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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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  • RP

    Are the markets really controlled by a few traders or have they become a product of computers? Once some action occurs in a market, computerized selling or buying occurs in seconds before a human can react. Maybe government actions could impact the markets more by regulating computerized sales and purchases. Also, how can our government regulate market reaction to what happens in Europe?

    And there is a couple very basic questions everyone needs to consider.
    1. Given our leaderships inability to control our debt and deficits, can we expect them to regulate business any better?
    2. Given the numerious times we hear of illegal activities with companies that are regulated, do we have qualified individuals in government to insure regulations are followed.

    I offer we do not in both cases.

  • Dr. J

    OK. So markets aren’t really economic democracies. They are really an economy aristocracy.

    I’d say they’re more like an economic republic. You, like the rest of us, chose to give these guys your money to invest on your behalf, and to a large extent their pursuit of good returns is merely doing your bidding.

    They’re doing an imperfect job of it, to be sure, as agents often do. Which brings us back to RP’s question: what do you trust your agents in Washington to do better?

  • Cannonshop

    RP’s right, it’s not the number or extent of the rules, it’s the willingness and competence to enforce them. As in the market when dealing with customers, for regulators it’s “Willing AND Able” that is the problem from the enforcement end, not the broadness or narrowness of the powers involved.

    Not that some broadening, or at least, levelling of the rules would be a bad idea-it’s frankly ridiculous that Insurance companies and banks are not subject to antitrust law, for instance, and I’ve long been an advocate for the idea that “Too big to fail” is really “Too big to succeed“. This comes from working for VERY large firms on the manufacturing side, where the same things that paralyze government’s ability to serve the public, paralyze companies’ ability to achieve even very reasonable internal goals-that is, excessive ‘management level’ Bureaucracy, internal misallocation and misuse of resources, excessive levels of non-value-added administratium, hidebound careerism, etc.

    The EXACT same problems Libertarians and Conservatives note about “Big Government” infect “Big Business”, which makes “Big Bussinessmen” unlikely to be the solution to Big Government problems-they use the same basic toolset to address problems, with the same lackluster results, that already often fail the public when used by Government.

    what is “Privatization” but single-source outsourcing? In both cases, the emphasis ceases to be serving the customer, and becomes an unequal relationship with an entity that has no competitors, and thus no compelling reason to serve the customer (whether it’s the Public in the case of Privatization, or the company supplied in the case of a sole-source outsourcing in industry).

    The problems are complicated by the use of false labels-the United States does not operate a true “Free Market” economy-we have gov’t subsidizing industries and banks, gov’t approved oligopolies and monopolies, gov’t regulations that exist to keep specific manufacturers in business regardless of the march of technical development (and thus, stifling of technical development), etc. etc. But what is worse, is we have ‘enforcement agents’ whom do not, and being human, can not, know all the regulations they are tasked with enforcing-there’s just too many, and they’re conflicting in many cases, or redundant in others.

    Much of what is lost, both in the biggest, rotting-est corporations, and in Government, is the idea that rules should follow reasons, rather than simply form. That is, the Intent of the Rules should be what is enforced, not the letter of the procedure.

    Credit-Default-swaps violated none of the LETTER of the law, but they certainly went against the INTENT of the law, see? same for the massive malinvestment in Mortgage Securities caused by Bundling-which also violated the spirit, but not letter, of the law. When form trumps function, changing a label is enough to make what would be illegal and fraud, into something legal and marketable, see?

    It requires a dedication, and analytical approach, for a potential regulator to discern the difference-and it requires judgement to carry it out, and those things are not prevalent in large Bureaucracies whether Business or Government in nature-skepticism and curiousity and the ability to discern what is going on are traits that, in the world of ‘form’, with its obsession in aping the process mindlessly, are dis-encouraged.

    Just a thought, mind.

  • davidpsummers

    The idea that markets are wise is hogwash. But so is the idea that markets are out to “get” someone or are controlled by some ideological agenda.

    If a bond is really worth an interest rate being asked, and people to get that interest, they will buy the bond. If one person refuses to take a fair deal, there will be someone else to take it for them. Even if there are only a few people trading, those who have the money and want the deal can always get someone else.

    That fact is that the markets do a decent job of indicating the guesses of those who have money on where the profit is. This isn’t always right and “market psychology” is a real phenomenon. OTOH, If a government can’t get the trust of those who they want to lend them money, regulations won’t suddenly build that trust.

  • merchan5967

    I very much agree with RP. Our government is far too ideologically divided to agree on what the rules should be, and they are far too in bed with Wall Street to be trusted with enforcing those rules.

    This is why I am a big believer in the idea of a democratized economy, be it direct democracy , or representative democracy, through board level representation, as is done in Germany and the Scandinavian countries.

    I believe such a system would insure that workers’ needs are put before the almighty dollar, because workers would make the major the decisions in these companies, or at least be consulted in the decision making process, and what’s good for workers, is good for America.

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