Posts Tagged ‘Corporations’

Is it just me, or are things amiss?

Times are interesting to say the least.  Our president is working overtime to extend olive branches to people all across the planet, but wagging a stern finger at those of us in the US who seek to make profits providing a service to others.

I read much about our foreign policy and the strategy of undoing the terrible decisions of the predecessor administration.  To that end, we are “reaching out” to leaders of Iran, North Korea, Russia, Egypt, Libya, Syria, and Lebanon.  We respect them.  We seek to listen to them. We hope for them.  We believe that treating them with respect and dialoguing on the high road will encourage them to act in ways that benefit the citizens of their countries and the world.  We are giving these leaders the benefit of the doubt.  Long before they demonstrate fair dealing, we honor them as if they already have the Noble Peace Prize.

Contrast that theme with the treatment of our own managers, business people and entrepreneurs.  In a variety of sectors including, banking, financial services, mortgage lending, insurance, and autos, our corporate leaders are cast as villains.  In less than one year, they have been summarily fired, suppressed, demoted, penalized, criticized and otherwise scapegoated after years of demonstrating honorable service to their respective organizations or to our systems of commerce.  Where is the benefit of the doubt?  Why not take the high road?

I am at a loss to understand why our own citizens are not worthy of the grace and understanding that we offer leaders of other nations?  It seems to me that the current administration has it backwards.  Invite dialogue with the leaders of US businesses and lecture the world leaders.  Encourage those in our economy who offer jobs and support the pursuit of happiness, and speak harshly to those who threaten our life and liberty.

Who is the enemy?

chron.com

In the Wall Street Journal’s opinion section, Scott Sperling of THL Partners (a private equity firm) defends the current administration’s auto workout plan as a capitalistic approach.  With all due respect, I don’t believe he understands the meaning of capitalism.

Rather than re-inventing the wheel, I present the wikipedia definition of capitalism below;

Capitalism is an economic system in which wealth, and the means of producing wealth, are privately owned.  Through capitalism, the land, labor, and capital are owned, operated, and traded for the purpose of generating profits, without force or fraud, by private individuals either singly or jointly, and investments, distribution, income, production, pricing and supply of goods, commodities and services are determined by voluntary private decision in a market economy.  A distinguishing feature of capitalism is that each person owns his or her own labor and therefore is allowed to sell the use of it to employers.  In a “capitalist state”, private rights and property relations are protected by the rule of law of a limited regulatory framework.

I believe that the above adequately defines capitalism and further discussion on it would be a waste.

In no way do the actions taken by the federal government (this administration or past administrations) to ‘save’ the US auto industry have any resemblance to 1) the fair trade of land, labor, and capital, and/or 2) the respect for the rule of law.  For him to offer that it is capitalistic because all parties suffered is ludicrous. In his own words, he mentions that the government “demands… …retirees take equity” and that it (government) “used rigorous analysis to make tough decisions.”  Remember, it was Bush and Congress (including Obama) that decided to get involved in the first place by writing a bailout check rather than letting these two (GM and Chrysler) go through the rational and logical process called Chapter 11.  The definition of capitalism does not include a caveat allowing an elected majority the right to dictate terms that go against the rule of law.

Actually, we can go back a little farther and assess some blame on the banks for being willing to fund a leverage buyout of Chrysler by a private equity firm, knowing that said firm has never been self-sufficient, was at the peak of an economic cycle, and had massive fixed labor costs (most of that is not hindsight).  They, under capitalism, have every right to make bad decisions, but they should have to suffer the consequences.  If they did, maybe Chrysler would have been liquidated and GM would have survived, as a major market participant would have been eliminated from the market.  Who knows the outcome since the free market was never allowed to operate.

It may be that the action taken by the current administration was the best solution available to lessen the pain by the largest amount for all parties directly involved, but in no way can it be confused with capitalism.  It was an action taken (forcefully and against the general population of the US) by a body of government elected by about 50% of the population, with the thought (right or wrong) that immediate steps were needed for the good of “society.”  In my opinion, the likely immediate benefits are far outweighed by the lasting implications of this decision, especially, if we resign ourselves into thinking that these actions represent capitalism. 

As mentioned above, maybe this was the best coarse of action, but we need to be honest about it residing outside the basic principles of capitalism.  If we accept Mr. Sperling’s argument, we do ourselves an injustice, redefine the word ‘capitalism’, and bend to forces of those in power, neglecting the rights of Individuals (singly or jointly) to succeed and fail.

If you don’t read the entire article, please read the excerpt below.

“The value of the rule of law is not merely a matter of economic efficiency.  It also provides a bulwark against arbitrary governmental action taken at the behest of politically influential interests at the expense of the politically unpopular.  The government’s threats and bare-knuckle tactics set an ominous precedent for the treatment of those considered insufficiently responsive to its desires.” – Todd J. Zywicki

There are many people discussing if government threatened hedge funds to take less during the Chrysler bankruptcy.  Implied in these discussions/opinions is that hedge funds are dirty, greedy, evil people looking to profit from others’ misfortunes.  Most definitely some are evil, much like individuals in general.  But what does that have to do with the government’s actions?

That whole discussion misses the point and is completely irrelevant to the fact that the government got involved with the automakers bankruptcy filing and enacted policy, ignoring the Rule of Law.  The fact is the government forced secure creditors (Chrysler made very specific promises to them giving them first rights to all assets in case of bankruptcy) to take less than due to them and gave considerably more to the UAW who were unsecured creditors (Chrysler made promises to them but the union workers were well aware that they were behind the secure creditors in case of bankruptcy).  Who held the secure debt is immaterial to this case as the Rule of Law is not being followed.  And it’s our own government not following it!

If you want to see the unintended consequences of these governmental dictates, please refer to page C2 of today’s Wall Street Journal or to recent comments from Bill Gross of Pimco (the largest steward of debt instruments in the US).  When the government changes the rules after the fact, no private capital will want to align with them to help solve the liquidity problems.  Or, if they do, they will require outsized returns to take on the outsized risks.  This only increases the costs of capital movement, therefore lowers the actual movement of capital which only drives the economic decline farther down.

This is exactly what happened in the 1930′s as the government continued to enact legislation that changed the rules after the fact.  This caused private capital to move/stay on the sidelines.  CEO’s decided to wait to buy new equipment and/or hire.  Capital providers demanded a higher return given the government’s involvement.  Investment, which drives job growth, stalls.  Quality of living drops.

Question:  Why does it matter if a hedge fund owns any of the Chrysler debt?  Does anyone feel it fair to treat them as less-than-equal investors?  If so, how do you want to parse out the good hedge funds (those managing the money for charities and widows) from the bad ones?  Who is to say that one man’s money is more ‘ethical’ than someone elses?  And what does any of that have to do with the government disobeying the Law?

To find my happy place, I usually pick up an Ayn Rand book. (No jokes please).  So, yesterday, I was in a really bad mood and picked up Ayn Rand’s Capitalism: The Unknown Ideal.

The book is a collection of essays by Ayn and a number of her followers (including the great Greenspan who, ironically, wrote about the need for a gold standard so that our nation didn’t go about printing money willy nilly). There are over 20 essays in this book with at least 18 of them pertinent to today’s discussion of expanding governmental powers.  This book alone will provide me with loads of blog content.  Lucky you!

In this post, I wanted to highlight her essay entitled “Let Us Alone” which starts with this:

“Since ‘economic growth’ is today’s great problem, and our present Administration is promising to ‘stimulate’ it – to achieve general prosperity by ever wider government controls, while spending an unproduced wealth – I wonder how many people know of the term laissez-faire?”

Interesting, no?  She could have written this yesterday (if she was alive, of course).  She opens the essay describing seventeenth century France under the rule of Louis XIV and then goes on with the following.

“Colbert, chief advisor of Louis XIV, was one of the early modern statists.  He believed that government regulations can create national prosperity and that higher tax revenues can be obtained only from the country’s ‘economic growth’; so he devoted himself to seeking ‘a general increase of wealth by the encouragement of industry.’  The encouragement consisted of imposing countless government controls and minute regulations that choked business activity; the result was dismal failure.

“Colbert was not an enemy of business; no more than is our present Administration.  Colbert was eager to help fatten the sacrificial victims – and on one historic occasion, he asked a group of manufacturers what he could do for industry.  A manufacturer named Legendre answered:  ‘Laissez-nous faire!’  (‘Let us alone!’)

“Apparently, the French businessmen of the seventeenth century had more courage than their American counterparts of the twentieth, and a better understanding of economics.  They knew that government ‘help’ to business is just as disasterous as government persecution, and that the only way a government can be of service to national prosperity is by keeping its hands off.”

Timeless observations.  Do you think the banks and auto companies are rethinking their pleas for help?

We don’t need to confine this to the past 6-9 months’ financial crisis we are currently experiencing.  It has been a trend of this country and its government for the past century.  I believe the current breaking of our banking system is the evidence of excess/improper/corrupt/whatever regulation and does not serve as an example of our need for more.  And yet we find ourselves asking for more.  Global Climate Regulation.  Universal Health Care.  More Social Security.  No Child Left Behind.  Prescription Drug Plans.  The list goes on and on.  I’m afraid it only stops when, as many have stated many times before, no one will take our promissory notes and we will be sitting there with “great ideas” and “great needs” and no money or skills to execute them.

But there may be a happy ending…  Refer back to the last paragraph of Ayn Rand’s that I presented above where she mentions government help is no better than government persecution.  The two are attached at the hip as we see in the current environment.  Bonuses for bailouts show how government help can quickly move to persecution, mostly of the innocent as the corrupt sit hand in hand with the politicians doing the persecution.  That, my friends, is what gives me hope that there is a light at the end of the tunnel.  The faster we can have individuals realize that the helping hand of government quickly turns into the heavy hand of coercion, the faster we will see individuals strive for self sustaining private solutions.

I was looking back through past George Will opinion pieces and came across this one.  He states a few facts that, on their own, are astonishing.  However, when you think about them in context to the stimuless plans offered by government, it makes you realize just how impressive private enterprises such as WalMart are.  And how important they are to the operation of our economy. 

Now, as you read his article, understand that he uses the term ‘liberal’ incorrectly.  He may be smart and well educated but he’s only human.  (As I will discuss in a future blog, the term has been stolen from us, the true liberals). 

For me, the astonishment comes from the two numbers he states in the article.  US productivity growth would have been 13% less in the second half of the 1990′s if it wasn’t for WalMart.  And, WalMart’s everyday low pricing has a more stimulative effect on the economy than most of the government programs currently in place. 

And they make money offering all these goodies!!!  Last time I checked, the government can’t balance its own budget, is filled with fraud, waste, and corruption.  And can only assist some by impeding on the rights of others.

Maybe a more stimulative program for the government to follow would be to lower the barriers to progress (letting WalMart provide it’s services to more people) rather than attempting to protect its legacies (i.e. the failed policies of the New Deal and LBJ’s Great Society).