Those Evil Businessmen

After witnessing the collapse of firms such as Enron and Worldcom, Americans are now content to sit back and witness the demise of those who were supposedly responsible. The trials of executives such as Ken Lay and Bernard Ebbers are starting to take shape and most of their underlings have already been sentenced or entered into plea bargains. I’ve searched the internet far and wide for info on this topic and it is clearly evident that an overwhelming majority of Americans view these trials in a very black and white manner. There is no doubt in most people’s minds that these executives are guilty of heinous crimes and should be locked up for a long, long time.

In cases where sentences have already been handed down, the public seems to think that they were too light. To quote one anonymous WSJ reader, these men “should be tied to a post in the middle of a giant ant hill and left to die.” This mindset is understandably common among people who feel they have been swindled. Those responsible should hang. And of course, it is the government which should do the hanging and which should protect the swindled from ever being taken again. Not only does the government relish this role, it does everything it can to create and foster it.

I am not insinuating that no fraud took place or that no punishment should be meted out to the dishonest men who perpetrated it, although I do think that punishing these men as if they were murderers and rapists is extremely harsh. Many rapists and murderers get off with surprisingly little jail time compared to what these executives are facing. Yes there was terrible damage done to the livelihoods of many Americans. But what should be done in this situation is to sit back and take a good long look at exactly who’s fault this is. Rather than naively placing all the blame on a few scapegoats, a more thorough, penetrating analysis is in order.

Why were so many Americans “ruined” in the wake of these collapses? Sure people lost their jobs, but that happens all the time. Yes many people’s retirement nest eggs were wiped out, but whose fault is that? If you were wiped out by these crashes, it’s time to take some of the blame upon yourself. The fact is no one should have had a substantial portion of their nest egg tied up in these two stocks (or any other of the thousands of hopelessly inflated stocks associated with the late 90’s bubble.) Betting the house on a few companies is almost always a bad idea, even when the companies are great investments, let alone when they’re selling at 220 times sales with a P/E ratio of 80.

People were wiped out because they either had no idea what they were doing, or they allowed themselves to get caught up in the bubble mania and threw caution and centuries of experience to the wind. In the end we reap what we sow. Folly and greed beget tragedy and ruin surely as night follows day. This is as true for Middle America as it is for the corporate fraudsters at Enron and Worldcom. No one should have been ruined by these crashes except the criminals who committed fraud. The smart money stayed away from these companies all along, or at least sold them long before they crashed. From an individual standpoint, the first step toward preventing this type of tragedy is to acknowledge our ignorance and either become smarter investors, stay out of the markets altogether, or accept the fact that if we proceed in ignorance we may get burned.

In the market, nothing is more certain than that fools and the unwary will soon be parted from their money. Perhaps the only thing more certain is that once this happens, these “victims” will look around everywhere and at everyone but themselves, for someone to blame. Herein lies the source of the harsh feelings so many have towards corporate America since the stock market bubble burst 5 years ago. They see corruption and corporate greed as the sole source of their troubles. Naturally they run to the nanny state to protect them, and the state receives them with open arms and consoling assurances.

The irony here is that the government played the central role in the stock market’s meteoric rise and its catastrophic collapse. Bubbles are invariably spawned and fueled by credit expansion and tampering with interest rates. Anyone familiar with John Law’s inflationist adventures in France or the concurrent South Sea Bubble in England should be able to dissect a bubble from start to finish. If you want dishonesty and fraud, we have to look no further than the Fed chairman himself. The wizard behind the curtain who pulls the levers and pushes the buttons, who is supposed to “smooth out” the economy and keep us safe from the business cycle stated that “it is definitively difficult to identify a bubble until after the fact- that is when its bursting confirmed its existence.”

This is most likely an attempt to absolve himself of responsibility for the consequences of his organization’s fraudulent, inflationist actions. If the Fed chairman can’t recognize that things are getting out of hand, when people like Warren Buffet and John Templeton clearly can, then why is he running the Fed in the first place? Furthermore, if the Fed can’t prevent or dampen the business cycle effectively, which it obviously cannot, then why in the world do we have a central bank at all? The reality is that the Fed is responsible for creating and fueling the boom and bust cycles which consistently ruin the unaware.

The kind of scandal and fraud that occurred during the heyday of the credit fueled boom always accompanies runaway, financial bubbles. While things are good, this type of behavior is looked over and ignored or sometimes even encouraged. It is only after things fall apart and everyone wants someone to blame that the witch hunts begin. Sure there was fraud that took place but it wasn't limited to a few CEO's and a few large companies. What about the fraud perpetrated upon the American people 24/7 by the Fed? Where are the charges against Greenspan and Co. for producing and fueling inflation and runaway investment bubbles that have eroded the savings and livelihood of Middle America to a far greater extent than the collapse of these two companies ever could? Fiat money and fractional reserve banking are inherently fraudulent institutions. The government has merely gotten very good at hiding and justifying the fraud.

The main problem I have with the way the trials of the Enron and Worldcom executives are being carried out is that they are purely political. The state attempts to use all crises to expand its power and influence and this one is no different. Rather than being an objective search for truth in order to mete out justice, these trials constitute an Orwellian circus where the sole goal is to convince the public that big business is evil and that only the government can protect us from it. It is no coincidence that the accountants and underlings who also knew about and participated in the fraud have almost all gotten off with a slap on the wrist. They were never the targets. The goal was always simply to get them to sing the correct tune so that the big wigs, the Ken Lays, the Ernie Ebbers, the Martha Stewarts would be publicly humiliated and punished. They were threatened with heavy fines and long sentences unless they would “cooperate” with federal prosecutors in testifying against their superiors.

Consider this statement by former federal prosecutor George B. Newhouse Jr, taken from an August 12 NY times article. “To the potential Scott Sullivans of the world, if you see the light and cooperate with the government, the government will use that cooperation to mitigate any fines or penalties." Or consider what Judge Barbara S. Jones told Sullivan at his sentencing. "Mr. Sullivan, you would have faced a substantial sentence had you not cooperated with the government." These kinds of invitations to “sing” against an accomplice constitute a serious incentive to say and do whatever the prosecutors want in order to help “solve” the case. Justice often goes out the window in the name of expediency.

The government will get its convictions because that’s what it wants. These men were condemned before they ever set foot in a court room. The trials provide the perfect forum to publicly demonize big business and to plant the seeds of suspicion and fear with regards to free markets in the hearts of Americans. Thus the state sets itself up as the great protector of the consumer while convincing the masses that if it weren’t for government regulation, big business would suck them dry.

The argument for an unregulated investment environment is too lengthy to be presented here, although some interesting essays on the subject can be found here, here and here. Suffice it to say that whenever a government agency purports to protect the consumer through regulation and inspection, it embarks on a counterproductive and harmful crusade. Alan Greenspan himself (in his earlier days,) commented on this in his essay The Assault on Integrity. He states that:

“Regulation- which is based on force and fear- undermines the moral base of business dealings. It becomes cheaper to bribe a building inspector than to meet his standards of construction. A fly-by-night securities operator can quickly meet all the S.E.C. requirements, gain the inference of respectability, and proceed to fleece the public. In an unregulated economy, the operator would have had to spend a number of years in reputable dealings before he could earn a position of trust sufficient to induce a number of investors to place funds with him. Protection of the consumer by regulation is thus illusory. Rather than isolating the consumer from the dishonest businessman, it is gradually destroying the only reliable protection the consumer has: competition for reputation.”

Again, I want to reiterate that I am not trying to justify the fraud that did actually occur. It seems obvious that there was fraud and dishonesty that took place. What I am saying is that more government regulation is definitely not the answer. The government can't protect us from these kinds of events. It can only punish men after the fact as the law allows. All regulation does is serve to subsidize the unscrupulous and unproven at the expense of the honest and trustworthy.

Should Kenneth Lay and Bernard Ebbers receive harsh punishment? Perhaps. But then perhaps there are bigger fish to fry. Before we grab the rope and head for the ant hill, we should realize that this is all an elaborate game, one that has been going on for quite some time. Rather than pointing the finger of blame at big business, we should be pointing out the real culprits, the ones that will never see trial but that defraud us every day without fail. Rather than pointing towards Houston, Texas or Clinton, Mississippi, our fingers should be pointing towards D.C.