Opression through Complexity of Institutions

Creating Infrastructure for Private Regulation

Creating Infrastructure for Private Regulation
by Alex Merced

 Everyone on both sides of the aisle have empathy for consumers who are defrauded, swindled, and are tricked into entering trade under false premises. The debate isn't should there be mechanisms to protect and put oversight on the consumer market that'll help prevent these kind of problems, but what should the mechanism be?

 Those typically on the Right believe in the markets ability to take care of itself, and that firms that participate in fraud will eventually fail since they'll cannibalize their consumer base, and only legitimate reputable firms will exist when all is said and done that regulation of any form shouldn't exist cause it inhibits the level of competition that'll keep prices reasonable for consumers and allow pressure to keep firms honest.

 Those typically on the Left believe that even if this is true, the market will leave massive collateral damage in the wake of weeding out these fraudulent firms. They advocate regulating industries into "best practices" via government run regulatory monopolies also known as regulatory agencies. While this may have some effect on prices and the amount of competition, they feel the amount of confidence that consumers will have will outweigh the costs since consumers will feel safer to spend more.


The Problem with both of these positions

- The amount of collateral damage from having no mechanism for oversight can and will deter market confidence for sometimes long periods of time, which can create a society that is skeptical beyond necessity. This can actually inhibit the amount of investment and consumption in the economy.

- Centralized oversight from government monopolies are heavily subject political conflicts of interest and regulatory capture, and since there is no alternative it becomes the equivalent of no oversight but with the added danger of a public that thinks they are being protected and behaving as they are. (Imagine jumping out of plane thinking you are wearing  a parachute, but really they gave you a backpack of bricks, you feel perfectly safe till you hit the ground)

- Overconfidence is just as bad as no confidence, not only is fraudulent firms a problem but also is overconfidence by consumers to trade without doing their due diligence.

- Government enforced monopolies which use police/legal force to force best practices only make it more expensive and difficult for new start ups to compete against larger more established firms who might become more fraudulent feeling safe from competition and also grow too big because of this protection allowing them to capture regulators.

So Then what does Ideal Oversight look like?

Ideal oversight would come from a market of regulation, where competing firms compete to earn fees from consumers for regulatory services such as product reviews/rankings, product disclosures, and consumer education. This offers several benefits:

- Avoid regulatory capture since consumers can switch regulators when one regulator becomes too corrupt

- Since participation by the consumer and the firm is voluntary, consumers don't feel unduly protected unless paying for regulatory service and by trading with firms approved by that regulator.

- This allows for oversight with minimal collateral damage, doesn't move the barrier to entry since compliance with any of these regulatory companies is voluntary (if you don't, you don't have access to their members as customers)

As with anything the answer is not to have something or to have central provision of it, but to have market provision of the service or good. Although there is one way the government can help in fostering such a market in private regulation, by helping establish a model for consumers and regulators to find each other and disclosure of information. While I am against all government intervention, this is more a method to transition from the current monopoly to a regulatory market. To understand my proposal we must understand the logic of the securities act of the 1933.

The Securities Act of 1933


 In the 20's most of the communication technology we take for granted today didn't exist or was in it's earliest stages. A investor looking for an investment had no internet in which to pull a particular companies financials or information to base a decisions off of, only what a broker chose to provide them who had a conflicting interest in getting them to like any particular investment cause of commissions.

 So the logic of the act of 33 wasn't to prevent companies of varying quality to make their securities available to the public, but instead to require that the sale of the securities be made through a disclosure of information we now know as a prospectus. Also, these prospectuses must be registered with the Securities Exchange Commission to make sure all proper disclosures are made.

 The basic idea of disclosure is one of the most interesting parts of this act, it wasn't about making the decision for a customer in what's good for them in the way the FDA does with drugs or more modern financial regulation may do but instead empowering the consumer to be able to carry out their responsibility of making a decision.

 As technology involved, access to information has evolved with the internet and now the SEC has their EDGAR database in which anyone can look up all this disclosure information for any company. Although again, this was not perfect for many reasons...

- The SEC is a public monopoly that use legal/police force which tends to make consumers feel unduly safe so while there is more disclosure retail investors have less incentive to read it feeling the SEC has broad enough jurisdiction

- Consumers will deal with any firm since they assume that all firms are registered with the SEC, instead of looking for an approval sticker or id of some kind (although Broker Check was made to address this, they'd be more willing to use such a service if they were educated to use it)

If the SEC was established not as a monopoly but as a model for what other firms can do as a regulatory business, other firms would approve on many of the shortcomings of the SEC in order to take their market share. A Market would develop and the competition would eventually allow a phasing out of the SEC and the expense for the government... of course government doesn't like competition with their agencies or phasing out power which is just the problem with governments themselves (thus why I'm an anarcho-creatarian).

How do we apply this to today?

The Government could establish a model, an online platform where regulatory businesses can put up all their information and allow consumers to subscribe to their services. The government could of course put stipulations similar to registering a prospectus to putting your company on this platform and take assessments on subscription fees to help fund the platform so it doesn't use taxpayer money.

This platform can categorize all these private regulators by industry, geography, and by services offered. Education materials can be made available on this platform on how to use the services from these regulators, and profits from assessments can be used on ad campaigns (similar to Got Milk commercials).

This should be done in a non-coercive way, regulatory companies are not obliged to post on this service although they stand to benefit from air of legitimacy they'll get and marketing from ad campaigns. Also other companies should be free to create their own competing platforms so this way eventually the government can either close the platform as it loses market share to more innovative platforms or sell it to buyer of their choosing.

This would handle many issues of oversight, regulatory capture, consumer confidence, anti-competitive, and other issues prevalent with the mainstream right and left views of regulation.

Capitalism and Democracy

Capitalism and Democracy
by Alex Merced

Detractors to Capitalism often will make satire of the idea of "the invisible hand" as if Free Market Capitalist believe there is an actual invisible hand. The Invisible hand is a metaphor for much more beautiful and plausible idea; that the actions and choices of every individual under no coercive influence can best manage scarce resources. I mean to anyone who calls themselves anti-establishment, how can this not be a beautiful idea, the lack of central power, the freedom from a top down world. Detractors will then make arguments about "Market Failure" essentially making claims that the market doesn't achive impossible and often impracticle goals such as EQUAL income distribution.

Proponents such as myself are always glad to point out any problems that do exist tend to often if not always come from the results of barriers to entry through prohibitions and costly regulations that inhibit the amount of choice and diversity that makes a market works to it's best ability. Essentially to believe in Free Market Capitalism is to believe in a sort of Market Democracy where instead of decisions being the votes of all individuals but by the purposeful actions of all individuals.

Detractors will claim that you can't trust people to make the right decisions with their resources and their lives, so of course you need a coercive foce such as government to correct these "failures". In order to choose who sits in government to make these corrections detractors will be proponents of a democratic process... believing that the choices of all individuals will put best people in power, basically a market for government power. My questions then becomes, if you don't believe peoples decisions individually can manage resources then how can you claim that those same individuals decisions on who to manage will be any better?

The counter arument would be "Like the markets, we believe it should be a regulated process", thus comes all the campaign finance rules, ballot access measures, and other regulations of the democratic process. Although, if this is a market process these regulations should achieve the same results we see in the market limiting choice thus limiting the ability for individuals to truly take actions that make the market mechanism work at finding the most valued result.

Bottom line...

If you can't believe in Markets, how can you believe in Democracy?

What Does a Free Market Banking System Look Like? by Alex Merced

1. No Federal Reserve: The Central Banks fixing of Interest causes malinvestment causing long term projects to be undertaken employing many, but those jobs are lost when those projects are shown not to be in line with the actual savings to complete the project(half way built houses) or to purchase the finished products (empty condo units).

2. NO FDIC/SIPC: There would still be private deposit insurances, and the costs of insuring deposits at a bank that takes on excessive risk will keep prudent investors in safe banks, also since the cost of insurance is spread out among many insurance companies depositors won't have to wait years to make their claims.

3. No Central Regulator: Instead of a government funded regulation monopoly which is subject easily to regulatory capture, consumers would pay for private firms who'd represent their pooled interest and establish rules for banks who want to deal with these firms clients. Since these firms are paid for by the consumer, not the government (political conflicts of interest), not by the industry (industry conflicts of interest), the interest of the clients/investors will be in line with that of the firm/regulator. This also allows for different regulatory frameworks to co-exist so people wanting to take on more risk can go to different regulator allowing more risk and allows alternatives if one regulator becomes corrupted by regulatory capture. These firms would require banks to meet their requirements, they'd rate securities, and other services which the investors might want.

4. A return to Sound/Constitutional money: Gold and Silver would be money once more and banks would be able to create their own money substitutes (redeemable pieces of paper), and can only participate in fractional reserve banking with depositor consent eliminating the fraud concerns.



Although in this environment we still have one issue: While even with private deposit insurance and private regulation a bank can conceivably go bust and frightened remove deposits from all banks, to prevent this government can use it's enumerated power to set standards...

The Government would establish standard units (ex. $1 = 1/40 ounce of gold) and standard reserves terminology, so consumers, businesses can determine the quality of the bank that issued the note/dollar...

Class 1 Banks: Reserves of 75% -  100%
Class 2 Banks: Reserves of 50% - 75%
Class 3 Banks: Reserves of 25% - 50%
Class 4 Banks: Reserves of 0% -25%

So if a Class 4 bank were to go bust people won't rush to pull money out of higher class banks. Also, Gresham's Law (bad money will crowd out good money) will kick into place...

Good Money - Class 1 Banks - People will put their savings in the Class 1 banks since to keep such high reserves a bank would have restrict withdrawal but the extra safety would be great for long term savings such as retirement. Lower yields, but higher purchasing power.

Bad Money - Class 4 Banks - In order for these banks to survive they need liquidity, so these banks would work like the banks of today issuing credit cards, checking accounts, way to get money instantly and quickly. Higher Yields but lower purchasing power.


While there'd be no rules that these banks would fall into these roles, it'd be logical that they would over time. Also businesses can ask for different quality of money, a store that only accepts class 1 money would have lower prices than that accepts all the way to class 4 money yet people who don't want to be subject to all the inflationary pressures of class 4 can have the option to only bank with class 1 banks and use the money at stores that only accept class 1 dollars.

Overall, a monetary/banking system like this is transparent, the only role of government is to set some standards and maybe a reporting system to have a database which private companies can develop systems to check class status of banks and notes, yet no government rules on how these standards should dictate behavior, that would be left to the people and private regulators.

This, is a free market system, transparent, versatile, and flexible

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.

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.