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Tony Rubolotta
Caught in the Cobweb
September
17, 2008
I have written here before that government interference in the economy
delays the inexorable forces of economic laws, which in turn magnifies
the corrections that must inevitably take place. More government
regulation was not going to save Lehman Brothers from bankruptcy. It may
have delayed bankruptcy, but reality would still triumph in the end to
produce an even greater disaster. A government doing everything it can
to forestall and conceal the most catastrophic pending collapse in
economic history should not be trusted with anyone’s assets. The failure
of Social Security will make Lehman Brothers look like chump change.
Lehman did not fail due to lack of government regulation so much as it
did from application of the wrong regulations and a risk free mindset
created by previous government bailouts. People screaming for regulatory
reform in the wake of the Enron, Tyco and WorldCom failures were given
the Sarbanes-Oxley Act (SOX). SOX has proven to be yet another imposed
government burden entangled with a jobs creation scheme for CPAs and
bureaucrats. It is mostly show since the substance of the law is overly
complex and fails to address the driving force behind the failures it
was ostensibly passed to prevent. The lemmings are still stampeding over
the cliff, confident that the government safety net (SOX) will save
them. This leftist mentality that government is always the answer simply
increases the lemming herd to a critical mass no safety net can hold.
My guess would be that Lehman Brothers was in compliance with SOX and a
few other government regulations that may have contributed to this
failure. No one is talking about the burden of EEOA, but companies pay a
severe price for compliance. Companies do not hire the best people for
the job, but are burdened with a quota system that counts gender, skin
color and ethnic origin as the only qualifications that matter in
employment practices. To get the right person in the right job may mean
hiring three additional and unnecessary people just to satisfy state and
federal bean counters. Alternatively, companies may just fill those jobs
with unqualified or minimally qualified people and cross their fingers.
Neither situation is good in a competitive market, but it sure makes
liberals feel good, until the company goes bust with their money.
Greedy investors with unrealistic expectations for returns and wanton
disregard for risk fueled the failures that led to SOX. Greedy corporate
officers were more than willing to supply the high risk investments that
the greedy investors demanded. Supply and demand; it works every time.
Those same greedy individuals now want you and me, the taxpayer, to pay
for their foolishness so they can do it again.
The same leftist mentality that insists greed should be a risk free vice
is fueling the mortgage crisis. Lending institutions were gambling that
housing prices could only go up, as were borrowers, and that rising home
prices would secure their high risk loans through equity appreciation.
Of course, the government has had a hand in this too, insisting loans
reflect gender, racial and ethnic quotas and risk be damned. While I
believe the magnitude of this crisis has been exaggerated for political
purposes and media entertainment value, it will only grow if the
government offers some form of relief.
The Law of Supply and Demand regulates prices and determines the cost of
failure or reward for success for taking risk. Anyone that has taken
Economics 101 is familiar with the cobweb effect and the elegantly
self-regulating and self-adjusting features of this law. They should
also realize that if the equilibrium point is not reached in a sequence
of small adjustments, but thwarted by external manipulations, the
distance and pressure to reach equilibrium increase. The longer the
correction is delayed, or the more it is skewed by artificial means, the
more severe it will be when it finally happens. Socialists believe they
can beat this law, but they never have. The Soviet Union tried for 70
years to manipulate their economy without regard for this fundamental
law. The outcome speaks for itself.
We had laws against fraud and deceit long before SOX was passed. We also
had moral laws against greed and corruption even longer before SOX was
passed. Today’s buyers and investors are the best informed in human
history. How then were they duped? The government through SOX merely
created a false sense of security that fraud and deceit had ended or was
being controlled. Liberalism created the false notion that morality is
relative. Greed could be redefined as a need. Both create the risk free
mindset. Together, they created Lehman Brothers.
No more regulations please. Repeal SOX, enforce the laws against
fraudulent business practices and let the little corrections serve as
warnings to prevent catastrophic corrections later. The government that
is overseeing Social Security is unfit to do more than that. |
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