The Government Confidence Game

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President
Bush and the Congress are endeavoring to increase investor confidence
in business and the equity markets. This is not such a good idea.

It
was misplaced confidence that caused bad investments to be made
in the first place. Many of those bad investments were made evident
when the dot-coms bombed. Increasing confidence for its own sake
would simply be recreating the same situation where unwarranted
confidence led to error.

Government-inspired
confidence is like advertising. The government encourages you to
invest in some part of the economy by way of telling you how safe
it is now that they've gotten involved. It's a subsidy from the
government. If people don't trust your company enough to invest
in it, or have not done the research to determine if they want to
invest, then don't worry – the government will come in and
boost their confidence. They will be much less critical of a company's
prospectus (if they even bother to review it) after it has that
stamp of approval from the government. Not that a specific company
might have such a stamp, but even a broad stamp across the whole
business landscape has the same effect. If it's a US company, then
people should have confidence in it – or so the line goes.

The
new accounting regulations ("new" meaning newer than the
old ones that failed, not new as in never before were there such
regulations) that are being foisted upon American business is the
same type of regulation that follows everywhere government money
goes. Since the government has arrogated the role of ensuring confidence,
and thereby subsidized the confidence-deficient, regulation is an
obvious string attached to such a subsidy. What the government blesses,
it must control. The blessing turns into a curse.

Companies
will have new regulatory burdens that cut into profitability. There
will be new barriers that some entrepreneurs decide not to negotiate,
lessening competition. The existing companies will benefit from
this lack of competition. This protection will keep them afloat
when they would otherwise be forced to change or forced out of business
by superior processes and products. So the customer ends up losing
out. This is all basic economics. Nobody has accused the folks in
Washington of suffering from economic knowledge. Unintended consequences
follow poorly thought out, though "good", intentions.
The regulation to check business fraud will protect business fraud.
Certainly not the overt fraud of outright deception, but rather
the defrauding consumers of the better things they could have for
their money if there had not been external prevention of those innovations
through suppressive regulation.

What
ever happened to risk anyway? People were somehow led to believe
that investments yield a positive return by definition. Loss couldn't
be possible, and when it happened, someone else must be responsible.
So they call the radio talk shows and their congressmen, and demand
"justice." They demand everyone in the country take on
their risk. Everyone pays taxes to a government that will then bail
the errant investors out. Or if not to recover their funds, at least
punish the "offenders." Of course, the offenders were
punished. People took away their confidence, and the company value
collapsed. The people who kept their confidence too long lost the
most. It would seem skepticism would have served them better than
confidence.

Confidence
doesn't make the economy grow, just as confidence cannot replace
the value lost through dollar inflation. Real value is real. When
that real value is thrown away on poor business practices or on
diluted money, it is gone. No amount of confidence will bring it
back, though it certainly keeps the apparatus operating. As long
as there is "value" left in a market or a currency that
is only there because of people's confidence in it, there is room
left to fall. If reality ever takes the minds of people, and their
confidence gives way to scrutiny, the false value will be squeezed
out some more. The waste that was always there will be countable
and evident.

July
15, 2002

Matt
Lasley [send
him mail
] , the father of five, lives in the shadow of
Pike’s Peak.

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