Monday, May 3, 2010

Crony Capitalism's Foundation

"Free markets depend on truth telling. Prices must reflect the valuations of consumers; interest rates must be reliable guides to entrepeneurs allocating capital across time; and a firm's accounts must reflect the true value of the business. Rather than truth telling, we are becoming an economy of liars. The cause is straightforward: crony capitalism. ... Classical liberals, whose modern counterparts are libertarians and small-government conservatives, believed that the state's duties should be limited to (1) to provide for the national defense; (2) to protect persons and property against force and fraud; and (3) to provide public goods that markets cannot. ... Why has this happened? Financial services regulators failed to enforce laws and regulations against fraud. Bernie Madoff is the paradigmatic case and the [SEC] the paradigmatic failed regulator. Fraud is famously difficult to uncover, but as we now know, not Madoff's. ... Are we to believe that regualtors were unaware? ... The idea that multiplying rules and statutes can protect consumers and investors is surely one of the great intellectual failures of the 20th century. Any static rule will be circumvented or manipulated to evade its application. ... Public choice theory has identified the root causes of regulatory failure as the capture of regulators by the industry being regulated... In a paper for [Fed's] Jackson Hole Conference in 2008, economist William Buiter described 'cognitive capture,' by which regulators become incapable of thinking in terms other than that of the industry. ... Congressional committees overseeing industries succumb to the allure of campaign contributions, the solicitations of industry lobbyists, and the siren song of experts whose livelihood is beholden to the industry. ... We call that system not the free market, but crony capitalism. It owes more to Benito Mussolini than to Adam Smith. ... Hayek's mentor, Ludwig von Mises, predicted in the 1930s that communism would eventually fail because it did not rely on prices to allocate resources. He predicted that the wrong goods would be produced: too many of some, too few of others. He was proven correct. ... Low interest rates particularly impact housing because a home is a pre-eminent long-lived asset whose value is enhanced by low interest rates. ... If we want to restore our economic freedom and recover the wonderfully productive free market, we must restore truth-telling on markets", my emphasis, Gerald O'Driscoll (GO) at the WSJ, 20 April 2010, link:

I have said things like GO for decades.

3 comments:

Anonymous said...

Free markets and free societies depend on truth telling...

A premise so profound and central can form the basis of alliance between right and left allayed against the fraud on Wall Street and mega corporations.

It may be too early but this alliance will come...

And it will sweep away the current crop of crony capitalists.

Independent Accountant said...

Comrade Anonymous:
Read my 20 October 2008 post: http://skepticaltexascpa.blogspot.com/2008/10/agents-of-influence.html.

IA

Ubu said...

I come here every morning because I can count on reading articles like this that lay out the truth with such earnest words. Little by little, I see decent men and women become determined to put an end to the criminals and frauds who infest our political and financial system at every level. Thanks, IA.