Wednesday, September 24, 2008

Give the Market Back its Freedom

Let's get this straight. The liquidity crisis is not a failure of capitalism or a result of deregulation. Rather, it is a classic case of Moral Hazard that benefited politicians and Wall Street pseudo-capitalists while using taxpayers as their co-signer. This is what happens when you have too much market distorting regulation that can be easily manipulated for personal and political gain.

Washington abused its power of force and law and the good credit of the American people to borrow money at below market rates in order to lend to unworthy borrowers and cronies in a massive socialist/fascist vote buying scheme. This was all done in the name of creating "affordable housing" regardless of the willingless or ability of borrower to afford it in the first place. It also attracted risky speculation that never would have happened had mortgages been priced to reflect market realities.

Democrats going all the way back to Jimmy Carter are to blame, although more than a few Republicans were right there with them. At the very least the entire GOP is guilty of either willful neglect, incompetence or both.

The all too predictable meltdown now has the perpetrators scrambling to cover their collective asses while adding insult to injury by sticking us with the bill. In other words, the same people who got us into this mess are now asking us to trust them to get us out of it with more of the same.

What to do now? Get the Government completely out of the mortgage business and let the real free market solve the problem. Newt Gingrich has a sound plan to get this started, which includes:

"First, suspend the mark-to-market rule which is insanely driving companies to unnecessary bankruptcy. If short selling can be suspended on 799 stocks (an arbitrary number and a warning of the rule by bureaucrats which is coming under the Paulson plan), the mark-to-market rule can be suspended for six months and then replaced with a more accurate three year rolling average mark-to-market.

Second, repeal Sarbanes-Oxley. It failed with Freddy Mac. It failed with Fannie Mae. It failed with Bear Stearns. It failed with Lehman Brothers. It failed with AIG. It is crippling our entrepreneurial economy. I spent three days this week in Silicon Valley. Everyone agreed Sarbanes-Oxley was crippling the economy. One firm told me they would bring more than 20 companies public in the next year if the law was repealed. Its Sarbanes-Oxley’s $3 million per start up annual accounting fee that is keeping these companies private.

Third, match our competitors in China and Singapore by going to a zero capital gains tax. Private capital will flood into Wall Street with zero capital gains and it will come at no cost to the taxpayer. Even if you believe in a static analytical model in which lower capital gains taxes mean lower revenues for the Treasury, a zero capital gains tax costs much less than the Paulson plan. And if you believe in a historic model (as I do), a zero capital gains tax would lead to a dramatic increase in federal revenue through a larger, more competitive and more prosperous economy.

Fourth, immediately pass an “all of the above” energy plan designed to bring home $500 billion of the $700 billion a year we are sending overseas. With that much energy income the American economy would boom and government revenues would grow."


I would add to that the following:

Fifth, break up Fannie Mae and Freddie Mac into too small to save pieces and sell them off to the private sector. Government has no business being in business as it will always put political considerations above sound business practices.

Sixth, investigate and prosecute Franklin Raines, Jim Johnson, Jamie Gorelick and anyone else who was involved in this fraud. Additionally, Barney Frank, Chris Dodd, Bill Clinton and any other officials behind this mess should be exposed for their corruption and removed from any position of authority going forward on this matter. If we were to use Enron as a benchmark for financial crime and punishment, then nothing is too good for these crooks.

The proponents of a bailout are saying a collapse of the financial system is inevitable if taxpayers don't step in with more money. They don't know that and it's probably not true. Instead, it's a fear of the unknown consequences that the free market will impose on these excesses. That will be painful, but far less so than more willful ignorance of the Law of Supply and Demand.

True capitalism can be strict and punishing, but it is always more fair and beneficial to everyone than the arrogant intrusiveness of the state.

At the end of the day, this is an object lesson as to why we should be as vigilant, if not more so about a separation of business and state as we are with religion and state. Not that we needed more examples of the 100% historical failure rate of Government meddling in the free, voluntary trade of individuals.

Links to more on this subject Here, Here , Here and Here.








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