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The Big Lie


The Big Lie

By: Steve Sadler, CEO

January 21, 2016

It has long been said that the bigger the lie the easier it is for people to believe it. Perhaps this truism is a truism because it’s true. Evidence in our current world would certainly suggest that there is a lot of truth that the bigger the lie the easier it is for people to be deceived. Take for instance the big lie being told repeatedly in the mainstream media and neighborhood gatherings and restaurants all over the United States of America today.

What is this big lie and what is it that Americans are being deceived by? The big lie is that the recent near collapse of the American economy and our current economic malaise are problems that stem from free-market capitalism. The economic system currently operating in the United States is Hell and gone from free-market capitalism. Without getting into all the details, all the economic nuances and all the financial theory, let’s just take a couple of interesting anecdotes that illustrate this point with a clarity that is undeniable.

Interestingly, the biggest financial issues that our country faces, the biggest problems resulting from the meltdown or the stock market crash, are in areas where government involvement, interference and regulation are the heaviest. Is it surprising to you that the largest single failure in the last few years was AIG, a huge insurance conglomerate?

The insurance industry is one of the most heavily regulated, highly overseen industries in the world. In the United States alone, every insurance company is subject to the regulation of the state insurance commissioner as well as regulation by the Feds. These regulations run thousands and thousands of pages of Byzantine rules and mazes of policies and procedures, requirements and constraints, capital rules and sales guidelines and investment restrictions. How ironic it is that in this highly regulated industry, where all minutiae is subject to the second-guessing of a government worker — a Monday morning quarterback on the dole — would become the largest bailout debacle in the history of the United States of America?

I would like to mention the failure of General Motors and Chrysler. Hold on, you say, these guys are not a highly regulated industry. Really? Let’s take a look at the various ways the federal government and the state governments interfere with the smooth operation of the automobile industry.

Regulations or restrictions?

First, think for a moment about “CAFÉ” standards — which stands for Corporate Average Fuel Economy — or all those mileage and emission requirements foisted upon car manufacturers by various regulatory agencies from the state of California to the federal EPA. Now at first blush these regulations may seem in fact to be very beneficial. What is often misunderstood however, or neglected, is to account for the enormous investment required for the companies to reengineer their automobile design, engine design and their manufacturing processes in order to meet these requirements by the EPA.

Recently Pres. Obama declared that new mileage standards, the so-called CAFE standard, would be raised significantly with a fairly short two-year timeline for compliance. Unfortunately Pres. Obama with that stroke of the pen was not able to magically overcome the laws of physics, gravity and friction and he has not seen fit to create the technology and innovation that would allow for his regulatory decree to be met without crippling effects on the manufacturers themselves.

SavvyJan20166The human cost of regulation

To take it one step further, let’s look also at the impact these regulations have on the actual consumers, the people our government is supposedly protecting. Over the course of the last few decades, automobile industry standards for mileage have resulted in numerous technological innovations. But the single largest factor in the increasing gasoline mileage averages is the weight of the vehicle.

As manufacturers have been forced to skinny down the weight of the vehicles, we are replacing steel with plastic and — shocking but true — the number of highway fatalities continues to rise. An even cursory examination of the data would lead you to an inescapable conclusion that pound for pound nothing protects a passenger or driver like a heavy steel cage.

Unfortunately, that same heavy steel cage causes the mileage efficiency of the vehicle to drop, leaving the manufacturer in grave jeopardy of regulatory interference. So essentially, what I’m saying is that the American driver in the American passenger car is being sacrificed on the regulatory altar of mileage standards.

This sacrifice of the consumer is antithetical to free market capitalism. Without direct, persistent and aggressive government interference and intervention in the marketplace, this result would never have happened.

Now back to my main point, which is the big lie. As you can see, we have discussed very briefly the regulatory interference in the insurance industry and the regulatory interference in the automobile industry. No doubt you will recall that General Motors and Chrysler were among a group of auto industry manufacturers and suppliers that received almost $80 billion through the federal Auto Industry Financing Program. The “rescue program” cost taxpayers $9.3 billion, according to the U.S. Treasury. That’s $38 from all 245 million adults in the U.S. Except those 245 million adults weren’t asked if they wanted to “donate.”

SavvyJan20163When regulation doesn’t work

Next, let’s talk briefly about banks. Everybody loves big banks, right? Well, we seem to own most of the big banks in the country — that is the U.S. taxpayer does. In the midst of the financial crisis of 2007-10, we saw a government intervention in the marketplace of the financial institutions that has never been seen before in the history of this country.

Now a reasonable person would probably ask themselves, “Why is this necessary?” Why is it that the one industry that is more directly controlled and more directly under the sway of federal and state regulators — from the Federal Reserve Bank, to the Federal Deposit Insurance Corporation, or the old Office of Thrift Supervision that was the successor to the Federal Home Loan Bank Board but was rolled into the Office of the Comptroller of the Currency, or the U.S. Treasury Department, or the Federal Reserve system — why is it that this industry is the one that always gets in trouble?

With federal regulatory standards for everything from how a loan is made to the disclosures required on the forms signed by investors, from federal involvement in the creation of currency to the establishment of reserve requirements at banks, to the delineation of acceptable investments and leverage ratios and interest rates, one would think — if you believe the big lie — that “regulation creates safety, stability and security.” That is that the banking industry would be a panacea of placidity.

That’s not the case, is it? Our friendly financial institutions are a bloody mess. At every turn, the federal regulatory overlay introduces perverse incentives that are completely antithetical to free market capitalism. From Fannie Mae and Freddie Mac loan requirements, to the securitization of various losing loans, the ‘too big to fail’ banking system is nothing but an enormous fraud perpetrated on the American people by the worst elements of Wall Street and orchestrated by federal regulators.

So far we’ve touched briefly on the insurance industry with the AIG debacle, automobile manufacturing with General Motors and Chrysler, and the financial services industry with Citibank and Wells Fargo, not to mention Merrill Lynch and Lehman Brothers and Bear Stearns and so many more. But what have we not talked about?

These are but examples, albeit high profile ones, of the actual result of regulatory interference in free market economies. Despite the so-called good intentions of our friends in Washington D.C., despite the best efforts of Barney Frank, or Christopher Dodd or John Paulson, or John Snow, or Henry Paulson, the regulatory regime does precisely the opposite of what it advertised to do. Regulatory interference by government fiat creates uncertainty, instability and risk. The big lie is revealed.

SavvyJan20168When free market shines

In an effort to illustrate the magnitude of the big lie, let’s review briefly an industry that is enormous and critical for the economic functioning of our nation — not to mention the world — that has largely escaped intensive regulatory interference.

It is my favorite example of an industry that has become essential to the smooth operation of the entire world and yet has escaped intensive regulation would be the computer industry. Take a look at the evolution of Microsoft and Apple and the applications of all of these technologies into various aspects of our lives and note the distinct absence of regulatory requirements for the amount of memory in your computer, the speed of your processor, on the size of your keyboard, or the size of your display.

Regulatory requirements for the functioning of software, or pricing, or many other aspects of technology have largely been absent. Microsoft and Apple, and there are many others, have been allowed to operate in a relatively free market way.

Is it any coincidence that the computer industry has grown by leaps and bounds, impacted our daily lives in an enormous and positive way and created millions of millionaires? Coincidence I think not. Oh yeah, and don’t forget that the cost of computing power has been in steep decline for decades.

In reality, the truth is that regulation makes us lazy and vulnerable. Any time you cede power to a faceless third party bureaucrat, there is a reasonable chance that you will be worse off in short order. Who cares about you, your family, your prosperity more? That guy behind the counter at the DMV? Or you? And don’t kid yourself, the folks at the FCC, DOJ, IRS, SEC, EPA, or any other alphabet soup agency, are not much different from the people at DMV. They’re unaccountable bureaucrats with power over you. Sounds appealing, does it not?

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