Thursday, May 24, 2007

Protecting Us from Ourselves

This blurb appeared in May 10th's Wall Street Breakfast at SeekingAlpha:
L.A. "alternative investment" firm Oaktree Capital Management LLC announced it will raise nearly $700 million in an offering -- but the shares will trade on a private market constructed by Goldman Sachs rather than on a public exchange. Oaktree will sell roughly 13% of itself for $40-44 a unit. The new market, to be called "GS Tradable Unregistered Equity OTC Market," or GSTrUE, will be accessible only to institutions and sophisticated investors, and Oaktree will be its first issue. By offering shares on GSTrUE, Oaktree will sidestep the regulatory oversight that accompanies public share offerings. In addition, shareholders, unlike those of companies whose shares trade on public markets, will have almost no say in how the company's business is conducted. Oaktree has assets worth approximately $42 billion. Fortress Investment Group was the first hedge fund to go public in January, and private investment firm the Blackstone Group has an IPO pending. "We expect that many of our most significant competitors will soon become public," wrote Oaktree founders Howard Marks and Bruce Karsh in the offering memo. "...Choosing not to do likewise would put us at a major disadvantage."
My guess is that we will see more and more of these types of trading vehicles and exchanges which, thanks to regulation, are forced to exclude most small investors. In fact, this is the only possible result of regulation intended to protect people from themselves, since regulators obviously can't make people more knowledgeable or self-reliant, they can only provide "protection" by eliminating their choices and opportunities (in this case ensuring that small investors remain small and poor).

Of course investors have always had the choice NOT to invest in something they didn't understand, but now even if they do their homework they're prohibited from acting on their knowledge and trying to improve their own situation. And similar arguments hold in all such cases, e.g. when the FDA decides how much risk a dying person can take with his own life and body, or when the government forbids you to invest your own social security funds, or when the FCC decides that you can’t listen to profanity, etc. etc. In all such cases you already had the choice to do what the government now mandates, i.e. you could decide not to try an experimental drug, or to hand your retirement accounts over to a financial advisor, or to turn your radio or tv off -- but with regulation you no longer have any other choice, even if with all things considered, you deem it best for your life to do something different than the all-knowing government has decreed you must.

It's easy to simply put the blame on regulators, but in reality the vast majority of our intellectuals and therefore most average Americans approve of and even encourage these types of restrictions, so once again, the battle must be fought not at the political level but at a more basic philosophical one, including defining what is the good and why.

3 Comments:

Blogger Galileo Blogs said...

Thank you for a great article on regulation. I especially liked how you connected all forms of regulation stretching across many areas of life, from investing, to medical practices, etc.

Americans now largely approve of regulation as a general principle. They expect government to regulate in order to "protect" them from risks. An appalling example of it is in New York. New Yorkers have blithely embraced a ban on smoking on private property, such as bars and restaurants, and a ban on the use of trans fats at restaurants.

These outrageous and precedent-setting bans have been rather common in New York's history. For example, the first zoning law to "protect" us from tall buildings was passed here in the early 1900s. I suspect that many other regulations such as building codes, occupational licensing, and multifarious business regulations now common in America began here in New York.

Why is that so? I suspect the answer has something to do with the education of New Yorkers. Many people come here who went to progressive schools where they were indoctrinated with the modern view of the virtue of government regulation of the economy. That is also true of Boston and San Francisco, two other loci of progressive government activity.

My other theory is that because New York is prosperous, the connection between wealth and capitalism has become less obvious to many people. New Yorkers simply see that "the goods are here." Therefore, they do not consider that the goods are here because they were produced using the freedom that still remains in our economy. In New York, the goods have stayed here, despite destructive government policies. Those policies have not yet reached a tipping point where they are obviously destroying the wealth of the city (as they did in the 1970s). Therefore, New Yorkers think that onerous regulation and high taxes can coexist with prosperity. "Somehow" the goods will be here, regardless of what government does to stand in the way of production.

So, oddly enough, New York's very wealth, itself the result of the elements of capitalism that do exist, is a reason why the city's leaders can smugly support the regulations and taxation that will eventually destroy that wealth.

Why do you think the pro-regulation mentality has taken root in America and particularly so in places such as New York, Boston and San Francisco?

7:37 PM  
Blogger Amit Ghate said...

Hi Galileo,

Thanks for the comments and question. I definitely don't have a full answer, but I'll try to provide a few (hopefully) relevant thoughts later this weekend or on Tuesday at latest. In the meantime have a great long weekend!

5:59 PM  
Blogger Amit Ghate said...

Hi Galileo,

My thoughts on your question run along some of the same lines as your hypotheses; first that education is responsible, though I come at it more from the angle that people in the cities you mention tend to be much more educated than in other places, so they have many more bad ideas than do those with less formal education, not necessarily that some cities have more progressive education than others (though that is probably true too).

Thus, by being productive and successful, the men in the major cities you list could afford to -- and did -- send their kids all the way through graduate school, thinking that this was best for them. But given the ideas they were taught, such an education was actually an attack on all that made it possible, and in this way the producers became promoters of their own undoing.

And not only do their kids have 20+ years of bad ideas thrust on them, in many cases they’ve also been so sheltered that they don’t have any of the real-life experience to untangle the ideas or to see the anti-life consequences of the abominable ideas they’re taught. (This too is similar to a point you make.)

Next, I think that much of regulation is aimed at keeping those in power in power, i.e. of maintaining the status-quo. One of the greatest things about the 19th century is that the expression “shirt-sleeves to shirt-sleeves in 3 generations” was a fact of life. If an heir didn’t measure up, he wasn’t the beneficiary of regulatory power which served to throttle new competitors, while nowadays it’s the reverse (see the Kennedy’s for example). In fact, the original subject of this post illustrates this, i.e. those with sufficient wealth are allowed to invest as they wish (again Ted Kennedy can do what he wants) but those without it are restricted and are thus at a severe disadvantage. This suits the goal of maintaining the status quo and of entrenching social classes -- something which is as anti-American as any policy could be -- yet which is supported by all our intellectuals. A similar case can be made for the income tax; those starting off without any money have to begin by working for income and are heavily taxed, while those that have money and pull can find different ways less subject to taxation and regulation to maintain their wealth. This again has the effect of preserving artificial economic and social strata.

Don’t get me wrong here, I’m obviously not advocating that we tax the rich to remedy this(!), rather that we get rid of all or as many of the taxes and regulations that burden our society as well as the welfare programs they allegedly go to support. The solution isn’t to forcibly create a “level playing field” as the leftists want, but simply to allow everyone the freedom to achieve (and to fail if they make the wrong choices and/or take the wrong actions).

On top of these political issues, there are also more fundamental issues to consider, viz. those which go to the nature of man and his functioning on earth (i.e. of philosophical ideas). For instance, Warren Buffett, who is self-made, extremely knowledgeable about business and as smart as they come, is an advocate of the regulatory state. His position rests on a certain view of man and of reality, so his mind will only be changed by arguing against those more basic premises. (And while I think actual experience in a truly capitalist society would help him accept such arguments by giving him more direct evidence from which he could confirm the principles, it would still be necessary to make the arguments.)

So as much as each political step taken to dismantle the regulatory state is positive and tends to engender further “virtuous circle” effects, there is no way to avoid addressing and refuting the basic philosophical ideas upon which the regulatory and/or mixed economy and/or totalitarian state depends.

5:45 PM  

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