Gaining Security and Losing Freedom

# 011 March 21, 2009

[On ancient Athens]: In the end, more than freedom, they wanted security. They wanted a comfortable life, and they lost it all -- security, comfort, and freedom. When the Athenians finally wanted not to give to society but for society to give to them, when the freedom they wished for most was freedom from responsibility, then Athens ceased to be free and was never free again. Edward Gibbon

The Federal Reserve shocked the business world this week by announcing the $300 Billion plus purchase of Treasury Securities of the U.S. Government. This is a poorly veiled attempt to get mortgage rates down below 4%. The Fed has attempted to push long term interest rates down by cutting the short term rates to almost zero; this is a drastic last ditch effort to push rates lower indicating how desperate the Fed and the Obama administration have become. They are now willing to risk certain inflation in order to jump start the housing market.

Housing is the backbone of the American economy. In the book “The Mystery of Capital” by Hernando de Soto (yes he is related) the author asks the question, “Why does capitalism seem to work in the West but not in third world or formerly communist countries?

The key to the growth of capital in the West is private property rights and ownership, with a government dedicated to a system of law that not only allows, but promotes private property ownership and the business development that is associated with the accumulation of capital. The author makes the point that many believe the lack of development in third world countries is due to the inability of the citizens to save; the truth is quite the contrary. The poor and dispossessed of these countries have a tremendous amount of savings (comparatively speaking), but little or no capital due to the lack of ability to maintain legal property ownership. This requires resorting to extra-legal ownership, outside the bounds of written “legal” law and within the framework of local laws and customs. While this type of legality is ok for a specific community, it does not afford legal protection against illegal encroachment and does not give the owner the opportunity to turn the equity in such property into capital.

As the US Government takes control over more businesses, the business loses the ability to acquire capital. Capital is not money. Capital is the process achieved by converting the potential assets of a tangible object or property into value by utilization of the asset.

For example, you own a piece of land. That land is worth $20,000. Since the land is vacant, it does not create any income for you, in fact it creates expense because you have to pay property taxes, assessments and possibly even upkeep. You take this land and lease it a company that puts a trailer on it that sells ice. The company makes a profit from the ice it sells and pays you a lease payment of $500 per month. Now an asset that previously only cost you money makes you $6,000 per year. This is what I am describing when I explain the creation of capital.

When the government steps in and takes over a business, the business loses the motivation to create a profit. The reason a business creates a profit is so the owners, managers, shareholders, etc. can make more money (profit).

Take a quick look with what is going on today with AIG, Bank of America and others. Read your local paper, watch CNN, MSNBC, Fox News, check the internet highlights. Everywhere you look there is talk of controlling and capping CEO pay. WHY? Because if the government is in charge, there can be no profit incentive. The question being asked is, if the taxpayers are funding the business, then why should someone get a million dollar bonus? The short answer: THEY SHOULD NOT!

As I wrote before, if you control the questions, the answers do not matter. Let me repeat: As I wrote before, if you control the questions, the answers do not matter.

The question is not; “Should we cap CEO’s pay?”

The question is; “Why in the world are we paying to “save a business?”.

If AIG had been allowed to go bankrupt, we would not be having this discussion. The real producers of AIG would have left and found another job. The problematic employees, the poor workers, those that really were not productive would have been out on the street… and guess what, no need for bonuses! The company is gone!

You cannot make an improper action proper by doing “what’s right or fair”. You cannot make an immoral act moral by having “good intentions”. As my mother used to say, the road to hell is paved with good intentions. If the action is improper, incorrect or immoral, then any effort to justify the action is wasted. The only way to correct the improper action is to undo it. Our government does not know how to undo anything.

By its very nature government cannot run a free market business because government is a bureaucracy. Bureaucracy can be defined as, the administration of a system or industry without regard to profits but with total regard to following codes, laws and decrees. Since bureaucracies are not created to make a profit, the only thing that can be calculated is the cost.

The problem with a government owned or controlled business is that there are no market factors involved and as a result other rules must be put in place to govern the conduct of its affairs. Under such a system the government bureaucrat has a commitment to comply with the rules and regulations (to the letter of the law) of the system without regard to the reasonableness or purpose or intention of the law or decree. This includes profits and the creation of capital.

With a profit-seeking venture you govern the conduct by public perception (i.e. the purchase of goods and services). If the service or product is not useful, no one purchases it and the business bankrupts. Not so with government bureaucracies. The behavior of the public is not a criterion in determining the usefulness of the bureaucratic service. The only criteria can be to improve service or reach by increasing size and expenditures. Government bureaucracies, by their very nature must continue to increase in size, scope and authority – they are a self perpetuating organization, constantly drawing in ever-larger amounts from the treasury.

In truth, citizens must choose between the market economy and socialism. Socialism is an intensely bureaucratic political/governing system. Someone must determine what will be produced and at what price. If the market is not allowed to decide, then the government will.

In a capitalist system (read: free society) the government’s responsibility is to preserve the market economy by protecting life, health and private property against fraud or violent aggression. If the consumers are not able to set prices and supply by means of the free exchange of market supply and demand, then it will be by government compulsion.
This is what we are facing today.

NOTE: Just as an FYI, if the government passes a law that caps CEO pay with companies that have been bailed out, the next step is to cap CEO pay at other “too big to fail” companies. The explanation will be, if we do not require these major corporations to control cost and do business “ethically” we may have to step in and bail them out. Therefore we must cap CEO pay (and expenses) on all major companies that are “too big to fail”. Watch out…. the dominoes are starting to fall.

“Every decent man is ashamed of the government he lives under.” H.L. Mencken

With warmth and regards (as always),
Allen
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