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Posted by on Nov 24, 2011 in At TMV | 5 comments

Democratic Governments To Markets: “Get Bit”

Around the world a pernicious belief now exercises such a strong hold on political leaders that it shapes virtually all their economic policies. It’s the belief that “markets” are the primary source, the appropriate source, of wisdom when it comes to shaping these policies; and that it has to be this way because like it or no, governments can do nothing to check the power of markets.

Resistance, in other words, is futile. And foolish to boot, because markets (in this thinking) are always correct in their actions, representing as they do the collective wisdom of countless individual investors.

What a crock!

Markets the collective wisdom of countless individuals? Nonsense. Most market movements these days are generated by a relatively small group of money managers in a few money centers. These few aren’t even moving around their own money. They are moving around OPM, other people’s money, my savings and investments and yours, given to them as a trust.

Yes, these few money movers have a fiduciary responsibility to act in prudent ways and they generally do. Kind of. If you define “prudence” as what generates the biggest quarterly returns and the largest returns to the money managers. If their actions produce a 2 3/4 percent quarterly return instead of a market average 2 1/2 percent, in the process pursuing investments that indirectly or even directly lead to a crippling austerity among the very people whose money they handle, that ain’t their lookout.

OK. So markets aren’t really economic democracies. They are really an economy aristocracy. And OK. The ends they bring about don’t necessary bring long-term good of investors, much less society as a whole. But that having been noted, isn’t it true that there’s nothing democratic governments can do to check the power of markets over economic policy-making?

More nonsense. Indeed, if this question had been asked before markets were foolishly so over-deregulated in recent decades, the questioner would have laughed out of the room.

Governments need not be powerless before markets. Government have the bigger stick — if they choose to use it. And markets could not effectively fight back.

At this point some readers will snicker and think: ‘This poor silly writer. He doesn’t understand that we have a world economy and world markets today, and if a government such as our own presumed — dared! — to stand up to its market masters, these masters would simply go elsewhere, places with more accommodating governments, and do what they’ve been doing in other locales.’

Well, no. They couldn’t. I’ll use stock trading as an example that illustrates why our government could control market behavior to a far greater extent if it chose to do so.

Virtually every country, developed and undeveloped, now has a stock market. A company can have its IPO and trade on any of them. Few that have the option of trading anywhere, however, choose anywhere but U.S. exchanges because our exchanges have the liquidity, the cachet, and the technical infrastructure that makes going elsewhere (for those who have the choice) usually seem foolish.

Our stock market is 3 1/2 times larger than the next largest, Tokyo’s; more than 4 times larger than the London exchange; 9 times larger than the Hong Kong or Canadian exchanges. So the idea that the U.S. government can’t regulate more to keep markets from behaving in ways that hurt Washington’s own chosen policies, or can’t tax more, because that will lead market makers to flee to other lands, is plain hooey. I can open a footwear store in the Gobi desert if I wished and not pay taxes or be regulated in any way, but that doesn’t mean it makes sense to do so.

Beyond regulation and taxation, there are other levers a determined government can use to bring markets to heel. Most big market players have the U.S. government as a prime client, selling its financial securities. The U.S. doesn’t have to throw its business to firms that irritate it greatly. Jawboning can also make some market players seem less desirable in the eyes of their neighbors. Class warfare? Maybe. Or maybe just self-defense.

The point here is not to say that democratic governments should go out of their way to fight markets. But to simple make clear that “if markets say we have to do something, we have to do it” need not always be the governing principle in setting economic policies.

We don’t need a tyranny of banks anymore than we need a tyranny of tanks. To remain free, we must free ourselves from the intellectual canard that markets must always rule.

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