The Government Confidence Game

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.