Showing posts with label Free Market. Show all posts
Showing posts with label Free Market. Show all posts
Tuesday, October 15, 2013
Wednesday, September 28, 2011
Sunday, September 25, 2011
Wednesday, August 11, 2010
Big Government (or any Government) Will Never Lead to Prosperity
Big Government (or any Government) Will Never Lead to Prosperity
by Alex Merced
What we constantly get told in some form or other, is that you need government for things to work... but in all reality things work in spite of government. It's like when your a kid and you want something, all the rules in the world won't stop you from trying.
For Example, two countries that are catching up very quickly if not surpassing the US and Europe in economic power are China and India, arguably their governments are bigger and more coercive in scope of control. You can take the economist approach and see that spending as a share of GDP is vastly less than the US, but what I want to take a look as is the rules they govern with, not so much the spending.
China: By having it's non-democratic central government, the current leadership in China has LIBERALIZED a lot of it's economic policy and up until recently has focused on having a savings economy. While it's intervention in the supply of savings has and will cause problems, it couldn't of done it without somewhere to invest those savings in which the US more than glad to play the role which arguably leads to more problems for the US as the Spending economy. Another aspect to take a look at is Hong Kong, once the best bastians of Free Marketeering on the globe which played it's role in sparking the economic growth in the region if not being the Seed that grew into it.
India: This country is known for some of the largest amount of red tape and barriers to entry of any country, with buildings filled with stacks of pending applications for all sorts of things. Yet no one can honestly make the argument that the excessive beuracracy has led to it's quickening growth. So while the same type of Liberalization we see in China isn't in india, a system of corruption and bribery has developed to supercede the beuracracy and foster a freer market... essentially a black market for merely "permission" to enter and participate in commerce.
People will never be diverted from purposeful action no matter what the rules, every rule in the US either eventually is found to have loophole or has some built into it initially. What keeps people honest is their respect for boundries which comes from their own self developed ethical framework. So if we care about what people do in their social and business lives we may affect more change by discussing principles to live life by than about which rules we should establish that people will ignore if their principles allow.
by Alex Merced
What we constantly get told in some form or other, is that you need government for things to work... but in all reality things work in spite of government. It's like when your a kid and you want something, all the rules in the world won't stop you from trying.
For Example, two countries that are catching up very quickly if not surpassing the US and Europe in economic power are China and India, arguably their governments are bigger and more coercive in scope of control. You can take the economist approach and see that spending as a share of GDP is vastly less than the US, but what I want to take a look as is the rules they govern with, not so much the spending.
China: By having it's non-democratic central government, the current leadership in China has LIBERALIZED a lot of it's economic policy and up until recently has focused on having a savings economy. While it's intervention in the supply of savings has and will cause problems, it couldn't of done it without somewhere to invest those savings in which the US more than glad to play the role which arguably leads to more problems for the US as the Spending economy. Another aspect to take a look at is Hong Kong, once the best bastians of Free Marketeering on the globe which played it's role in sparking the economic growth in the region if not being the Seed that grew into it.
India: This country is known for some of the largest amount of red tape and barriers to entry of any country, with buildings filled with stacks of pending applications for all sorts of things. Yet no one can honestly make the argument that the excessive beuracracy has led to it's quickening growth. So while the same type of Liberalization we see in China isn't in india, a system of corruption and bribery has developed to supercede the beuracracy and foster a freer market... essentially a black market for merely "permission" to enter and participate in commerce.
People will never be diverted from purposeful action no matter what the rules, every rule in the US either eventually is found to have loophole or has some built into it initially. What keeps people honest is their respect for boundries which comes from their own self developed ethical framework. So if we care about what people do in their social and business lives we may affect more change by discussing principles to live life by than about which rules we should establish that people will ignore if their principles allow.
Wednesday, August 4, 2010
A Response to Peter Kleins Lecture: Corporations and the Free Market
A Response to Peter Kleins Lecture: Corporations and the Free Market
by Alex Merced
Listen to Peter Kleins Lecture here
You've might have read in previous posts on Liberty is Now that I am one of the Libertarians who criticize corporations role in the free market. Although Let me make a few quick bullet points as far as where I do agree with Kleins lecture:
- I do agree that Limited Liability is not in itself illegitimate, through mutual contractual agreements one can delegate liability without special legal entities. Although, I think of liability as something you own, so through a contract your can transfer title to that liability, but unlike a C Corp it can't be completely separated from ALL owners, at least one owner will have to take title to the liability which is why a Limited Partnership I think is more akin to what is possible in a free market than a C Corporation.
- I agree several mechanisms prevent CEO's and other firm managers from being lazy, and making sure they are competitive, but this is not really from where I attack C Corporations.
The Premise of my Critic:
That due to the separation of management and liability unique to C-Corps that publicly traded companies are inherently unsustainable cause everyone in the checks and balance chain has short time horizons for example:
- The CEO and other Officers don't necessarily have ownership (though a lot of them do), although the overriding incentive is to keep their job, which means to please to shareholders proxy, the Board of Directors.
- The Board of Directors once again may or may not have ownership, but the overriding incentive is to keep their directorship and to do this they need to please the shareholders.
- Due the ease of getting in and out of an investment in a public company, investors tend to have short time horizons and will want short term gains, they don't care about the long term since they'll soon enough sell it and move to the next investment. So if Directors and Officers make decisions for the long term sustainability of the company that adversely affect the short term dividend and growth outlook be sure the shareholders will act to change the board.
Counter Point: Wait, won't a lot of this money be managed by professional money managers who should know better?
- Money Managers for Mutual Funds and Pension Funds also don't necessarily have ownership and are judged by their performance on the short term. So to keep their jobs, their time horizon is kept quite short, which is characterized by the number of pension funds that ran surpluses during bubbles but didn't change the allocation to more prudent variations to lock in those gains in order for the manager to keep their job. Now, most pension funds are under funded for the benefits they need to pay out.
Why is the Limited Partnership Better for Corporate Governance?
The General Partner - The people at the top of the totem pole making the highest decisions regarding the business has unlimited liability, so with that being the case, they have a stake in the long term sustainability in the company.
The Limited Partner - Has legitimate limited liability, yet can't liquidate their shares at a whim, they will need to find a buyer and get the approval of the general partner. Since the shares are less liquid, the limited partner wants the company to have a stable sustainable value so the value persists till he can find a buyer for their shares, meaning the investor now has a stake in the long term of the company.
Other Factors to Consider for Corporate Governance:
- To Moral Hazard of Public Unemployment Insurance on employer and employee incentives, versus the sustainable incentives of privately purchased unemployment insurance
Employee: If the employee has to pay higher premiums for more unsustainable jobs, then he might take a lower wage sustainable job cause he'll bring home more wages after the premiums, which will incentivize talent to go to sustainable firms not high paying unsustainable firms. Also if you work in a field where jobs are scarce, private plans can allow you to purchase more coverage beyond the 6 month standard at no cost to the tax payer. Employees can also lower their premiums by becoming more skilled and educated, since these would lower the risk of job loss.
Employer: If the employee won't work for the employer cause premiums are too high, this is an incentive for employer to develop a sustainable job atmosphere and company to lower those premiums.
- The effect of Corporate Tax Laws many of the incentives for bizarre corporate expenditures is that they are tax write offs, and it's better that the company spend it on golden curtains and high priced furniture and than let the government take the same money from them in taxes.With simple tax reforms, corporation would have an incentive to be more frugal and let that money trickle to the bottom line for larger dividends to investors.
by Alex Merced
Listen to Peter Kleins Lecture here
You've might have read in previous posts on Liberty is Now that I am one of the Libertarians who criticize corporations role in the free market. Although Let me make a few quick bullet points as far as where I do agree with Kleins lecture:
- I do agree that Limited Liability is not in itself illegitimate, through mutual contractual agreements one can delegate liability without special legal entities. Although, I think of liability as something you own, so through a contract your can transfer title to that liability, but unlike a C Corp it can't be completely separated from ALL owners, at least one owner will have to take title to the liability which is why a Limited Partnership I think is more akin to what is possible in a free market than a C Corporation.
- I agree several mechanisms prevent CEO's and other firm managers from being lazy, and making sure they are competitive, but this is not really from where I attack C Corporations.
The Premise of my Critic:
That due to the separation of management and liability unique to C-Corps that publicly traded companies are inherently unsustainable cause everyone in the checks and balance chain has short time horizons for example:
- The CEO and other Officers don't necessarily have ownership (though a lot of them do), although the overriding incentive is to keep their job, which means to please to shareholders proxy, the Board of Directors.
- The Board of Directors once again may or may not have ownership, but the overriding incentive is to keep their directorship and to do this they need to please the shareholders.
- Due the ease of getting in and out of an investment in a public company, investors tend to have short time horizons and will want short term gains, they don't care about the long term since they'll soon enough sell it and move to the next investment. So if Directors and Officers make decisions for the long term sustainability of the company that adversely affect the short term dividend and growth outlook be sure the shareholders will act to change the board.
Counter Point: Wait, won't a lot of this money be managed by professional money managers who should know better?
- Money Managers for Mutual Funds and Pension Funds also don't necessarily have ownership and are judged by their performance on the short term. So to keep their jobs, their time horizon is kept quite short, which is characterized by the number of pension funds that ran surpluses during bubbles but didn't change the allocation to more prudent variations to lock in those gains in order for the manager to keep their job. Now, most pension funds are under funded for the benefits they need to pay out.
Why is the Limited Partnership Better for Corporate Governance?
The General Partner - The people at the top of the totem pole making the highest decisions regarding the business has unlimited liability, so with that being the case, they have a stake in the long term sustainability in the company.
The Limited Partner - Has legitimate limited liability, yet can't liquidate their shares at a whim, they will need to find a buyer and get the approval of the general partner. Since the shares are less liquid, the limited partner wants the company to have a stable sustainable value so the value persists till he can find a buyer for their shares, meaning the investor now has a stake in the long term of the company.
Other Factors to Consider for Corporate Governance:
- To Moral Hazard of Public Unemployment Insurance on employer and employee incentives, versus the sustainable incentives of privately purchased unemployment insurance
Employee: If the employee has to pay higher premiums for more unsustainable jobs, then he might take a lower wage sustainable job cause he'll bring home more wages after the premiums, which will incentivize talent to go to sustainable firms not high paying unsustainable firms. Also if you work in a field where jobs are scarce, private plans can allow you to purchase more coverage beyond the 6 month standard at no cost to the tax payer. Employees can also lower their premiums by becoming more skilled and educated, since these would lower the risk of job loss.
Employer: If the employee won't work for the employer cause premiums are too high, this is an incentive for employer to develop a sustainable job atmosphere and company to lower those premiums.
- The effect of Corporate Tax Laws many of the incentives for bizarre corporate expenditures is that they are tax write offs, and it's better that the company spend it on golden curtains and high priced furniture and than let the government take the same money from them in taxes.With simple tax reforms, corporation would have an incentive to be more frugal and let that money trickle to the bottom line for larger dividends to investors.
Friday, April 30, 2010
Tuesday, April 27, 2010
C Corporations and Moral Hazard
C Corporations and Moral Hazard
By Alex Merced
When confronting todays economics problems one thing we can agree across philosophies, theories, and economic frameworks is that Moral Hazard is rampant in the current system. The question then becomes how do you eliminate the moral hazard to return more realistic expectations in economic calculation.
The mainstream view on the left and right is that this moral hazard is created by "irrational" behavior cause by "too much" capitalism, so regulation must be enacted to reform this behavior and bring transparency to the market. As far as to handle the regulation issue, I've discussed how free market regulation can exist.
Now to Austrian Economics aficionados like myself usually take a different approach and believe that this moral hazard took generations of distorting economic calculation to create. This has been done via institutions like the federal reserve, IRS, and FDIC. Although I take it a step farther and say that the modern legal corporate structure is fundamentally flawed to a free market working, cause it separates or moves liability from two major players in enterprise, the executives running the enterprise and the Shareholders.
So let's see the effects...
Shareholders: Since Shareholders in a C Corporations have no direct legal liability or tax liability by virtue of ownership of these shares it makes disposing of these securities a decision made with very little cost except the opportunity cost of future gains that weren't realized if they continued to hold the shares. This makes the shareholder willing to sell the shares at a moment notice when the price goes up, and makes the value of company in itself in the long term a very slight consideration. Unlike this, Limited Partnership shares still separate legal liability as a Limited Partner but you retain the tax liability and you can't just dump the shares at a moments notice, this incentive creates a culture where investors do their due diligence and are concerned about the long term outlook of the company in case it takes time to find a buyer of the share.
Executives of Company: The executives and the Board of Directors are beholden to the shareholders... yet the make up of the shareholders is constantly changing due to shareholders having such a short time horizon as explained above. If the shareholders are not pleased with the short term returns from their investment, they can pressure the removal and change of these executives. Although if the company is built on unsustainable policies for short term growth, the executive doesn't own the capital in the enterprise so the concern of losing their position is a greater incentive to not change these policies to something sustainable. In a limited partnership the General Partner runs the company and must have a 1% interest in the company itself creating a dual incentive since their own capital is tied up in the venture and they have unlimited liability. While they are still beholden to the limited partner, the limited partners do have an interest in sustainable corporate governance because of the liquidity of their investment.
So essentially the C Corporation has opened a greater array of investors to the capital markets, but at the cost of moral hazard and short term thinking that results from the "Liquidity" of these investments. What I conclude is that if we're going to have a more SUSTAINABLE foundation and capital structure we need more active people running these enterprises, meaning they need more active investors which will never happen with the current C Corporation structure of liability. While some advocate creating artificial liability in the C Corp, why bother when you already have a business structure proven to create more sustainable businesses in the Limited Partnership.
Bottom Line, abolish the C Corporation.
By Alex Merced
When confronting todays economics problems one thing we can agree across philosophies, theories, and economic frameworks is that Moral Hazard is rampant in the current system. The question then becomes how do you eliminate the moral hazard to return more realistic expectations in economic calculation.
The mainstream view on the left and right is that this moral hazard is created by "irrational" behavior cause by "too much" capitalism, so regulation must be enacted to reform this behavior and bring transparency to the market. As far as to handle the regulation issue, I've discussed how free market regulation can exist.
Now to Austrian Economics aficionados like myself usually take a different approach and believe that this moral hazard took generations of distorting economic calculation to create. This has been done via institutions like the federal reserve, IRS, and FDIC. Although I take it a step farther and say that the modern legal corporate structure is fundamentally flawed to a free market working, cause it separates or moves liability from two major players in enterprise, the executives running the enterprise and the Shareholders.
So let's see the effects...
Shareholders: Since Shareholders in a C Corporations have no direct legal liability or tax liability by virtue of ownership of these shares it makes disposing of these securities a decision made with very little cost except the opportunity cost of future gains that weren't realized if they continued to hold the shares. This makes the shareholder willing to sell the shares at a moment notice when the price goes up, and makes the value of company in itself in the long term a very slight consideration. Unlike this, Limited Partnership shares still separate legal liability as a Limited Partner but you retain the tax liability and you can't just dump the shares at a moments notice, this incentive creates a culture where investors do their due diligence and are concerned about the long term outlook of the company in case it takes time to find a buyer of the share.
Executives of Company: The executives and the Board of Directors are beholden to the shareholders... yet the make up of the shareholders is constantly changing due to shareholders having such a short time horizon as explained above. If the shareholders are not pleased with the short term returns from their investment, they can pressure the removal and change of these executives. Although if the company is built on unsustainable policies for short term growth, the executive doesn't own the capital in the enterprise so the concern of losing their position is a greater incentive to not change these policies to something sustainable. In a limited partnership the General Partner runs the company and must have a 1% interest in the company itself creating a dual incentive since their own capital is tied up in the venture and they have unlimited liability. While they are still beholden to the limited partner, the limited partners do have an interest in sustainable corporate governance because of the liquidity of their investment.
So essentially the C Corporation has opened a greater array of investors to the capital markets, but at the cost of moral hazard and short term thinking that results from the "Liquidity" of these investments. What I conclude is that if we're going to have a more SUSTAINABLE foundation and capital structure we need more active people running these enterprises, meaning they need more active investors which will never happen with the current C Corporation structure of liability. While some advocate creating artificial liability in the C Corp, why bother when you already have a business structure proven to create more sustainable businesses in the Limited Partnership.
Bottom Line, abolish the C Corporation.
Sunday, April 25, 2010
Does Wall Street Contribute to the Economy?
Does Wall Street Contribute to the Economy?
by Alex Merced
One of the complaints I keep hearing about is that Wall Street doesn't contribute anything to the economy. Well, Wall Street, which is just a moniker for the "Finance" industry has done a great job of facilitating it's function in the economy. The function of the finance industry to facilitate financing (lending and investment), and the only way it does this is not only by creating and selling securities as the detractors would like to believe. Derrivatives, Prorietary Trading, and all the other fun politically unpopular stuff that Wall Street does helps create liquidity and demand. If these securities arn't liquid (which really just means has lots of demand), then it makes it hard to sell new securities for new companies cause the amount of investors becomes less. So yes these trading markets where firms and investors make money for themselves do serve this financing function, but does that mean everything is working as it should... no.
Risk and Reward help dictate how investors align their capital over time, and we have seen that investors, company executives, and everyone has seen their time horizons shrink demanding profits and returns on their investments quicker than ever before. When peoples time horizons shrink, more risk must be taken to achieve their goals in this time horizon, so one must study how culturally time horizons have shrank. Here are many factors I would consider:
1) The advent of C Corporations seperated those with Capital at Risk from those making the business decisions. Even in a Limited Partnership the General Partner who ran the business had to at least have %1 stake in the venture but now in a C Corporation the CEO is beholden to shareholders who are looking for short term gains since their securities can easily be sold at a moments notice. In a limited partnership, Limited Partners with Limited Liability can't just sell their shares on the fly so they have a stake in long term stability of the company and invest based on long term outlook instead of short term price fluctuations. C Corporations truly separated the liabilities of failure and liquidity from investors and executives and allowed them to operate in a short term gain framework.
2) Growing Government with low interest rate policies have put inflationary pressures on the returns needed by investors, plus the taxation that comes later on from these policies. So just to preserve the purchasing power they currently had investors had to make more gains faster, and of course Broker/Dealers are going to facilitate finding a way to do so.
So we need to return to free market values with realistic time horizons, but as long as we seperate liability from capital via legal institutions like the C Coporation (SIPC, FDIC, and the Federal Reserve don't help either), and tolerate growing government in distorting economic calculation to finance it's operations the Finance Industry won't have the capacity to return functioning in a sustainable manner, and no amount of regulation can make up for natural risk and reward.
by Alex Merced
One of the complaints I keep hearing about is that Wall Street doesn't contribute anything to the economy. Well, Wall Street, which is just a moniker for the "Finance" industry has done a great job of facilitating it's function in the economy. The function of the finance industry to facilitate financing (lending and investment), and the only way it does this is not only by creating and selling securities as the detractors would like to believe. Derrivatives, Prorietary Trading, and all the other fun politically unpopular stuff that Wall Street does helps create liquidity and demand. If these securities arn't liquid (which really just means has lots of demand), then it makes it hard to sell new securities for new companies cause the amount of investors becomes less. So yes these trading markets where firms and investors make money for themselves do serve this financing function, but does that mean everything is working as it should... no.
Risk and Reward help dictate how investors align their capital over time, and we have seen that investors, company executives, and everyone has seen their time horizons shrink demanding profits and returns on their investments quicker than ever before. When peoples time horizons shrink, more risk must be taken to achieve their goals in this time horizon, so one must study how culturally time horizons have shrank. Here are many factors I would consider:
1) The advent of C Corporations seperated those with Capital at Risk from those making the business decisions. Even in a Limited Partnership the General Partner who ran the business had to at least have %1 stake in the venture but now in a C Corporation the CEO is beholden to shareholders who are looking for short term gains since their securities can easily be sold at a moments notice. In a limited partnership, Limited Partners with Limited Liability can't just sell their shares on the fly so they have a stake in long term stability of the company and invest based on long term outlook instead of short term price fluctuations. C Corporations truly separated the liabilities of failure and liquidity from investors and executives and allowed them to operate in a short term gain framework.
2) Growing Government with low interest rate policies have put inflationary pressures on the returns needed by investors, plus the taxation that comes later on from these policies. So just to preserve the purchasing power they currently had investors had to make more gains faster, and of course Broker/Dealers are going to facilitate finding a way to do so.
So we need to return to free market values with realistic time horizons, but as long as we seperate liability from capital via legal institutions like the C Coporation (SIPC, FDIC, and the Federal Reserve don't help either), and tolerate growing government in distorting economic calculation to finance it's operations the Finance Industry won't have the capacity to return functioning in a sustainable manner, and no amount of regulation can make up for natural risk and reward.
Free Market Regulation Explained
Free Market Regulation Explained
by Alex Merced
Everyone always assumes that as free marketers that we advocate there be no regulations at all, but the truth is we think there should be no government monopolies of regulation or violence used in enforcing it. Then the response always is, if the government can do it then people won't. Although there are plenty of ways regulation can be done for profit in a way were the regulators have consumer interest more in mind than they do now. You've probably already read plenty of articles of the effects of government regulation as far as eating up resources and raising the barrier to entry reducing competition for the very firms your trying to control so let's take a different approach.
The intended or perceived intention of regulation is consumer protection, and we've seen that this is not always the result for one key reason, any entity is beholden to the people who fund it's operations in this case government. People think of the government as a intermediary of the people but while they are publically elected they are politically motivated. Since they truly hold the DIRECT power to fund these regulators, the regulators are beholden to them and their political goals (Bush, Dodd, Cuomo, Frank w/ lending regs) instead of pure consumer protection. So as politics distorts the mission or purpose of a regulator, consumer protection falls by the way side.
This is also an issue with private sector SRO's since they are usally funded directly by the firms in the industry they are regulating so they are beholden to those firms. If these's SRO's such as FINRA etc. enforced the rules closely on their biggest constitutents (Goldman Sachs) it'd greatly effect the inflow of cash for their operations so once again consumer protection falls by the way side.
The bottom line, a regulator will always be beholden to those that pay their bills, so if you want them to protect the consumer they must be paid by the consumer directly. Even then, a regulator isn't infallible so allowing a market of regulators that consumers can volunteer to pay into and firms can volunteer to deal with to get to those consumers will allow the correct incentives and pressures for the regulatory firm to advocate on their customers behalf (such as for-profit lawyers, you hire them to protect you. Also this structure is similar to AARP or other groups you pay memberships for).
This market of regulators shouldn't have any type special power handed over the government, since we've seen that ever mixing private/public institutions ends in disatrous results (Fannie, Freddie, FINRA, Sallie Mae, etc.). Industry firms will try to strike deals with as many of these regulatory firms as possible to have access to the consumers who hired them as their intermediary, and the industry firms that strike these deal will voluntarily be monitored by these regulatory firms who will then promote and recommend these firms monitored by them to consumers who pay for the regulatory firms services. Everyone who participates in this protection is doing so voluntarily but cause of the pressure created directly by consumers.
Another way to regulate in the free market is through review publications as we see in entertainment magazines that review the music and movies we enjoy. Musicians and Entertainers operate with the pressure of getting good reviews or have their success effected by it, although if one reviewer were to write good reviews for bad movies his audience would shrink and more over to another reviewer putting pressure to remain honest. Also, if one reviewer opinion is drastically different than other, this would also call into question the quality of his review. Although these review magazines are paid for directly by consumers, so they are beholden consumers.
Although in the case of securities rating agencys, giving them psuedo government power by keying legal regulation into their ratings created a perverse incentive to cater to their clients (the buy side) into rating things highly so they can legally leverage them. If there wasn't these coerced limits by government regulation, these rating agencies wouldn't of had the same pressures to rate the Mortgage Backed Securities AAA.
Even without the free market of regultors and review publications there is the ultimate free market regulator, consequence. If consumers and providers feel there are consequences to their risks, and there is nothing mitigating this consequence (FDIC, SIPC, Federal Reserve) then the risk will typically prevent them from taking "Irrational" risks, and those that do will suffer the consequence and serve as a warning to others.
At the end of the day, protection of the individual is the responsibility of the individual. If the individual does not take the time and isn't willing to directly be involved in their own protection the protection they do get will never truly be on their side and the world around them will stagnate from the results. To fix the world you need more aware and active individuals, willing to pay for their own protection, willing to get involved in protecting themselves and truly understanding every individual decision they make.
by Alex Merced
Everyone always assumes that as free marketers that we advocate there be no regulations at all, but the truth is we think there should be no government monopolies of regulation or violence used in enforcing it. Then the response always is, if the government can do it then people won't. Although there are plenty of ways regulation can be done for profit in a way were the regulators have consumer interest more in mind than they do now. You've probably already read plenty of articles of the effects of government regulation as far as eating up resources and raising the barrier to entry reducing competition for the very firms your trying to control so let's take a different approach.
The intended or perceived intention of regulation is consumer protection, and we've seen that this is not always the result for one key reason, any entity is beholden to the people who fund it's operations in this case government. People think of the government as a intermediary of the people but while they are publically elected they are politically motivated. Since they truly hold the DIRECT power to fund these regulators, the regulators are beholden to them and their political goals (Bush, Dodd, Cuomo, Frank w/ lending regs) instead of pure consumer protection. So as politics distorts the mission or purpose of a regulator, consumer protection falls by the way side.
This is also an issue with private sector SRO's since they are usally funded directly by the firms in the industry they are regulating so they are beholden to those firms. If these's SRO's such as FINRA etc. enforced the rules closely on their biggest constitutents (Goldman Sachs) it'd greatly effect the inflow of cash for their operations so once again consumer protection falls by the way side.
The bottom line, a regulator will always be beholden to those that pay their bills, so if you want them to protect the consumer they must be paid by the consumer directly. Even then, a regulator isn't infallible so allowing a market of regulators that consumers can volunteer to pay into and firms can volunteer to deal with to get to those consumers will allow the correct incentives and pressures for the regulatory firm to advocate on their customers behalf (such as for-profit lawyers, you hire them to protect you. Also this structure is similar to AARP or other groups you pay memberships for).
This market of regulators shouldn't have any type special power handed over the government, since we've seen that ever mixing private/public institutions ends in disatrous results (Fannie, Freddie, FINRA, Sallie Mae, etc.). Industry firms will try to strike deals with as many of these regulatory firms as possible to have access to the consumers who hired them as their intermediary, and the industry firms that strike these deal will voluntarily be monitored by these regulatory firms who will then promote and recommend these firms monitored by them to consumers who pay for the regulatory firms services. Everyone who participates in this protection is doing so voluntarily but cause of the pressure created directly by consumers.
Another way to regulate in the free market is through review publications as we see in entertainment magazines that review the music and movies we enjoy. Musicians and Entertainers operate with the pressure of getting good reviews or have their success effected by it, although if one reviewer were to write good reviews for bad movies his audience would shrink and more over to another reviewer putting pressure to remain honest. Also, if one reviewer opinion is drastically different than other, this would also call into question the quality of his review. Although these review magazines are paid for directly by consumers, so they are beholden consumers.
Although in the case of securities rating agencys, giving them psuedo government power by keying legal regulation into their ratings created a perverse incentive to cater to their clients (the buy side) into rating things highly so they can legally leverage them. If there wasn't these coerced limits by government regulation, these rating agencies wouldn't of had the same pressures to rate the Mortgage Backed Securities AAA.
Even without the free market of regultors and review publications there is the ultimate free market regulator, consequence. If consumers and providers feel there are consequences to their risks, and there is nothing mitigating this consequence (FDIC, SIPC, Federal Reserve) then the risk will typically prevent them from taking "Irrational" risks, and those that do will suffer the consequence and serve as a warning to others.
At the end of the day, protection of the individual is the responsibility of the individual. If the individual does not take the time and isn't willing to directly be involved in their own protection the protection they do get will never truly be on their side and the world around them will stagnate from the results. To fix the world you need more aware and active individuals, willing to pay for their own protection, willing to get involved in protecting themselves and truly understanding every individual decision they make.
Saturday, April 17, 2010
Best Explanation of the Financial Crisis Yet
This video not only nails on the head several economic concepts, but very accuratley retells the story of the financial crisis spread this video around!!!
Wednesday, February 24, 2010
What Makes Free Markets Work by Alex Merced
MercedForFreedom.com/AlexMerced.com Presents...
A Summary of what Makes a Free Market Work
by Alex Merced
Recommended Resources to Learn More About Economics:
Mises.org
FEE.org
1) Voluntary Price Systems
Resources are best allocated by a voluntary price system where prices are set by volutary exchanges by people in a free market. If the market is free from intervention prices will reflect the supply and demand of goods helping them be used more efficiently, and encourage individuals to invest in innovations that will address scarcity.
Example:
Let's say without subsidies and intervention the price of energy under current technology becomes high, since energy is a need it will encourage investors to invest in research in development of alternate energy sources. Since many market actors will invest in different types of alternatives, over time the most efficient one will survive since it will provide the lowest costs.
Problems that cause goods not to be priced efficiently are many, and are generally cause by the government intervening in the pricing system. Here's a list of some ways a government can manipulate a pricing system and cause economic inefficiencies.
Taxes: By taxing the people, it can create market incentives by giving tax deductions or credits which will increase the demand for a good increasing the price and lower the demand for other goods decreasing the price relative to where it's voluntary price should be. This will create false price indicators to innovators and investors of where innovations and capital are needed.
Price Fixing: By fixing prices the government can cause shortages or surpluses of goods. A government creates a central bank to in part fix the price of money (interest rates) although creating an artificially cheap money will cause overinvestment which will turn into malinvestment (cause of bad price indicators) which will create a shortage of capital later on when the malinvestment causes economic problems. Another price typically fixed is wages by putting controls on the minimum wage it makes low-skilled labor more expensive than it's supply, so then employers are able to attain less laborers meaning less jobs creating a surplus of labor(unemployment).
2) Competition
In a free market free from intervention, anyone with even little to no resources can make an attempt to compete with the biggest actors in the market. While dealing with one small competitor would not make a dent in a large established company, a plethora of competition can diminish enough of their business that if they don't innovate or improve their serivce/product they will be removed from the market. This competetive pressure improves products and services, and requires that no artificial barriers to entry be put such as regulations, licensing, and other controls that prevent competition.
If there is no intervention in competition there can be no monopoly pricing even if there are monopolies, cause if a monopoly changes his price or service it would trigger competition. Monopoloy pricing can only exist if government imposes rules and fees to prevent competition and reduce competitive pressures on established actors.
3) Innovation
At the End of the day the goal is to increase the standard of life which can only come from innovations that make life more efficient, make less labor neccessary to do chores, make leisure time more enjoyable, etc. Innovation is encouraged through competition. Innovation in the most valued products and services occur with a voluntary pricing system since it indicates to innovators where innovations are most desired. This is why a free market is important to maintaining an improving standard of living.
4) Money
Money, or the medium of exchange is just as prone to all benefits of a free market as any good or service. Allowing voluntary pricing and competition in money will allow for more stable money that will make pricing as an indicator more clear and efficient to innovators and investors. So government monopolies and regulation of money have all the same negative effects it would on any other good or service. Central Banks & Legal Tender Laws only give the government a mechanism to borrow money to infinetly expand at the cost of market and the price systems ability to work efficiently reducing the standard of life of governments people.
A Summary of what Makes a Free Market Work
by Alex Merced
Recommended Resources to Learn More About Economics:
Mises.org
FEE.org
1) Voluntary Price Systems
Resources are best allocated by a voluntary price system where prices are set by volutary exchanges by people in a free market. If the market is free from intervention prices will reflect the supply and demand of goods helping them be used more efficiently, and encourage individuals to invest in innovations that will address scarcity.
Example:
Let's say without subsidies and intervention the price of energy under current technology becomes high, since energy is a need it will encourage investors to invest in research in development of alternate energy sources. Since many market actors will invest in different types of alternatives, over time the most efficient one will survive since it will provide the lowest costs.
Problems that cause goods not to be priced efficiently are many, and are generally cause by the government intervening in the pricing system. Here's a list of some ways a government can manipulate a pricing system and cause economic inefficiencies.
Taxes: By taxing the people, it can create market incentives by giving tax deductions or credits which will increase the demand for a good increasing the price and lower the demand for other goods decreasing the price relative to where it's voluntary price should be. This will create false price indicators to innovators and investors of where innovations and capital are needed.
Price Fixing: By fixing prices the government can cause shortages or surpluses of goods. A government creates a central bank to in part fix the price of money (interest rates) although creating an artificially cheap money will cause overinvestment which will turn into malinvestment (cause of bad price indicators) which will create a shortage of capital later on when the malinvestment causes economic problems. Another price typically fixed is wages by putting controls on the minimum wage it makes low-skilled labor more expensive than it's supply, so then employers are able to attain less laborers meaning less jobs creating a surplus of labor(unemployment).
2) Competition
In a free market free from intervention, anyone with even little to no resources can make an attempt to compete with the biggest actors in the market. While dealing with one small competitor would not make a dent in a large established company, a plethora of competition can diminish enough of their business that if they don't innovate or improve their serivce/product they will be removed from the market. This competetive pressure improves products and services, and requires that no artificial barriers to entry be put such as regulations, licensing, and other controls that prevent competition.
If there is no intervention in competition there can be no monopoly pricing even if there are monopolies, cause if a monopoly changes his price or service it would trigger competition. Monopoloy pricing can only exist if government imposes rules and fees to prevent competition and reduce competitive pressures on established actors.
3) Innovation
At the End of the day the goal is to increase the standard of life which can only come from innovations that make life more efficient, make less labor neccessary to do chores, make leisure time more enjoyable, etc. Innovation is encouraged through competition. Innovation in the most valued products and services occur with a voluntary pricing system since it indicates to innovators where innovations are most desired. This is why a free market is important to maintaining an improving standard of living.
4) Money
Money, or the medium of exchange is just as prone to all benefits of a free market as any good or service. Allowing voluntary pricing and competition in money will allow for more stable money that will make pricing as an indicator more clear and efficient to innovators and investors. So government monopolies and regulation of money have all the same negative effects it would on any other good or service. Central Banks & Legal Tender Laws only give the government a mechanism to borrow money to infinetly expand at the cost of market and the price systems ability to work efficiently reducing the standard of life of governments people.
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