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Posted on 07/15/2002 7:33:56 PM PDT by rohry
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| Monday, July 15, 2002 |
| Congress, Accounting, and the Free Market by William L. Anderson [Posted July 11, 2002]
The latest self-appointed “savior” of capitalism is Sen. John McCain of Arizona, who likes to speak of himself as “straight talking,” but who actually is nothing more than one of the many gasbags of Congress producing enough hot air to warm the planet many times. In a New York Times op-ed, McCain declares that the latest “string of corporate failures and scandals from Enron to WorldCom” have occurred because of lax regulation.[i] Thus, McCain intones, while being reluctant to impose even more regulations on the system, he believes the time is ripe to burden the system with, well, more regulations. Before examining McCain’s proposals, I think it appropriate to ask why a member of Congress, of all people, believes he has the right to demand standards of accountability from anyone, let alone U.S. businesses. For example, he declares that corporations have “fabricated revenues, disguised expenses, and establish off-balance-sheet partnerships to mask liabilities and inflate profits.” This statement is breathtaking, because he is describing current accounting practices of the U.S. government. Remember the nonexistent “surpluses” that seem to have disappeared? It seems that for political purposes, Congress fabricated revenues. Is there a greater scheme of financial fraud than Social Security, a Ponzi construction which, if practiced in the private sector, is a sure ticket to prison? Ever hear of “off budget” agencies like Ginnie Mae, Freddie Mac, and Sallie Mae? These outfits are created precisely to hide the trillions of dollars of financial obligations that ultimately fall upon U.S. taxpayers. To put it bluntly, McCain is party to what can be considered the greatest set of financial frauds in world history, something that puts the collapse of Enron and WorldCom in better perspective. It might seem more instructive for the physician to heal himself than for him to try to impose his will upon other parties. However hypocritical McCain and his congressional mates might be, I realize there is still the need to answer his criticisms and to examine his proposals to “bring back confidence” to free markets. In other words, just because McCain may personally be a fraud does not automatically make his proposals fraudulent. Unfortunately (or fortunately, as one might see it), McCain misdiagnoses the patient and calls for prescriptions which, if not killing it, will certainly do great harm. Let us begin. McCain and all of the modern critics are absolutely wrong when they declare that a “crisis of ethics” exists. McCain is hardly alone here, as I have read columns by people of all political and religious stripes declaring that what is needed is a new batch of ethical standards. In one sense, the problem is ethical, but not in the way the critics think. The current wave of “scandals,” if I may call them that, did not emanate from dishonest motives per se, but rather from the business climate brought about by the reckless efforts by Alan Greenspan’s Federal Reserve System to expand credit and create an unsustainable boom. Because people are trained to view the Fed’s credit expansions as beneficial to the economy, they are unable to understand just how such actions create opportunities for financial shenanigans. The first thing to remember here is that the Fed’s efforts are absolutely dishonest in themselves, creating monetary reserves literally out of thin air. Once that is done systematically for a long time, it is inevitable that the rules of the game will change as well. An atmosphere of reckless credit expansion creates all sorts of incentives for “creative” accounting practices. Take McCain’s accusation of false revenue projections, for example. It is little wonder that, during a credit-induced artificial boom, firms caught up in the financial madness will be much less careful in projecting future revenues than they would be in normal economic times or during a bust. This is because the economic rules that apply during the boom are not the same rules that exist during the bust, when the realities of malinvested resources come to the fore. The boom permits business owners to play much faster and looser with assets and equity, since it seems that whatever decisions they make are good ones. This is the characteristic of the boom, in which most business owners look like financial geniuses; it is only during the bust that what Ludwig von Mises calls the “cluster of errors” made by businessmen are made known. Right now, it is impossible to know if the overprojections made by executives at WorldCom were the result of deliberate fraud or simply came about because of boom-induced calculations. Everyone now knows that those calculation were in gross error, yet under the conditions that existed because of the Fed-caused artificial boom, WorldCom’s projections might very well have been reasonable. That does not mean those projections were a good thing, given the conditions of the boom. Credit-induced booms are unsustainable, and someone must ultimately pay the piper. Furthermore, since they were based on an unreal state of the economy, one can say they were fraudulent in the larger sense of the word, although not fraud as McCain would define it. (Since the write-downs are in the billions of dollars, I doubt that anyone in his right mind would have cooked up such a scheme as a deliberate criminal fraud, since the market in the end always has a way of bringing such things into balance.) If McCain wishes to hold Congress and the U.S. government to the same standards that they wish to impose upon private enterprise, perhaps his rhetoric should be aimed at Alan Greenspan, or even himself and the politicians and staff members that populate Capitol Hill. For example, he writes:
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This is a stunning statement--one that deserves thorough debunking--not to mention being one that is a sign of depraved hypocrisy. Does McCain mean that if a business makes revenue projections that do not pan out, then the executives should be imprisoned? How does one determine the “financial health of the company,” since those standards change drastically with business conditions and also with the latest set of regulations that come from the government?
For example, “tax reform” of 1986, as well as regulatory “reform” in 1989, exacerbated the collapse of many savings and loan institutions which otherwise were relatively healthy. When Congress, by the stroke of a pen, changed tax laws regarding real estate holdings, a number of thrifts which one day were healthy the next day became insolvent. Like the WorldCom and Enron debacles of today, many members of Congress, not to mention their media amen chorus, blamed the entire episode upon criminal fraud and were ultimately able to railroad innocent people, such as Charles Keating, into prison.
To put it otherwise, to implement such a policy would devastate American businesses, as every executive in this country would be in danger of being imprisoned because his or her company did not meet financial expectations. Such people would be prey for politically minded federal prosecutors, who have a vast array of weapons at hand to make people bow down to the criminal law apparatus of the government. It is easy for people like McCain, who do not have to meet a payroll or make important decisions regarding the life and health of an institution, to demand accountability standards that he himself would refuse to meet. Unlike Congress, businesses cannot take in revenues upon coercion. If I refuse to shop at Wal-Mart, for example, that is my right; if I refuse to give Congress the financial support it demands, then I go to jail.
Furthermore, if McCain really wants to impose these standards upon U.S. businesses, perhaps he first should begin with his own legislative house. After all, in calling for the resignation of Securities and Exchange Commissioner Harvey Pitt, McCain declares, “Government’s demands for corporate accountability are only credible if government executives are held accountable as well.” Does that mean U.S. senators? Should McCain be held criminally liable for campaign promises that he fails to honor? Should he be held criminally liable when he fails to keep his oath to “protect and defend” the U.S. Constitution?
These are questions I doubt the good senator would want to answer. Instead, we see the moral grandstanding that seems to be an occupational disease in Washington, D.C. One could only hope that real justice would prevail, and that the John McCains of this world would have to be subject to the same sets of laws and penalties they impose upon everyone else. Instead, we have legislation that will devastate private enterprises concocted as a scheme to “save capitalism.” Senator, we do not need to be protected from “predatory capitalism.” The real predators are in Washington, and they are you and your political allies.
William Anderson, an adjunct scholar of the Mises Institute, teaches economics at Frostburg State University. Send him MAIL. See his Mises.org Articles Archive.
[i] John McCain, “The Free Market Needs New Rules,” New York Times op-ed, July 8, 2002.
Golly gee, I bet this will be just the thing to perk up the markets.
Seems like there was discussion a while back about where corporations came from and how they came to be legal persons. If I recall, Congress created them in the late 1800s, which makes corporation problems Congress's baby.
That's true. A corporation has to be formed somewhere, and it is usually in a state where they are registered and obey state laws. There are international or offshore corporations as well. Seems like Stanley Tools is moving it's corporate HQ offshore like Loral. They probably have to be registered in every state where they do business anyway, which would give Congress something to say due to interstate commerce.
"Physician, heal thyself." ("Perhaps McCain should look to his own house first..")
As Steve Forbes said last Saturday on Forbes on Fox,
"Senators should have to sign the U.S. Budget under penalty of criminal prosecution," (paraphrasing Forbes)
If there are any inaccuracies,
any fraud,
any deficit spending,
any deceptive accounting,
any theft of public resources.
Of ourse the senate is filled with more hypocritical thieves and leftist-socialist windbags, who engage in theft, waste,
deceptive accounting tricks, fraud on a grand scale (the Federal Deficit is >$6 TRILLION,
WASTE is in the hundreds of billions annually,
theft of hundreds of billions of dollars annually is from
honest, quiet, hard-working ordinary Americans on the grandest of scales imaginable, and then some) every day,
which would send any ordinary businessman up the river for life.
(To paraphrase Sen. Hollings:
"We do every single day with the Budget,
things which would be sufficient to send an ordinary businessman to jail for life.")
Right now, it is impossible to know if the overprojections made by executives at WorldCom were the result of deliberate fraud or simply came about because of boom-induced calculations. Everyone now knows that those calculation were in gross error, yet under the conditions that existed because of the Fed-caused artificial boom, WorldCom’s projections might very well have been reasonable.
Just as politicians and bureaucrats have the gall of pointing their fingers at Enron, WorldCom etc, -- taking the "high road" when the government is by far the champion at cooking the books -- they would expect WorldCom guilty of following government bureaucrats destructive lead -- it was politician and bureaucrats irrational exuberance that lead the charge. The trio of Clinton, Greenspan and Rubin lead the charge followed by the unsuspecting business community and investing public.
The irony is that putting money in the stock market is speculation. Investment instruments or vehicles are savings accounts, guaranteed certificate of deposits (CDs), savings bonds and annuities -- if a person wants to speculate there's the commodities and futures markets, FOREX currency markets and stock markets. To name a few of each.
In terms of freedom of investment-and-speculation information the government has always held an oppressive and protectionist relationship with the financial and speculation markets as well as with the individual investors and speculators. Information about foreign investment instruments and speculation markets is basically non-existent in the United States. That's not because their undesirable, for many lucrative off-shore opportunities do exist, rather, it's because the government controls an unfair market advantage against the people and their business community. Speculative and investment instruments are not advertised in the U.S..
That does not mean those projections were a good thing, given the conditions of the boom. Credit-induced booms are unsustainable, and someone must ultimately pay the piper.
We had businesses that had no choice but to compete amongst themselves in an artificial boom. We had close to one hundred million investors that were in effect, speculating in markets. ...Speculating in markets orchestrated by the Clinton/Greenspan/Rubin trio's bubble-debt economy bound to protectionists financial-market oversight was a sure to be followed by a proportionately-sized bust.
The unmitigated gall of politicians and bureaucrats to be blaming the business community and yanking on inventors bruised-emotional chains -- intentionally adding fuel to the fire -- encouraging them to call for "lynchings".
The government is not the solution, it is the problem! Ceaselessly creating a never-ending array of problems that need not exist in the first place.
The Genie is Out of the Bottle.
Congress has created so many laws that virtually every person is assured of breaking more than just traffic laws. Surely with all this supposed lawlessness people and society should have long ago run head long into destruction. But it has not.
Instead, people and society have progressively prospered. Doing so despite politicians creating on average, 3,000 new laws each year which self-serving alphabet-agency bureaucrats implement/utilize to justify their usurped power and unearned paychecks. They both proclaim from on high -- with complicit endorsement from the media and academia -- that all those laws are "must-have" laws to thwart people and society from self-destruction.
Again, despite not having this year's 3,000 must-have laws people and society increased prosperity for years and decades prior. How can it be that suddenly the people and the society they form has managed to be so prosperous for so long but suddenly they will run such great risk of destroying their self-created prosperity?
The government is the all time champion of cooking the books and it has the gall to point fingers at the whole business community because of a few bad apples. The entire business community and employees that support it should stand tall against a government feigning to protect the little guy from organizations that cook their books.
If there was ever a prime example of the fox guarding the hen house it is the government claiming to protect the little guy from organizations that cook their books. President Bush will have to militarily smash down terrorism. For that is his job. It's not the President's, congress or' the government's job to manipulate the economy.
The business community with their employees will have to stand tall against the PC-status-quo fox -- self-proclaimed authorities claiming/feigning they'll use the government to protect the little guy and a complicit media and academia that supports them; for they are all the fox -- to regain their rightful place as the champions of honest business that has always increased the well-being of people.
The government, having already manipulated the economy to almost no-end, President Bush can play the unbeatable five-ace hand of replacing the threat-of-force IRS and graduated income tax with a don't-pay-the-tax-if-you-don't-want-to consumption tax. For example, implement the proposed national retail sales tax (NRST). Not only would that win votes for Bush and republicans in congress it would boom the economy.
Where will it lead?
War of Two Worlds
Value Creators versus Value Destroyers
Politics is not the solution. It's the problem!
The first thing civilization must have is business/science. It's what the family needs so that its members can live creative, productive, happy lives. Business/science can survive, even thrive without government/bureaucracy.
Government/bureaucracy cannot survive without business/science. In general, business/science and family is the host and government/bureaucracy is a parasite.
Aside from that, keep valid government services that protect individual rights and property. Military defense, FBI, CIA, police and courts. With the rest of government striped away those few valid services would be several fold more efficient and effective than they are today.
Underwriters Laboratory is a private sector business that has to compete in a capitalist market. Underwriters laboratory is a good example of success where government fails.
Any government agency that is a value to the people and society -- which there are but a few -- could better serve the people by being in the private sector where competition demands maximum performance.
Wake up! They are the parasites. We are the host. We don't need them. They need us.
* * *
After all, in calling for the resignation of Securities and Exchange Commissioner Harvey Pitt, McCain declares, “Government’s demands for corporate accountability are only credible if government executives are held accountable as well." Does that mean U.S. senators?
"Too often, we have cooked the books, exploited off-balance sheet accounting, fudged budget numbers and failed to disclose fully the nation's assets and liabilities. If we in Washington are to have credibility in the public eye as we address the corporate accounting mess, we must reform our own fiscal practices," said McCain. Social Security Called A Bigger Fraud Than Corporate Scandals
Prove it first. It's not like it's a new discovery or problem. It's a seventy-year-old problem. It's just that now politicians and bureaucrats have trapped themselves and the general public is becoming increasingly aware. They've been caught and McCain is getting interview time to peddle gussied-up compassionate government.
"Allowing Americans to invest responsibly a small part of their payroll taxes will not only save Social Security, but will provide them with greater retirement income than those who no or will soon depend on Social Security checks," said McCain. Social Security Called A Bigger Fraud Than Corporate Scandals
Notice McCain so readily wants himself and government to allow Americans to invest part of their own money. But he has a condition; it most be done responsibly. And who decides what is responsible? Certainly not the all-time champion, cook-the-books bureaucrats and snake-oil-salesmen politicians.
The are running citizens and society headlong into destruction.
Mclame blames everyone's elses money for all the worlds troubles, there are only certain people such as himself, who can properly manage it.
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The argument may be tired and hackneyed, but advocates never grow weary of presenting the same scenario, which goes as follows: Free markets are desirable, and unnecessary government regulation may stifle business growth, but we are living in a period of the Big Exception. Today, markets are in trouble, betrayed by the very practitioners of capitalism, and only new, outside regulations imposed by the state can bring back investor confidence and permit free markets to flourish once again.