampened economic growth. Mexico had its own Obamas one hundred years ago with names like Diaz and Obregon. It has long lagged behind us as a result.

The Founders wrote a great deal about “minorities” in their commentaries on the Constitution, but the minority they had in mind was the minority everywhere and at every time in history most vulnerable to demagoguery and shifting winds: the relatively small numbers of wealthy investors in a given society, whose wealth is a relatively insecure monument to generations-long investments, innovations, and prudence.

Mickey Kaus notes that this whole thing will only delay the pain and prove a costly political failure for Obama. Chrysler produces a medicore product that few want to buy. Unless gas skyrockets (which itself will require swift economic growth), Americans will not be snatching up the death-traps known as Fiats. It’s unclear when Obama will ever allow a big business or connected group to suffer so long as he is at the helm. Instead, the rest of us, who are not so organized or visible, must suffer higher taxes, reduced growth, and an uncertain future so Obama can claim a victory and appear sympathetic and charitable by spending our money. This charade can’t go on forever though. The very thing Obama needs more of to ensure economic growth–predictability and respect for capital–has become increasingly absent from his administration, in spite of his moderate talk during the campaign. You can’t force people to invest, and no one will when government changes the rules in the middle of the game repeatedly.

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Treasury Secretary Henry Paulson’s proposal to consoldiate various financial regulatory agencies is uninspired and likely will prove useless.  This proposal rests on the unquestioned assumption that bad economic results should never occur, and, if they do on a large enough scale, should be bailed out by the government.  If they should be bailed out, then the federal government rightly acquires some interest in preventing them. But consolidation alone won’t do the trick, even if these flawed assumptions about the goals of economic regulation are accepted. 

Without new rules and expanded authority–which Paulson  has renounced–it’s unlikely any consolidation of the SEC, CFTC, OCC, and other regulatory agencies can yield better results than today.  This is the same logic behind joining various agencies under the Department of Homeland Security, which has accomplished little more than these agencies could in the past working seperately because of old fashioned rules on profiling and the lack of increased border infrastructure.  The case for consolidation is even less compelling in the case of finanical regulators, as poor inter-agency communication was widely reputed to be one factor in the 9/11 attacks.  By contrast, no one thinks that the current mortgage crisis is the result of some regulatory gaps or bad communication between the agencies.  Rather, investment banks, hedge funds, and other unregulated organizations now control huge amounts of the lending going on today and largely do their work off of the regulators’ radar. 

Investors know that these organizations are less regulated and more opaque than the regulated alternatives in the form of commercial banks and publicly traded companies.  The reason people still invest in these entities in spite of these demerits is a greater anticipated yield.  But everything comes at a price.  Investors of capital overseas, for instance, take the risk of other countries’ screwed up legal systems and greater degrees of corruption.  This is as it should be.  The whole point of regulation is to promote the proper pricing of risk and divert capital into safer investments at home to further American economic enterprise.  Bailing out investment banks and other holders of subprime mortgage instruments would instead reward high risk speculators, bailing them out of their risky choices, even as Paulson eschews more regulatory authority.

If the DHS is a good analogy to the proposed regulatory consoldiation, the best analogy for the Federal Reserve’s bailout of failing investment banks is the failed IMF strategy of bailing out the central banks of corrupt nations during the Asian currency crisis of the late 90s.  There, as in the US today, under-regulated high risk investments overseas attracted too much capital that underestimated the risks.  Investors seemingly forgot that the Third World is impoverished for a reason.  This led to a number of investment and monetary bubbles, which in turn burst.  Instead of allowing the devaluation to run its course, which it eventually did, the IMF at first bailed out Asian central banks and their investors leading to continued over-investment in “emerging markets.”  It would have been preferable if investors were forced to take their lumps as regimes as varied as China and Indonesia suffered the painful “correction” they deserved because of their instability and corruption. 

Our own Indonesia, the free-wheeling world of hedge funds and subprime securitized mortgages, needs to be shaken out so that in the future capital will not be invested to an irrationally high degree in high risk, underregulated investments.  Consolidating regulators and bailing out the failed investors is the worst of both worlds:   it increases public exposure without any concomitant increase in regulatory authority over the high risk institutions involved.

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In between his paeans to folks in Bangalore wearing Nike shoes and drinking Starbucks coffee while talking on their Samsung phones, Thomas Friedman also likes to write about foreign policy. He infamously declared every six months for three years running that the situation in Iraq was critical and, by implication, that if things did not sort themselves out that the war was essentially lost. He never felt obliged to revisit his previous predications. He also quietly started speaking out against the war after positioning himself earlier as one of its most sentimental cheerleaders.

But now he’s turned a new corner. His banality and faddishness have fully joined forces with his peerless capacity for observing the mundane through the lens of a well-traveled propagandist for globalization. He basically has declared the war on al Qaeda won and the events of 9/11 over-played and, therefore, unimportant for the next election. No hidebound slave to the past, he writes:

I will not vote for any candidate running on 9/11. We don’t need another president of 9/11. We need a president for 9/12. I will only vote for the 9/12 candidate.

What does that mean? This: 9/11 has made us stupid. I honor, and weep for, all those murdered on that day. But our reaction to 9/11 — mine included — has knocked America completely out of balance, and it is time to get things right again.

Yes, in the wake of 9/11, we need new precautions, new barriers. But we also need our old habits and sense of openness. For me, the candidate of 9/12 is the one who will not only understand who our enemies are, but who we are.

I guess I missed that great day, some two or three years ago, where representatives of al Qaeda stood on the deck of the USS Nimitz and signed formal documents of surrender. Has Friedman not noticed the recent attacks on Glasgow airport, al Qaeda’s massacres of civilians in Iraq, the radicalization of European Muslims, the Paris riots, and the Bali, Madrid, and London bombings? We’ve not had a significant domestic attack after the various resrictions Friedman complains about were put in place. His failure to notice this bona fide success is analogous to the liberal complaint about “warehousing criminals,” even though the last decade of increased incarceration has also led to a significant reduction in violent crime. One of the worst things about Friedman, and one of his great deficiencies as a columnist, is his failure to refocus the public’s attention on important, though easily forgotten, matters of importance. He instead loves the ephemeral, as evidenced by his vulgar habit of dropping brand names to show how we all consume the same things world-wide.

Al Qaeda is real. It means us harm. Within its ranks, one finds motivated personnel who have shown a remarkable combination of cunning, high concept operations, and willingness to exploit our tendency towards forgetfulness and complacency. The post 9/11 changes on the border and outside our borders–including the establishment of GITMO and the increase of monitoring of visitors to the US–mean that American citizens can live more securely and with fewer restrictions upon ourselves. As I’ve noted before, the false freedom of open borders means less freedom of movement and security at home. Instead of coining useless new phrases–like al Qaeda 2.0–Friedman should use his powers of rhetoric to envision the results of al Qaeda’s next attack, perhaps an exploding LNG tanker in Boston or a hijacked cargo jet hitting the Sears Tower or a company of urban snipers slipping in through Mexico.

Friedman does not understand that the very openness he wants to return to was, in part, the cause of the various security lapses that led to 9/11. The government and private industry maintained a culture of willful blindness and wishful thinking. Frieman tells us we need to be more open and solicitous of the opinions of the rest of the world, and, to appease our critics, we must close GITMO and create procedures to faciliate easier access for business travellers. He intones, “Those who don’t visit us, don’t know us.” My God. Has Friedman not noticed that sometimes people visit us, hate us more, and use their visits to kill lots of us, e.g., Atta, Qutb.

It’s true, there has been a great deal of water under the bridge since 9/11 on how best to deal with al Qaeda; in particular, the strategy of forcible democratization of the Middle East seems entirely discredited by events in Iraq. But the problems of the Iraq War do not mean that al Qaeda is no longer a big deal or that we can turn our attention to the things that Friedman really gets excited about like gadgets and smart foreigners with similar, transnational values.

Friedman is the most prominent champion of globalization in the American media. He undoubtedly endures endless sleights, sincere pleading, and criticism from Davos People for America’s alleged crudeness and insensitivity. With his latest column, Friedman has guaranteed access to the finest cocktail parties in Davos and Geneva and Paris and Durban for years to come. At the same time, he has disqualified himself from being taken seriously by Americans who are concerned about American security.

There is little accountability in journalism. People make predictions that do not come true and still continue to earn a living. I want this stupid column plastered everywhere the next time al Qaeda manages to undertake a successful attack, which, sadly, is almost certainly inevitable.

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Andrew Sullivan, as usual, is confused and lets himself get carried away when it comes to homosexuality. He notes, “In 1994, just 19 Fortune 500 brands advertised in the gay press. Last year, 183 did.”

He concludes solemnly, “The private sector has long led the government in recognizing the simple reality of gay America.”

Umm, no. The government has always recognized this just fine when it is relevant, and it certainly can’t be said to have ignored gays in the bygone age of criminal sodomy laws. No, the government treats us all the same, except when we’re different in a relevant way. It doesn’t need to recognize the “gay reality” more than any other. The government and its laws rightfully do not care if we have long or short hair, or if we spend our money on books or on CDs, or if we are stylish or dull. A gay person’s legal reality is no different than anyone’s else. A gay person can call 911, file a lawsuit, and apply for a student loan. And, of course, a gay person can marry a person of the opposite sex just like everyone else. What Sullivan really is saying by innuendo is the theme underlying so much of his writing: since esteemed big businesses don’t seem to get hung up on gays, and indeed make money marketing to them, why can’t I and every other gay person get my surrogate daddy’s approval through government-recognized gay marriage? I hate to be so harsh, but this theme runs through his and all other gay people’s appeals to acceptance rather than mere toleration.

Of course, the difference between the government and the market is profound. It is the differences between law and its attendant social approval on one side and voluntary, private arrangements on the other. The government does sometimes care if we’re a man or a woman, or a citizen or a foreigner, or any number of other distinctions. In these areas, the law’s otherwise one-size-fits-all rules recognize that people are not equal in all respects. But these exceptions are exactly that: exceptional. For the most part, the law treats all of us the same.

Businesses are quite different, since there is a great deal of money to be made by appealing to niche markets. Thus, instead of one movie or one book or one type of car or one type of music, there are many examples of each. Unlike the laws, the market and its participants gain a great deal by recognizing our differences in finer and finer detail. This doesn’t prove that the business world is more decent than the government, but rather that it functions differently. It appeals to our voluntary choices, does not use force against us, primarily seeks to make a profit, and does not purport to codify our moral sensibilities.

Indeed, the behavior of businessmen historically shows that they are prone to avarice and indifference to the common good and should, therefore, be appropriately regulated to prevent anti-social activity. Businesses, after all, have sold everything from radar detectors and unsafe cars to Olde English 800 and security systems for drug lords. Various businesses might appeal to gays–gay people do, after all, have money–but they also appeal to everyone else: good, bad, and indifferent. Government, with an entirely different set of tools and concerns must keep people and their businesses within certain boundaries. It must bestow its benefits parsimoniously. And this means, at times, it must operate far behind the curve of social change, lest faddishness be enshrined in law, e.g., urban renewal, prohibition.

Sullivan’s lazy, hair-brained, and easily refuted blog entries are a real disgrace to his own intellect and an insult to his numerous readers. His latest example of sophistry is, sadly, just one of many.

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