Remember how everyone told us that investment banks were trading securities, more specifically derivatives, which are so complex that not even Warren Buffet or Alan Greenspan understood them and this led to the downfall of the economy?  Well, there is no longer any need to concern yourself with any of that.  You see, even though Warren Buffet doesn’t understand derivatives trading our friends in Congress understand it perfectly.  In fact, they understand it so well that they have produced and passed a 2000+ page bill outlining new regulations on derivatives trading among other massive financial regulation.

The three most visible minds behind the new financial regulation were Chris Dodd (D – Connecticut Senator), Barney Frank (D – Massachusetts Representative), and Harry Reid (D – Nevada Senator and Majority Leader).  To say that these men are completely inexperienced and uneducated with regard to the world of finance would be a gross underestimation.  Dodd did his undergrad in English literature, Frank in history, and Reid went above and beyond with a degree in political science.  All three men went on to achieve law degrees.  Chris Dodd has the impressive distinction of holding a complete monopoly on the threesome’s private sector work experience with two years under his belt as a lawyer at a private firm.  Neither Barney Frank nor Harry Reid worked one day in the private sector in their professional careers.  What’s more, none of these men has spent one day in the financial sector and not one studied finance in school.

This is not an atypical cross-section of the people that are governing us today.  “Politician” has become a profession in this nation – no longer a service.  If, for a minute, we even assumed that the world does need protection from financial risks (which I would strongly argue it does not), this is like the blind leading the blind.  Dodd, Frank, and Reid would have us believe that they are somehow protecting you and me from the evils of Goldman Sachs and John Paulson.  However, they do not even know what they are protecting us from.  What Dodd, Frank, and Reid do know is how to win votes (though they seem to be losing their touch).  They can stand at a podium and tell the world that they are protecting them from the evil robber barons on Wall Street.  Because most of the populous does not understand financial derivatives any better than their congressmen, people are duped into buying ill-advised protection rather than face the free market head on.

How many of you got burned on your derivative investments over the past two years?  If you did get burned, how much of that was attributed to fraud or some other criminal act versus a bad investment decision?  Even though most people (particularly congressmen) do not understand derivatives, they are not beyond the human realm of understanding.  Mr. Buffet, though he claims derivatives can be harmful, trades in derivatives every day in his insurance concerns.  You own a derivative on your automobile called insurance.

A lack of understanding in Washington DC is making the financial system into a mass of molasses where nothing can be done without jumping through the hoops of regulation.  This serves to make finance more expensive and a game that only the behemoths can play in because of the exorbitant expense of jumping through said regulatory hoops.  The consumers and the small business people will end up paying for this.  It is already reported that banks will do away with free checking and many branches, instead charging $10 per month for a checking account and requiring you to deposit checks at ATMs instead of bank branches.  Loans will become more expensive as the costs of administering those loans within the government’s guidelines increase.  Lending to small businesses and consumers will become less frequent as financiers are unable to hedge their risks with derivatives.  Food production will become more expensive as farmers are unable to sell derivatives on their crops at the same prices.

Government has grown too large and it is stifling the people of this once great nation.  We no longer believe in free enterprise and efficiency, but rather rules and safety nets.  The only way this nation or any nation will prosper is to afford its citizens liberty – something that is lost on our politicians.  This election season take this nation back from the career politicians and those that would rather security (in all forms, not just militarily) than liberty and let’s start on the path to rebuilding the prosperous, free society that made this nation so great.

“Any society that would give up a little liberty to gain a little security will deserve neither and lose both.” -Ben Franklin

In a recent Huffington Post article, film critic Marshall Fine veritably gushes over Michael Moore’s latest diatribe, Capitalism: A Love Story, calling it “an urgently important piece of work.” The film’s grievances are legitimate and even admirable. Its conclusions and central premise however, are critically flawed.

Michael Moore pinpoints the problem as “two Americas – and most of us are living in the one that routinely gets the short end of the stick. Why? Because that other America – the one in which the bulk of the country’s wealth is owned by the richest one percent of Americans – is so firmly committed to hanging on to what they’ve got and getting more.”

On this point, few Americans would disagree, including myself and certainly including the oft-derided “tea party” movement, which turned out in droves to protest the transfer of billions of dollars of wealth from ordinary citizens in the “short-end-of-the-stick America” to wealthy corporate interests in the “richest-one-percent America.”

But Michael Moore’s analysis of this problem’s root causes is shallow, unsophisticated, and inaccurate. Why are there two such Americas? Because, Moore argues, the Reagan and Bush Administrations “did so much to deregulate and destabilize our economy in the name of the free market.”

Capitalism, as the film’s title suggests, is the culprit and the target of Michael Moore’s misguided polemics. The free market is the problem and more government regulation is the solution. This common line of thought and rhetoric is so tragic not merely because it is mistaken, but because the mistake is predicated on a fundamental misunderstanding of capitalism itself.

Let’s look again at the picture of the two Americas. Let’s call the bad guys Corporate America and their victims Middle America, because they are middle-to-lower class and often caught in the middle between special corporate interests and a corrupt government that rewards and aids those interests in their fleecing of Middle Americans.

How does Corporate America exercise its power and tyranny over Middle America? Moore points it out himself. One of his biggest grievances against corporate America in Capitalism: A Love Story is the seven hundred billion dollar bailout Wall Street received from the government.

Indeed, Moore’s distributor, Overture Films says that Capitalism: A Love Story chronicles what Moore considers “the biggest robbery in the history of this country the massive transfer of U.S. taxpayer money to private financial institutions.” Watch the trailer yourself and see how central the billion dollar corporate bailout is to Moore’s outrage and criticism.

Then remember that capitalism and free markets are based on no interference from the government. In a system of perfect capitalism, the bailouts would not have occurred. Indeed their very occurrence immediately precludes our system of economics from being considered capitalistic. It is not because our economy was so free and unregulated that this occurred, but because our government is allowed to become so involved in our economy.

In a free market, businesses succeed and fail on the basis of their ideas, on their merit in creating value for society. This is determined by the free and voluntary activity of individuals who exchange with others- again, on the basis of what improves and adds value to their lives. In this model, businesses that don’t create value for others… fail.

But in a controlled economy, the government decides who the winners and losers are irrespective of the value they create. In this case, failing businesses which should lose, get propped up as “winners” by the government, with money that is taken by the government, from taxpayers in Middle America, without their free and voluntary consent.

See who the culprit really is? Yes: the government. If the government were restricted to its Constitutionally enumerated powers (minus two centuries of a lot of case law and its many bizarre interpretations thereof), the bailouts would never have occurred. If America were a truly capitalist country, then the government would not be allowed to intervene by taking your wealth and transferring it to businesses that did not merit it.

If you can clearly and emotionally explain to others what I have written above, while vehemently agreeing with them as you should, that the corporations in America are way out of hand in their scope of power and influence, then we may be able to resolve a deep episode of polarization in American history that should never have happened.

For Michael Moore’s fans on “the left” to so deeply resent and abhor the government’s intrusive corporate bailouts, is an encouraging sign and a bright opportunity to clarify what the nature of capitalism and the proper role of government really are. With a little encouragement and clarity from free market proponents, we may yet see the rise of reason in 21st century American politics.

W. E. Messamore blogs at The Humble Libertarian.

I think this graph deserves an article of its own, as it speaks volumes. Yet another case in which people with good intentions do far more harm than good.

Credit for the graph goes to the Goldwater Institute.  The study from which the graph is derived can be found here: Goldwater Institute Study.

Thanks to John Stossel for putting this on his blog to be found.

Whole Foods CEO, John Mackey, recently published this editorial in the Wall Street Journal criticizing the Democrats’ health plan: WSJ Article by John Mackey.  In response to this article and John Mackey’s general libertarian ideals towards health care and other issues, many liberal-leaning Whole Foods shoppers have banded together to boycott the grocer.  A leading forum for these dissenters has been a Facebook group supporting the boycott.

The Facebook group, boasting over 19,000 members at the time of the publishing of this article, describes its mission statement as the following:

John Mackey, CEO and co-founder of Whole Foods wrote an op-ed in the Wall Street Journal on August 12, 2009 quoting Margaret Thatcher and suggesting that healthcare is a commodity that only the rich, like him, deserve.

Whole Foods has built its brand with the dollars of deceived progressives. Let them know your money will no longer go to support Whole Foods’ anti-union, anti-health insurance reform, right-wing activities.

I rather prefer the Margaret Thatcher quote with which Mackey began his article: “The problem with socialism is that eventually you run out of other people’s money.”

Being that we who contribute to this blog (and presumably most that read it) call ourselves libertarians, I would like to officially begin the Whole Foods Liberty Support group.  I hereby proclaim that we, as libertarians, should do what libertarians do best and vote with our dollars.  We should show that we support John Mackey’s stance on health care and libertarianism by making up for a small portion of the thousands of shoppers that will visit some other organic grocer.  Henceforth, I am buying all of my organic goods at Whole Foods.

Please join the newly created Whole Foods Libertarian Support Group on Facebook and work with me to setup regular economic lunch discussions at local Whole Foods stores.

*Note that organic foods are completely ludicrous and Jeremy P. Arendt, The United States Holding Company, and Rise of Reason are in full support of genetically modified food, pesticide, fertilizer, and anything else that makes food more abundant and cheaper. However, the freedom to pay too much for your produce is fully supported.  Likewise, all said entities are in full support of libertarians across the world and are therefore in support of shopping at Whole Foods.  Plus, the store really has some great items.

Freedom creates optimal efficiencies because it demands the best from people and the best is always the outcome.  However, one of the byproducts of efficiency is creative destruction.

Take, for example, the typewriter.  At the height of the typewriter industry there were two notable typewriter manufacturers (there were more than two, but I am only referring to two in this example).  Both companies grew into large corporations and bought out competitors in an effort to ramp up growth.  Eventually the personal computer was invented and an entirely new degree of competition entered the typewriter industry.  One of these two companies did not have the foresight to adapt to the changing free market – it kept producing mainly typewriters.  The company eventually declared bankruptcy in 1995.  That company is Smith Corona – most of you have probably never heard of them.  The second company in our example decided to diversify and enter the high-tech world of manufacturing computers and computer parts as well as a number of other industries.  That company is still around today and recently it sold its computer manufacturing division in an effort to slowly exit the manufacturing industry and expand itself into the consulting industry.  That company is one of the largest American companies today – International Business Machines Corporation (IBM).  The point of this exercise is to point out that freedom demands the best and creates the best.  IBM boasts revenues of about $100 billion each year because it has provided some spectacular services and products to its customers.  Smith Corona declared bankruptcy and is still struggling producing only two models of type writers because they have failed to adapt to the market and are not providing their customers with the best products for the lowest prices.  Just take a look at the two companies’ websites (www.ibm.com and www.smithcorona.com) to get an idea of what I am referring to when I say “best.”  This example of how freedom fosters the best of all things and weeds out those things that are inefficient and unproductive ends with a happy ending – IBM continues to operate and has probably provided more for Corona Smith’s old customers and employees than they would have ever had if it had not been for IBM.  Most importantly, the government did not get involved.

Other endings are not so happy.  Let’s consider the example of our automobile industry.  Since the beginning of our automobile industry many automobile manufacturers have opened and closed their doors.  Some names include Pierce-Arrow, the American Motor Car Company, Hudson Motor Car Company (acquired by American Motors Corporation), American Motors Corporation (nearly bankrupt and acquired by Chrysler and rebranded as Eagle), and Eagle (defunct since 1998).  Despite all of these companies closing their doors, the American economy continued on and the people that used to manufacture these vehicles found new jobs.  The exits of these companies were at the hands of competitors that offered superior products at lower prices, just as the troubles of GM and Chrysler in today’s day are at the hands of competitors offering superior products at lower prices.  However, because people all have big hearts (or disgustingly crooked intentions, depending on your angle) and look out for their fellow man, the elected officials of the United States Government decided we simply could not put all of the GM and Chrysler employees out of work (even though most of us clearly did not like what they were producing).  As such, the government stepped in and decided to tax us all to “prop-up” these companies.

In the United States, our freedoms have been trampled by people with the very best of intentions.    Most of the United States citizens in favor of “bailing out” GM and Chrysler (excluding congressmen, senators, anyone in the executive branch, any employee of GM and Chrysler, and any UAW member or representative) believed we should spend tax dollars on taking over the companies and redistributing the equity how President Obama saw fit because it would help the employees of these companies.  Some even listened to the politicians’ nonsense and believed that taking over these companies would somehow improve the economy.  Either way, most people believed that it would help their fellow Americans to nationalize two thirds of the United States automobile industry.  They had good intentions; they just did not have the knowledge to foresee that their actions would actually harm most Americans.  Most tragically, it would harm innocent Americans that had previously had no stake in GM or Chrysler and would still pay the price of nationalizing them.

Each dollar you spend is a type of vote.  You are voting that the product or service you acquire is better than its competitors.  When you buy a ticket to The Hangover rather than Paul Blart: Mall Cop, you are voting that more movies be made like The Hangover than Paul Blart.  Similarly, when Americans went out and bought Toyotas, Hondas, and Fords, they were voting that more vehicles be produced like those they bought than those produced by GM and Chrysler.  Now we do not have the freedom to decide.  Now the government decides for us.  We are each taxed (some more than others) and we have all therefore given our money to GM and Chrysler, even though they created inferior products.  Furthermore, this occurrence puts a big vote in from all of us that it doesn’t matter what kind of filth you put out of your factories – if you employ enough people the government of the United States will tax its citizens more to pay for your company’s shortcomings.  What do you suppose this will do to the research and development of these companies?

Because the auto-industry has been the focus this year it is easy to pick on, and I will continue picking.  Consider the subsidies the government gives buyers of hybrid vehicles.  These also come from the best of intentions (for most people).  Generally, the supporters of this subsidy want less vehicle emissions to enter our atmosphere in hopes of keeping the air clean and somehow (this is also bullshit . . .) cool our planet (apparently a cold planet is better than a warm one and I don’t think anybody knows why they feel that way).  No matter your politics, it is clear that most of these people have good intentions.  However, they are stripping the rest of us of our freedom and they are tampering with creative destruction.  They are effectively making each of us pay for part of a hybrid car, whether or not we want one.  Furthermore, they are making people that may not otherwise buy a certain model or brand of car, buy said car.  This creates a situation whereby people are voting for one type of car with their dollar because it is now cheaper (because we are all pitching in) than the car they would have otherwise purchased, even though the other car would otherwise be superior for that given price.  This then tells the automobile manufacturer to make more of the subsidized car and less of the car that is actually superior.  If the hybrid cars truly were superior cars for the price then people would naturally be lining up to buy them.  I can’t be certain because they are already subsidized, but I am confident that if there were not subsidies for hybrids that the Toyota Prius would still sell well because it gets great gas mileage for those people that are concerned with that.  We do not need the government to tell us (or “nudge” us as Cass Sunstein would say) what we should buy, sell, do, or believe.  If a product is better and cheaper then it will prevail.  If it is overpriced and lousy then it will be driven out of the market.  The same can be said for all things, not just automobiles.

These are but a couple small examples, but the lesson holds true to all things.  One of the most beautiful parts of a free society is that it embraces the best and discards the worst.  It is only when the government steps in to press its will upon the citizens of that society that things go wrong.  No matter the intentions of those people that push for new laws and regulations, one thing stands true about them: they feel they can run your life better than you can run it yourself.  I disagree.  I believe we are all capable of making decisions for ourselves.  Sometimes you and I will be wrong and we will pay our own price for being wrong and, likewise, we will reap our own benefits from being right.  But, no matter how often we are personally wrong, with enough people acting freely the world will inevitably improve and each and every one of us will be better off in the long run.

Please Comment: I’d like to hear if any of you can come up with a situation in which creative destruction is more destructive than creative.

A few weeks ago Chrysler declared bankruptcy.  Under normal circumstances the bankruptcy law of this nation would have been upheld and the assets of Chrysler would have been sold off and all proceeds would have been allocated to the bond holders (debt holders) until their principal investment was completely repaid.  After the bond holders’ secured claims (secured by the assets of the company) were repaid, the remaining proceeds from the sale of Chrysler’s assets would trickle down to the unsecured claims and eventually to the equity holders.

Everyone entered into their contracts with this vision of a bankruptcy in mind.  This is how bankruptcy has been handled in this nation for decades.  Every bond holder, union, and equity holder was expected to understand that in the case of liquidation (bankruptcy) secured lenders (bond holders) are paid in full first.  However, when the Chrysler bankruptcy came down the line President Obama and other members of his Administration decided that this was simply not good enough.  They decided that the Bankruptcy Code in the United States was not valid and that contract law was not valid.

After Chrysler declared bankruptcy the Obama Administration set into motion its own vision of how the restructuring and liquidation would work.  Instead of Chrysler’s assets being sold off and having the proceeds go directly to the secured lenders, the Obama Administration decided it had a place in the bankruptcy courts and forced the secured lenders to take a dramatic discount on their debt and rescinded their right to liquidate Chrysler’s assets in order to be repaid.  Instead, the Obama Administration decided that the United Auto Workers Union, an unsecured lender and therefore second in line to the secured lenders in the case of bankruptcy, would receive a 55% stake in all of Chrysler’s assets as well as a $4.5 billion note from the Chrysler company that would emerge from this mess.  Moreover, the Administration granted an 8% ownership stake to the unsecured United States and a 2% stake to Canada.  The remaining 35% stake in the assets would be sold to Fiat, an Italian automobile manufacturer (ironic since the entire goal, according to the Obama Administration, is to help American industry).

The only legitimate part this disarray is that the company’s assets would be sold to Fiat.  In a normal bankruptcy proceeding there is a strong chance that all of the assets would be sold to one company, or group of companies, and normal business operations would continue.  Not wanting to risk this, and — more importantly — not wanting to upset the unions, the Obama Administration broke the law of the United States and has shown clearly that the Executive Branch has adopted complete, autonomous control.  That was, however, until Supreme Court Justice Ruth Bader Ginsburg stepped in yesterday and put a hold on the deal.  This injunction will allow the Supreme Court time to decide if it will hear an Appeal from Indiana Pension companies regarding the restructuring of Chrysler.

My politics and my idea of justice are not always perfectly aligned with Justice Ginsburg, but in this case she is a holy saint.  Always wanting to help out the common man, Justice Ginsburg has realized that the ones that are truly hurt in this are the people that hold Chrysler debt in their retirement funds and other investment vehicles.  Those people include teachers, firemen, policemen and many other middle-class, hard-working individuals.  In this whole mess designed to coddle the United Autoworkers Union (UAW), many people in a far worse financial situation than auto-workers are being told that the money they have lent Chrysler is no good and that the Obama Administration will decide how much of a discount they will take on their debt.  All the while the Obama Administration bows down and kisses the feet of the UAW offering them a majority stake and a huge note.

The course of action taken by the Executive Branch regarding the Chrysler bankruptcy should not go unnoticed.  The laws of the United States – the very laws that have kept our nation’s order for decades – have been disregarded and, instead, a few people have again determined that they are above the law and are more able to decide what is best for each of us than we are able to decide ourselves.  Justice Ginsburg has stepped in to at least temporarily delay this Administration’s attempt to be rid of contract law and bankruptcy law and I applaud her for it.

Sources: The Wall Street Journal 06/09/2009