Government Intervention: The American Way?
By Scott Reeves Oct 14, 2008 2:00 pm
Federal mitts in the market is nothing new.
A sequel to Wall Street, the 1987 film that introduced Mr. Gekko’s financial finagling to the world, is in the works at 20th Century Fox (NWS). The new movie will play out against increased government intervention in the market, a move that would give actor Michael Douglas’s laissez-faire character fits.
But the US has a long history of government intervening in the market. Just don’t call it “nationalization” - leave that nasty word to the French.
In 1917, Uncle Sam seized the railroads to make sure war supplies and troops moved smoothly during World War I. Bondholders and stockholders were compensated. The railroads were returned to the private sector in 1920, long after the war ended in 1918.
The railroads flourished in private hands and were the center of an industrial economy in the 1920s. After the stock market crash of October 1929, many of the “Relax, it’s not so bad” news stories pointed to the continued strength of railroad equipment and supply orders as evidence of a rebound.
During World War II, Uncle Sam seized companies in a range of sectors, including railroads, coal mines and -- get this -- the Montgomery Ward chain of department stores. Why Monty Ward and not Sears? Only a long-forgotten bureaucrat knows for sure.
In 1952, President Truman seized 88 steel mills, arguing that owners were about to provoke an industry-wide strike that would hurt the troops in Korea. The Supreme Court ruled that the action was unconstitutional and overturned Truman’s action.
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2008-10-14 14:12:09
Obvious long-term solution
Limit the size of companies so that no one is "too big to fail". Also limit interlocking ownership so no one can have a major stake in enough similar companies to effectively create a "too big to fail" entity out of several smaller pieces that are cooperating (and therefore taking similar risks).
The alternative is to have government bureaucrats setting limits on the risks that can be taken.
Or to let the market sort it out, and socialize the inevitable losses while privatizing the profits.
Of the three choices, the one requiring the least government intervention is the first one. No company engages in interstate commerce in the United States if it has annual sales greater than, say, $10B. And no company engages in interstate commerce if it is not obvious that it complies with the limit, including the interlocking ownership provision.
The alternative is to have government bureaucrats setting limits on the risks that can be taken.
Or to let the market sort it out, and socialize the inevitable losses while privatizing the profits.
Of the three choices, the one requiring the least government intervention is the first one. No company engages in interstate commerce in the United States if it has annual sales greater than, say, $10B. And no company engages in interstate commerce if it is not obvious that it complies with the limit, including the interlocking ownership provision.
2008-10-14 14:34:46
Courage and Honesty are all that is required
The answer to this crisis is blindingly simple and patently obvious: require transparency. The source of all of our trouble is its lack. What is the purpose of off balance-sheet vehicles? To deny your counterparties a full and fair accounting of your ability to understand your risk profile or meet your obligations. What was the purpose of ratings agencies compensated in part by those whose issues they rated? To prevent a transparent accounting of the risks inherent in the issues.
On the consumer side of the equation, the fervent embrace of more exotic loan products to finance a lifestyle is a failure of courage and honesty too. Transparency with ourselves might've led us to say, "no, I cannot really afford this house even though the mortgage broker says I can."
While we can't (and shouldn't try to) legislate away greed, we absolutely should pursue regulation that forces complete - and I mean absolute - transparency. Under a regime that requires banks to disclose a complete and accurate balance sheet, markets would at least have some hope of being "self-regulating" in that fewer participants would want to enter into transactions with banks that were enormously leveraged or that maintained weak risk controls otherwise.
Real reporting of known facts requires courage and honesty. Unfortunately our nation's top business and law schools grind these traits out of their students as the first and most important order of business. Until that reverses, we'll continue to suffer as a nation.
On the consumer side of the equation, the fervent embrace of more exotic loan products to finance a lifestyle is a failure of courage and honesty too. Transparency with ourselves might've led us to say, "no, I cannot really afford this house even though the mortgage broker says I can."
While we can't (and shouldn't try to) legislate away greed, we absolutely should pursue regulation that forces complete - and I mean absolute - transparency. Under a regime that requires banks to disclose a complete and accurate balance sheet, markets would at least have some hope of being "self-regulating" in that fewer participants would want to enter into transactions with banks that were enormously leveraged or that maintained weak risk controls otherwise.
Real reporting of known facts requires courage and honesty. Unfortunately our nation's top business and law schools grind these traits out of their students as the first and most important order of business. Until that reverses, we'll continue to suffer as a nation.
2008-10-15 08:38:46
Takeover of Montgomery Ward by the Federal Government
During this period Montgomery Ward was run by a fellow named Sewell Avery. Avery was not one to "cooperate" with government coercion. It seems that the Roosevelt Administration singled out Montgomery Ward as an example to others.
Montgomery Ward profits for 1940 were a disappointing 4.5 percent of sales. As the United States entered World War II, imports from Europe virtually stopped. Shortages and substitutions became the rule. The government took even closer control of industry.
Avery, who detested interference, fought the government and the unions. In November 1942 he argued with President Roosevelt and the National War Labor Board over a closed shop for the United Mail Order, Warehouse, and Retail Employees' Union. Early in 1944, he refused to sign contracts with store employees. The War Labor Board ordered Avery to extend old contracts. Avery refused. On April 24 Roosevelt sent the National Guard to Montgomery Ward. They removed Avery bodily, got rid of several other top executives, and ran the company.
On May 9, 1944, the government returned Montgomery Ward to the management, but in December, labor problems struck again. The Congress of Industrial Organization (CIO) won an election in Ward's Chicago plant. Avery again refused a union shop. On December 28, 1944, the army seized Ward's Chicago catalog operations. The situation caused orders to pile up at the rate of 10,000 a day.
Montgomery Ward profits for 1940 were a disappointing 4.5 percent of sales. As the United States entered World War II, imports from Europe virtually stopped. Shortages and substitutions became the rule. The government took even closer control of industry.
Avery, who detested interference, fought the government and the unions. In November 1942 he argued with President Roosevelt and the National War Labor Board over a closed shop for the United Mail Order, Warehouse, and Retail Employees' Union. Early in 1944, he refused to sign contracts with store employees. The War Labor Board ordered Avery to extend old contracts. Avery refused. On April 24 Roosevelt sent the National Guard to Montgomery Ward. They removed Avery bodily, got rid of several other top executives, and ran the company.
On May 9, 1944, the government returned Montgomery Ward to the management, but in December, labor problems struck again. The Congress of Industrial Organization (CIO) won an election in Ward's Chicago plant. Avery again refused a union shop. On December 28, 1944, the army seized Ward's Chicago catalog operations. The situation caused orders to pile up at the rate of 10,000 a day.
2008-10-15 11:29:31
Obvious long-term solution
Ending the mistaken "personhood" status of corporations is one way. I don't mean massive changes, just that the corporation's existence should be created by agreements between living people, and die with them, or be re-constituted with new people so that property taxes, etc. are equal to what everyone else would pay with that much wealth.
Or, convert all taxes to consumption taxes to provide feedback of real costs of products, as well as getting rid of the shady accounting practices that are usually bolstered by the tax loophole system.
Much of the off-book accounting is due to tax laws, not just crooks.
If we eliminate the need for the IRS, there would be plenty of private auditors available for monitoring inter-corporate business deals.
Government intervention comes about when we fail to take on the responsibilities which intervention addresses. If corporations fail to protect the interests of their customers and shareholders, then the government steps in. We allow corporations to get away with writing their charter only in the interests of immediate profits for the shareholders, without extending the shareholders' responsibilities to the commons.
No one is secure if their neighbor is hungry.
Or, convert all taxes to consumption taxes to provide feedback of real costs of products, as well as getting rid of the shady accounting practices that are usually bolstered by the tax loophole system.
Much of the off-book accounting is due to tax laws, not just crooks.
If we eliminate the need for the IRS, there would be plenty of private auditors available for monitoring inter-corporate business deals.
Government intervention comes about when we fail to take on the responsibilities which intervention addresses. If corporations fail to protect the interests of their customers and shareholders, then the government steps in. We allow corporations to get away with writing their charter only in the interests of immediate profits for the shareholders, without extending the shareholders' responsibilities to the commons.
No one is secure if their neighbor is hungry.
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