Separation of Economy and State Part Two: People & Ideas

“The man who produces an idea in any field of rational endeavor – the man who discovers new knowledge – is the permanent benefactor of humanity. Material products can’t be shared, they belong to some ultimate consumer; it is only the value of an idea that can be shared with unlimited number of men, making all sharers richer at not one’s sacrifice or loss, raising productive capacity of whatever labor they perform.“ Ayn Rand

Humanity has been creating since the beginning and progress was built purely on the formation and sharing of “idea’s”.  This simple principle has taken us from the cave to skyscrapers.  As society has become more sophisticated so has the exchange of “ideas”.  This has inevitably led to power struggles and over reaching policy in order to control the underlying business of “idea’s”.  Once again, this leads me to the importance of the separation of economy and state.  The market is best suited to define the underlying value of “ideas” and the integrity of this valuation is put at risk when policy, power and regulation enter the equation.

There is a great lesson to learn from the recent economic downturn.  The American housing market prospered for decades through the market setting the standard for the creation of “ideas” in this industry.  Let’s fast forward to 2008 when the housing market nearly brought down the financial well-being of the global economy.  The underlying problem that started this debacle was the intrusion of policy on the real estate market.  The Housing and Community Development Act of 1992 codifies within its language the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 which created the Office of Federal Housing Enterprise Oversight, and mandated HUD to set goals for lower income and underserved housing areas for the GSEs Fannie Mae and Freddie Mac.  Although noble in their intentions this led to credit utopia and a license to give bad credit to a consumer based country that is no longer controlled by the market.

Now let’s take this “idea” through the free market test.  Would the Housing and Community Development Act of 1992 mandating HUD to set goals/mandates for lower income and underserved housing areas have made it as an “idea” in the market?  As an investment banker who makes a living raising capital in the markets, I would opine that it would have been very difficult.  There may have been a small portion of market acceptance that would have been generated only if the returns matched the inherent risk.  However, mandating and incentivizing this with the two largest lending institutions in the country was a recipe for disaster.  In the nature of full disclosure there are multiple reasons that led to the real estate crash in 2008 but the door was opened by utilizing policy and regulation to force “ideas” rather than letting the market adopt the “idea”.

The market is constantly assessing the value of people and their “ideas” and this is the purest form or knowledge exchange.  A great example of this practice is the story of Amazon.  Amazon did not turn a profit for the first 10 years of existence but the stock price continued to rise.  The market knew the value of the underlying “idea” and was ultimately rewarded for the risk.  This is one small but powerful example that illustrates that the free market has the ability to self-sustain even in the most precarious scenarios.  The formation of the “idea” is the most sacred exercise in humanity and any threat to that is a threat to progress.  This is why there must be a free market to allow people to create “idea’s” without fear, intrusion and over regulation.
Another great example of over regulation in response to market correction is the Sarbaines-Oaxley legislation that came into effect after the dot com bust in the early 2000’s.  This legislation has gutted our initial public offering market and sent many American companies scrambling overseas to find new sources of capital or remaining private companies.  Again, although this was well intentioned it ultimately stifled the free flow of “ideas”.  Exchanges are set-up to be self-sustaining through the market assessing their underlying value of “ideas” (i.e. companies).  Stock exchanges are incentivized to list strong mature companies that can grow and each time this is not accomplished or foul play is missed then the market will adjust accordingly.  The Sarbainer-Oaxley legislation has far reaching implications that has also affected individual’s ability to make the returns necessary for retirement.  See Optimum’s blog on Defined Benefit Versus Defined Contribution for more detail.
Probably the most frightening example of policy and power infringing on free markets is the Indiana State Police Pension Trust Vs. Chrysler which took place in 2009.  This went largely unnoticed in the media but I believe it is one of the lowest points in American history…

“This is the first time in the history of American bankruptcy law when secured creditors received less than unsecured creditors.  The Chrysler deal is a clear violation of the Fifth Amendment to the Constitution and more than 150 years of bankruptcy law. Furthermore, under the Fifth Amendment, private property cannot be taken without due process of law. That clearly has not happened in this case. There has been no process of law consistent with long-standing precedent whatsoever.” Richard Mourdock, Indiana Treasurer

What created a situation that would allow for such negligence to a system that has been in place for hundreds of years?  What would be so important that the underlying principles of risk and reward would be neglected?  First, the majority of Chrysler’s senior debt holders were major institutional banks that had received large amounts of TARP (Trouble Relief Asset Program) funds to keep themselves solvent from bad decisions made during the sub-prime crisis of 2008.  Second, President Obama was leading a team to strike a deal with Fiat and keep Chrysler from liquidation.  The US government was involved due to their investment of tax payers’ dollars into Chrysler to prevent liquidation.  The combination of US Government involvement and TARP protected institutions leading the bankruptcy proceedings was clearly a conflict of interest that was overlooked by the American people.   This event truly illustrates the destructive nature of power and policy intruding on the free market.

Why would I ,the tax payer and free market supporter, accept the “idea” that paying unsecured debt holders more than secured debt holders to save a company that was no longer valued as an “idea” creator in the market?

The US Governments involvement in this deal led to the most destructive intrusion of the free market and American liberties that we have seen in modern history.  It is vital that the market be the driving force behind the value of an “idea”.  Without this we no longer value people and their “ideas” which will lead to world economic collapse and the longest period of regression in world history.  We must take a stand as innovators and creators so that we the people can continue to progress humanity.  THIS CAN BE DONE BY KEEPING POWER, POLICY AND REGULATION IN CHECK!  Let us make Indiana Police Pension Trust Vs. Chrysler a symbol and motivation to take back the value of our “ideas”.