Thursday, March 26, 2009


There is blame on both sides of the political aisle for our current economic mess. But the siren call of socializing failing sectors of the economy - whether in banking, housing, health care or in Detroit - leads to a wrong and dangerous course that undermines the renewing and self-correcting nature of market forces.

Good intentions from Washington have too often resulted in harmful unintended consequences. Worse, there often is no corrective to harmful government-engineered outcomes because accountability is obfuscated and vested interests become entrenched, thus perpetuating a new dysfunctional status quo.

The Sarbanes-Oxley Act, a reaction to Enron-style accounting scandals enacted in 2002 on a Senate vote of 99-0, has been one of the most costly and counterproductive regulations imposed on our economy, hindering innovation, slamming the door shut on initial public offerings (IPOs) in the stock market and driving many companies out of U.S. markets and off U.S. tax rolls.

Yet because of political appearances and vested minority interests that benefit from the regulation at the expense of the general economy, no politician even talks about removing this drag on our economy - notwithstanding our current perilous condition. Cynics might call this tendency a death wish. President Eisenhower called it “creeping socialism.” Nobel Prize winner Friedrich von Hayek called it “The Road to Serfdom.”

Economic policy needs leadership that affirms market-based solutions and articulates clear objectives and priorities so as to allow natural adjustments within existing industries, foster normalcy in capital markets and renew the confidence of entrepreneurs to start new ventures that create jobs in tomorrow’s industries. In our present fragile condition, regulatory reform must be guided by two practical objectives: (1) restoration of confidence by the reduction and containment of systemic risk; and (2) creation of jobs by the fostering of investment and capital formation.

This is no time for undertaking radical new regulations like cap-and-trade or card check, which would significantly raise producer costs and tax consumers. The proposed sharp increase in government spending combined with costly new regulations on energy and employment in an overleveraged, shrinking economy is reckless. It risks turning a recession into a depression.

The first order of the day is to restore trust so that market participants can begin to make rational calculations about prices and investment. The three key variables surrounding trust are predictability, accountability and transparency.

It is not coincidental that our economy and capital markets made their biggest plunge after Bush administration policymakers took inconsistent and opaque actions, saving some institutions and allowing others to fail and abandoning a plan to buy troubled assets for a sudden, massive bank recapitalization.

In fact, government bailouts have been a curse, with just about every company that received government funds losing more value than the general market since the time of receiving the aid. That is no small feat in the worst bear market since the Great Depression.

A recent suggestion from Treasury Secretary Timothy F. Geithner to convert taxpayer-owned preferred stock in Citibank into less secure common stock certainly fails to engender trust. Bankruptcy reorganization of Citibank would wipe out all common-stock holders and $45 billion of taxpayer capital. Political grandstanding and outrage over the American International Group Inc.‘s payment of contractual bonus compensation to key employees deflects attention away from the real problem - a series of government interventions resulting in a $173 billion bailout, a sum that has cost taxpayers 1,000 times more than the AIG bonuses receiving all the media attention.

Despite the wide margin of electoral victory and the popularity of the Obama administration, the markets show a resounding vote of no confidence because the fundamental trust issues of predictability, accountability and transparency remain unaddressed and unresolved. Public markets are aggregate price mechanisms that carry vital signs and information that politicians ignore at their peril. The markets are speaking loud and clear, signaling a palpable fear that we are at a tipping point: that the capitalist system that has served us so well is threatened by creeping socialism and the road to serfdom.

Socializing failure and expanding government intrusion into the private sector is harmful because of the political effect, which distorts efficient and rational pricing and thwarts efficient allocation of resources and industry reorganization. The primary reason for Fannie Mae’s and Freddie Mac’s failure was politicization and socialization, which created a false sense of security, abrogated market signals and prevented the rational calculation and pricing of risk. The political and economic bailout of the U.S. auto industry is delaying and interfering with reorganization that market forces would bring about sooner.

The political effect of government ownership of banks and insurance companies that has visibly interfered with management and resulted in capping compensation will surely drive talent out of those institutions, thereby undermining their ability to recover. Thus, the present course of government action increases the likelihood of failure - threatening to further cripple established institutions, waste scarce taxpayer resources and irresponsibly burden future generations not only with yet more debt, but also with the double stealth tax of inflation and bracket creep.

We do not have the luxury of experimentation when the stakes are so high and the record of government solutions and stewardship is so thin. Perhaps all that is required at this hour is to remember that government can create nothing without first having taken it from the people. It is time for everyone who has children, grandchildren, a 401(k), savings or other property to rise up and just say “No. Go no further down this road to serfdom.”

Scott S. Powell is a senior vice president at ELP Capital Inc., which manages a commercial real-estate debt-based hedge fund. He also is a Commerce Bridge Corp. board member and a visiting fellow at Stanford University’s Hoover Institution.

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