Michael S. Malone explains in the Wall Street Journal why the 1990s boom in the creation of new technology corporations never came back. The news is not all bad, of course. The Accounting business has been booming like never before.

From the beginning of this decade, the process of new company creation has been under assault by legislators and regulators. They treat it as if it is a natural phenomenon that can be manipulated and exploited, rather than the fragile creation of several generations of hard work, risk-taking and inventiveness. In the name of “fairness,” preventing future Enrons, and increased oversight, Congress, the SEC and the Financial Accounting Standards Board (FASB) have piled burdens onto the economy that put entrepreneurship at risk.

The new laws and regulations have neither prevented frauds nor instituted fairness. But they have managed to kill the creation of new public companies in the U.S., cripple the venture capital business, and damage entrepreneurship. According to the National Venture Capital Association, in all of 2008 there have been just six companies that have gone public. Compare that with 269 IPOs in 1999, 272 in 1996, and 365 in 1986.

Faced with crushing reporting costs if they go public, new companies are instead selling themselves to big, existing corporations. For the last four years it has seemed that every new business plan in Silicon Valley has ended with the statement “And then we sell to Google.” The venture capital industry is now underwater, paying out less than it is taking in. Small potential shareholders are denied access to future gains. Power is being ever more centralized in big, established companies.

For all of this, we can first thank Sarbanes-Oxley. Cooked up in the wake of accounting scandals earlier this decade, it has essentially killed the creation of new public companies in America, hamstrung the NYSE and Nasdaq (while making the London Stock Exchange rich), and cost U.S. industry more than $200 billion by some estimates.

Meanwhile, FASB has fiddled with the accounting rules so much that, as one of America’s most dynamic business executives, T.J. Rodgers of Cypress Semiconductor, recently blogged: “My financial statements are a mystery, even to me.” FASB’s “mark-to-market” accounting rules helped drive AIG and Bear Stearns into bankruptcy, even though they were cash-positive.

But FASB’s biggest crime against the economy and the American people came when it decided to measure the impossible: options expensing. Given that most stock options in new start-up companies are never worth anything, this would seem a fool’s errand. But FASB went ahead — thereby drying up options as an incentive for people to take the risk of joining a young company and guaranteeing that the legendary millionaire secretaries would never be seen again.

Not to be outdone, the SEC has, through the minefield of “full disclosure” requirements and other regulations, made sure that corporate directors would never again have financial privacy and would be personally culpable for malfeasance anywhere in the company. This has led to a mass exodus of talented people from boards of directors in places like Silicon Valley. Full disclosure was supposed to make boards more responsible. Instead, it has made them less competent.

Read the whole thing.

The Onion’s bipartisan panel of political pundits discuss government’s response to the current financial crisis.

1:56 video

—————————————-

Hat tip to Scott Drum.

The Politico blog describes government in action enforcing honesty and fairness in campaign finance. John McCain should be proud of his own contributions to the present system.

The Federal Election Commission is unlikely to conduct a potentially embarrassing audit of how Barack Obama raised and spent his presidential campaign’s record-shattering windfall, despite allegations of questionable donations and accounting that had the McCain campaign crying foul.

Adding insult to injury for Republicans: The FEC is obligated to complete a rigorous audit of McCain’s campaign coffers, which will take months, if not years, and cost McCain millions of dollars to defend.

Obama is expected to escape that level of scrutiny mostly because he declined an $84 million public grant for his campaign that automatically triggers an audit and because the sheer volume of cash he raised and spent minimizes the significance of his errors. Another factor: The FEC, which would have to vote to launch an audit, is prone to deadlocking on issues that inordinately impact one party or the other – like approving a messy and high-profile probe of a sitting president.

McCain, on the other hand, accepted the $84 million in taxpayer money, which not only barred him from raising or spending more – allowing Obama to fund many times more ads and ground operations – but also will keep his lawyers busy for a couple years explaining how every penny was spent.

Through the end of September, McCain had socked away $9.4 million in a special fund to pay for the audit.

The Obama campaign does not expect to be audited, but spokesman Ben LaBolt said it would be ready in the event it is.

Arthur Laffer, in the Wall Street Journal, observes that free markets go up and free markets go down, but if you want enduring economic pain, there’s nothing like a panicky government trying to save the market from itself.

When markets are free, asset values are supposed to go up and down, and competition opens up opportunities for profits and losses. Profits and stock appreciation are not rights, but rewards for insight mixed with a willingness to take risk. People who buy homes and the banks who give them mortgages are no different, in principle, than investors in the stock market, commodity speculators or shop owners. Good decisions should be rewarded and bad decisions should be punished. The market does just that with its profits and losses.

No one likes to see people lose their homes when housing prices fall and they can’t afford to pay their mortgages; nor does any one of us enjoy watching banks go belly-up for making subprime loans without enough equity. But the taxpayers had nothing to do with either side of the mortgage transaction. If the house’s value had appreciated, believe you me the overleveraged homeowner and the overly aggressive bank would never have shared their gain with taxpayers. Housing price declines and their consequences are signals to the market to stop building so many houses, pure and simple.

But here’s the rub. Now enter the government and the prospects of a kinder and gentler economy. To alleviate the obvious hardships to both homeowners and banks, the government commits to buy mortgages and inject capital into banks, which on the face of it seems like a very nice thing to do. But unfortunately in this world there is no tooth fairy. And the government doesn’t create anything; it just redistributes. Whenever the government bails someone out of trouble, they always put someone into trouble, plus of course a toll for the troll. Every $100 billion in bailout requires at least $130 billion in taxes, where the $30 billion extra is the cost of getting government involved.

If you don’t believe me, just watch how Congress and Barney Frank run the banks. If you thought they did a bad job running the post office, Amtrak, Fannie Mae, Freddie Mac and the military, just wait till you see what they’ll do with Wall Street. …

Some 14 months ago, the projected deficit for the 2008 fiscal year was about 0.6% of GDP. With the $170 billion stimulus package last March, the add-ons to housing and agriculture bills, and the slowdown in tax receipts, the deficit for 2008 actually came in at 3.2% of GDP, with the 2009 deficit projected at 3.8% of GDP. And this is just the beginning.

But the government isn’t finished. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid — and yes, even Fed Chairman Ben Bernanke — are preparing for a new $300 billion stimulus package in the next Congress. Each of these actions separately increases the tax burden on the economy and does nothing to encourage economic growth. Giving more money to people when they fail and taking more money away from people when they work doesn’t increase work. And the stock market knows it.

William Voegeli, in the Fall edition of the Claremont Review of Books, argues that Americans ought to think rationally about the American Welfare State.

Voegeli contends that, though conservatives will never succeed in repealing the New Deal, the public is fundamentally unwilling to pay for significantly greater expansions, the problem of persistent poverty really stems from causes federal money cannot effectively address, and meanwhile ideology and illusions prevent sensible allocation of limited resources.

In a society that is remarkably prosperous by global and historical standards, shouldn’t “most vulnerable members” be construed as referring to the most vulnerable 5, 10, or 25% of the population—not just the abjectly miserable, let us concede, but people confronting serious threats or problems? Yet when it turns out, time and again, that the effective meaning of liberal welfare and social insurance programs is to elicit compassion and government subventions for the most “vulnerable” 75, 80, or 95% of the population, it’s hard not to feel scammed. …

.. Paul Starr of Princeton University and the American Prospect, says the welfare state is about the poor. Its “objective should be, above all, to eliminate poverty and maintain a minimum floor of decency to enable individuals to carry out their own life plans.” But giving benefits to everyone, not just the most vulnerable, serves social and political purposes. Socially, “the long-term tasks of nation-building and of fostering a common culture and a sense of shared citizenship also strongly argue for public and universal schooling, old-age pensions, and other services that serve an integrative as well as egalitarian purpose,” according to Starr. Politically, the imperative to construct democratic majorities that support programs for the poor “will often mean support for programs that provide universal benefits.” We may say that such programs “target” the most vulnerable 100% of the population.

Read the whole thing.

Henry G. Manne predicts a long period of the expansion of statism, economic stagnation, and freedom’s retreat.

The political direction of the country is now determined for a long time to come, and it is inevitably leftward. Politicians would never resist a popular but massive demand for more government regulation (even the few with enough brainpower to recognize what is going on). The business community has never been a strong supporter of free market capitalism, and it certainly cannot be counted on to change its stance this time around. The media, the various leftist trend-setting elites and university faculties have been waiting a long time for an opportunity just like this, and we can be sure that they won’t squander it. The shrillness of their attacks on free markets will reach new heights of righteous indignation and assumed moral and intellectual superiority.

No policy issue based on private property, low taxes, small government or free trade will escape the charge that any unregulated free market will lead to disastrous excesses just as happened with the great financial crisis of 2008. This will be true for such soon to be rebuffed ideas as tuition vouchers for private schools, private health care, lower estate taxes, deregulation in its many forms, reduced use of eminent domain, tort liability restraint and free trade.

We can anticipate a new reign of mercantilism, as the protectionists among us wield this strong new weapon against globalization and open markets. And all of this is true in large degree regardless of who wins the forthcoming election.

If Sarbanes-Oxley was any indication of the kind of legislation that results from crisis, then we can be sure that even more ham-handed regulation of all kinds will be the main product of the next Congress. Henry Waxman’s grandstanding this past week about bankers’ greed has been merely the warm-up for what is to follow.

Bankers eager for federal help now will find themselves regulated not far short of total federal control of their business behavior. Banks won’t be permanently nationalized, but what we will get will differ from that result semantically more than factually. Derivatives, for all their promise of alleviating panics and distributing risk, will not now be allowed to evolve into the brave new system once predicted for them. Accounting rules will become even more convoluted as we continue to ask for more information out of double-entry bookkeeping than it can ever deliver.

Still, there is a glimmer of hope left to those who detest this seemingly inexorable slide into socialism or its first cousin, the super-regulatory state. That glimmer comes from the ghosts of Adam Smith, Milton Friedman and Friedrich Hayek, who still haunt the halls of the left. And in spite of all the claims made that this debacle marks the demise of free market philosophy, it won’t go away so easily.

Read the whole thing.

Eugéne Delacroix (1798-1863), (detail) Atilla suivi de ses hordes, foule aux pieds l’Italie et les arts (Attila followed by his Horde, Trampling under Foot Italy and the Arts), Bibliothèque, Palais Bourbon, Paris, 1843-47

Bruce Bartlett, at the Cato Journal, describes how the same policies pursued by today’s democrat party produced the downfall of Rome.

In the end, there was no money left to pay the army, build forts or ships, or protect the frontier. The barbarian invasions, which were the final blow to the Roman state in the fifth century, were simply the culmination of three centuries of deterioration in the fiscal capacity of the state to defend itself. Indeed, many Romans welcomed the barbarians as saviors from the onerous tax burden. [15]

Although the fall of Rome appears as a cataclysmic event in history, for the bulk of Roman citizens it had little impact on their way of life. As Henri Pirenne (1939: 33-62) has pointed out, once the invaders effectively had displaced the Roman government they settled into governing themselves. At this point, they no longer had any incentive to pillage, but rather sought to provide peace and stability in the areas they controlled. After all, the wealthier their subjects the greater their taxpaying capacity.

In conclusion, the fall of Rome was fundamentally due to economic deterioration resulting from excessive taxation, inflation, and over-regulation. Higher and higher taxes failed to raise additional revenues because wealthier taxpayers could evade such taxes while the middle class–and its taxpaying capacity–were exterminated. Although the final demise of the Roman Empire in the West (its Eastern half continued on as the Byzantine Empire) was an event of great historical importance, for most Romans it was a relief.

Read the whole thing.

Spengler, writing in Asia Times, explains that America will inevitably continue to attract Asian investment and that people like Sarah Palin are the reason.

On my desk is a draft paper by a prominent Asian politician, sent to me privately for comment. It calls on Asians to take charge of their own financial destiny and invest their money in Asian markets rather than into the maelstrom of American markets. Privately, I advised the leader in question not to publish it. It will do no good. Asian capital markets cannot absorb Asia’s savings.

What does America have that Asia doesn’t have? The answer is, Sarah Palin – not Sarah Palin the vice presidential candidate, but Sarah Palin the “hockey mom” turned small-town mayor and reforming Alaska governor. All the PhDs and MBAs in the world can’t make a capital market work, but ordinary people like Sarah Palin can. Laws depend on the will of the people to enforce them. It is the initiative of ordinary people that makes America’s political system the world’s most reliable.

America is the heir to a long tradition of Anglo-Saxon law that began with jury trial and the Magna Carta and continued through the English Revolution of the 17th century and the American Revolution of the 18th. Ordinary people like Palin are the bearers of this tradition. …

It is true that Asian economies depend on American consumers and an American recession is bad for Asian currencies. But why don’t Asians consume what they produce at home? The trouble is that rich Asians don’t lend to poor Asians in their own countries. Capital markets don’t work in the developing world because it is too easy to steal money. Subprime mortgages in the US have suffered from poor documentation. What kind of documentation does one encounter in countries where everyone from the clerk at the records office to the secretary who hands you a form requires a small bribe? America is litigious to a fault, but its courts are fair and hard to corrupt.

Asians are reluctant to lend money to each other under the circumstances; they would rather lend money in places where a hockey mom can get involved in local politics and, on encountering graft and corruption, run a successful campaign to turn the scoundrels out. You do not need PhDs and MBAs for that. You need ordinary people who care sufficiently about the places in which they live to take control of their own towns and states when required. And, yes, it doesn’t hurt if they own guns.

Michael S. Malone hears the bell toll, but not for market capitalism.

The United States government has embarked on two pieces of social engineering in the last few years. One was to make oil expensive as expensive as possible to drive people to greater use of alternative energy sources – because anything less would be irresponsible and destructive to the environment. The other was to enshrine home ownership (i.e., easy-to-obtain mortgages) as a new American right – because anything less would be unequal and racist.

None of us voted on these decisions – indeed, neither was even spoken about directly, much less debated. But nevertheless, both became national policy… and both have sparked national, now international, crises. Then, once they became crises, both were blamed on ‘greedy capitalism’, instead of what they really were: legislative interference into market forces. …

But what makes this particular economic crisis so appalling, at least from this vantage point, is the sheer scumminess, corruption, short-sightedness and general incompetence of everyone involved. At least in the business world, especially in the take-no-prisoners world of high-tech that kind of venality and ineptitude either gets you fired or kills the company; by comparison, in Washington, it puts you in charge of the recovery effort. …

To my mind, what makes this economic crisis different from ones in even the recent past is that it has exposed the fact that there are, apparently, no real leaders left in Washington – that the intellectual capital in the National Capitol has fallen to a new low – if that’s possible. Most of all, it shows that we can no longer look to D.C. for leadership into the rest of the 21st century.

Marxists and statists of all stripes are, as one might expect, rubbing their hands in glee and declaring this the final death crisis of Capitalism. But I think just the opposite is occurring. What we are in fact seeing are the final death throes of governmental social engineering. As I noted two weeks ago, we are in a kind of Mentos-in-coke world right now – where, thanks to tech, the sheer speed of transactions and the enormous breadth of response, almost any outside influence can quickly turn the whole economy or culture) into an explosive brew.

Read the whole thing.

Stratfor’s George Friedman turns his non-ideological strategic lens on the mortgage crisis, and argues for following the model used in the Savings & Loan crisis of 1989.

Financial meltdowns based on shifts in real estate prices are not new. In the 1970s, regulations on savings and loans (S&Ls) had changed. Previously, S&Ls had been limited to lending in the consumer market, primarily in mortgages for homes. But the regulations shifted, and they became allowed to invest more broadly. The assets of these small banks, of which there were thousands, were attractive in that they were a pool of cash available for investment. The S&Ls subsequently went into commercial real estate, sometimes with their old management, sometimes with new management who had bought them, as their depositors no longer held them.

The infusion of money from the S&Ls drove up the price of commercial real estate, which the institutions regarded as stable and conservative investments, not unlike private homes. They did not take into account that their presence in the market was driving up the price of commercial real estate irrationally, however, or that commercial real estate prices fluctuate dramatically. As commercial real estate values started to fall, the assets of the S&Ls contracted until most failed. An entire sector of the financial system simply imploded, crushing shareholders and threatening a massive liquidity crisis. By the late 1980s, the entire sector had melted down, and in 1989 the federal government intervened.

The federal government intervened in that crisis as it had in several crises large and small since 1929. Using the resources at its disposal, the federal government took over failed S&Ls and their real estate investments, creating the Resolution Trust Corp. (RTC). The amount of assets acquired was about $394 billion dollars in 1989 — or 6.7 percent of gross domestic product (GDP) — making it larger than the $700 billion dollars — or 5 percent of GDP — being discussed now. Rather than flooding the markets with foreclosed commercial property, creating havoc in the market and further destroying assets, the RTC held the commercial properties off the market, maintaining their price artificially. They then sold off the foreclosed properties in a multiyear sequence that recovered much of what had been spent acquiring the properties. More important, it prevented the decline in commercial real estate from accelerating and creating liquidity crises throughout the entire economy.

Investors Business Daily observes that, although the left is ready to blame the subprime fiasco on an insufficiency of regulation, as lenders eliminated credit standards, government was right there encouraging their actions.

Commercial banks threw lending standards out the window in their rush to get new business. Like S&Ls of the 1980s, they would have gone wild without Gramm-Leach-Bliley. Washington, if anything, egged them on, but not because of free-market dogma. Banks and mortgage brokers were pumping up the homeownership numbers in America, and politicians were eager to take credit for that.

Wall Street, meanwhile, became a victim of its own innovation. It created new classes of derivative investments that spread — and, through leverage, amplified — the risk from the subprime mortgages produced by the banks. A new multitrillion-dollar market emerged almost overnight, lacking in transparency and reliable price signals. With their asset values in doubt, investment banks lurched toward insolvency.

If regulators failed here, it wasn’t because of policies adopted years before. It was more of the same story that has played itself out over and over in modern finance: Innovation races ahead of the rules. Crises tend to take almost everyone by surprise — including the major players as well as the regulators.

Read the whole thing.

Carel Brest van Kempen and friend

An August 25 WSJ article blamed a management plan by outside environmentalists which prevented feeding of komodo dragons (Varanus komodoensis) by residents of Kampang Komodo for the large monitor lizard’s increased opportunism and aggression, and for occasional incidents of human predation.

We don’t want the Komodo dragon to be domesticated. It’s against natural balance,” says Widodo Ramono, policy director of the Nature Conservancy’s Indonesian branch and a former director of the country’s national park service. “We have to keep this conservation area for the purpose of wildlife. It is not for human beings.”

This sounded like a good story to me and I blogged it here.

On the other hand, I have since found via Steve Bodio, that Carel Brest van Kempen, a Nature artist who knows his Oras as well as the local area, has a very different perspective, and makes a persuasive case contradicting the WSJ.

Mr. van Kempen says the village traces its origin to a penal colony, was settled by piratical Bugis fisherman from Sulawesi (whose ancestors were so naughty, he alleges, they inspired the English term “bogeymen”). The village has grown to 1600 residents, and Mr. van Kempen disapproves. “An unchecked human explosion will doom the dragons, ” he believes. Drastic measures were imposed by a 25-year plan drafted by outside experts. Mr. van Kempen endorses that plan, considering it “a thoughtful and practical attempt at a rather Sisyphean task.”

That Sisyphean task is obviously keeping the ora habitat free of local settlements.

The Management Plan bans a number of destructive and effective fishing methods, including explosives and poisons, reef gleaning, long lines, gill nets and demersal (bottom) traps, effectively restricting fishermen to using hook and line and traditional light nets. It also imposes catch limits and denies access to grouper and Napoleon Wrasse spawning grounds. A long list of fish species is proscribed, as are all marine invertebrates except squid. Some rather Draconian measures have been taken on land. All immigration has been disallowed; not even marriage confers a right to residency in the Park. Dogs and cats have been banned, as have most other domestic animals save goats and chickens, and restrictions have been put on use of fresh water. The gathering of firewood is no longer allowed and the laws prohibiting hunting of deer, pigs and buffalo are being strictly enforced. It’s the fishing restrictions, though, that have impacted the already struggling villagers the hardest, and they’ve caused considerable anger. There have been shootouts between rangers and fishermen, resulting in several deaths. Balancing the needs of the burgeoning villagers and those of the finite ecosystem is difficult, and the fact that it’s being imposed from outside causes real resentments.

If one actually reads the plan, one is obliged to conclude that the poor ignorant villagers, persons of low education who thoughtlessly reproduce themselves and get in the way of ecological progress are being first prevented from fishing by the most effective techniques and for the most marketable catch. Meanwhile, a totalitarian regime regulating intimate details of daily life (Don’t spray pesticides! How much water are you using? No dogs or cats, or wives from off-island, either!) must make things unpleasant indeed for residents, who are clearly being not all that subtly nudged to pack up and go away.

Once they’re gone, in comes the multi-million-dollar beach resort for eco-tourism, offering reef snorkling and dragon watching for beaucoup dollars per diem.

Steve Bodio and Matt Mullinex were dazzled by the details that van Kempen throws around, and by his obvious personal acquaintance with the neighborhood. I’m not persuaded. I remain permanently suspicious of Sarastro and all his expert planners, and on the basis of habitual preference for underdogs, I remain on the side of those local fishermen who are clearly getting pushed around.

The oras will clearly make out. The Indonesian government can make a good buck selling glimpses of this kind of unique wildlife to tourists, so they’ll be well protected.

No retraction from me.