The wholly political accusations this week against Goldman Sachs have strained my sensibilities.  This politically motivated witch-hunt was designed to obfuscate the SEC's gross incompetence regarding the Stanford Ponzi Scheme, and as a weapon/threat against the finance industry to facilitate the adoption of misguided, damaging financial reform.  (more detailed analysis pending)

(My sanity was further imperiled when TheAMD.com's hard drive crashed on Monday destroying hundreds of hours of analysis.  Special thanks to HP for selling me a "lemon" and enthusiastically torturing me from their call-centers abroad for the last 6 months)

"An Economy of Liars" featured in the Wall Street Journal on April 20th was a much needed respite from Washington D.C.'s Economic Death March.  The analysis brilliantly articulates why existing financial regulation has failed, why proposed reform won't work and why the economic policies of Modern Liberalism are both unsustainable and destructive. 

Link to article.

Exceptional excerpts below:

"Free markets depend on truth telling.  Prices must reflect the valuations of consumers; interest rates must be reliable guides to entrepreneurs 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 (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.  That conception of government and its duties was articulated by the Declaration of Independence and embodied in the U.S. Constitution."


"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.  Better than multiplying rules, financial accounting should be governed by the traditional principle that one has an affirmative duty to present the true condition fairly and accurately—not withstanding what any rule might otherwise allow."


"Nobel laureate Friedrich Hayek described the price system as an information-transmission mechanism.  The interplay of producers and consumers establishes prices that reflect relative valuations of goods and services.  Subsidies distort prices and lead to misallocation of resources (judged by the preferences of consumers and the opportunity costs of producers).  Prices no longer convey true values but distorted ones.

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.

In the U.S today, we are moving away from reliance on honest pricing.  The federal government controls 90% of housing finance.  Policies to encourage home ownership remain on the books, and more have been added.  Fed policies of low interest rates result in capital being misallocated across time.  Low interest rates particularly impact housing because a home is a pre-eminent long-lived asset whose value is enhanced by low interest rates.

Distorted prices and interest rates no longer serve as accurate indicators of the relative importance of goods.  Crony capitalism ensures the special access of protected firms and industries to capital.  Businesses that stumble in the process of doing what is politically favored are bailed out.  That leads to moral hazard and more bailouts in the future.  And those losing money may be enabled to hide it by accounting chicanery.

If we want to restore our economic freedom and recover the wonderfully productive free market, we must restore truth-telling on markets.  That means the end to price-distorting subsidies, which include artificially low interest rates.  No one admits to preferring crony capitalism, but an expansive regulatory state undergirds it in practice.

Piling on more rules and statutes will not produce something different than it has in the past.  Reliance on affirmative principles of truth-telling in accounting statements and a duty of care would be preferable.  Deregulation is not some kind of libertarian mantra but an absolute necessity if we are to exit crony capitalism."