Financial Reform and Freedom

It is important to understand that more is at stake in the debate over financial reform than mere arguments over how the economy should operate. While we can all agree that this is enormously important, we can hopefully agree that freedom is an even more important right that Americans should have the right to enjoy.

I can hear people snickering now wondering how financial reform is relates to freedom. The answer is that any sort of government regulation inherently relates to freedom. If the financial reform bill passes, the American public will not have access to some of the risky investments that certain investors want. A group of investors prefer high risk-high reward investments. This means that there is a small percentage chance that the thing they bet on win (this could be a subprime mortgage that pays itself off or an entrepreneurial investments that becomes the next macintosh). These investors understand that there is a small chance that they will ever see their money again but if the thing they do bet on happens to occur, they will see an enormous payday.

Who is the government to judge what is too risky for any one person? If I want to buy risky investments, and am aware of the risks, then that should be my choice and my choice alone. The government should mind its own business and let me place my investments in whatever portfolio I prefer, whether it be a safe and steady investment or a high risk investment.

Two other notes about risk:

First, risk is good for the economy. Risk is what the entrepreneur takes and stakes his entire family's future on. The entrepreneur takes a greater risk than any subprime mortgage bank ever did and they need to commended for it, not chastised by an overzealous government bent on taking more control from the people they are hired to represent.

Second, I can already hear the chorus saying that the investors who bought these subprime mortgages were lied to by the evil big banks. Even if they were not lied to, they were misled. This could be true. If this is true, there are already laws in place for this. Those laws should be enforced. Unlike some of my economist friends, I am not an anarchist. I believe a limited government can be a great thing exactly because they do stop major corporations from preying on people who do not understand their investments.

The government needs to also stop acting hypocritically. If they are really opposed to risky investments that have a very low chance of paying off, but when they do, the payoff is enormous, the government needs to immediately leave the lottery business. The government operates the highest payoff, lowest chance for success bet in the world, while they chastise those who buy subprime mortgages. I would love to hear their rationale for that.

Regulation interferes with freedom, always. Never forget that.

Meeting of 30 - President Obama Speech

The 30 most influential economists in the world will be meeting this week. On their website is this youtube clip:

He says a few things here that are worth noting:

At 0:53 President Obama says:

"This economic crisis began as a financial crisis when banks and financial institutions took huge and reckless risks in pursuit of quick profit and massive bonuses."

This statement is confusing for a number of reasons.

First, the banks took risks knowing they could lose. The people who took these risks are not stupid and were trained to understand the risk they were undertaking. The risk, of course, was in pursuit of quick profits. That is great. When I invest with a company, you can bet I am hoping they are doing things to turn a profit or I am out of there.

Second, President Obama knows a lot about risk. He often brags about how he took a risk after leaving Harvard Law School to do a non-traditional job (community organizing). Yet this risk is fine for him because he took it, but investors should not be allowed to decide the level of risk they are comfortable with. The banks that made the risky investments were funded by shareholders and others who were supposed to know the risks. For President Obama to say that those individual investors, no matter their wealth, should not bet permitted to take a risk he himself is not comfortable with is dangerous and flies in the face of the freedom that he is supposed to protect.

Next clip at 1:28

"To avoid this calamity, the American people... were forced to rescue financial firms facing crises largely of their own creation."

This is where President Obama really misses the point. The people were not forced to rescue the financial firms by the financial firms. We were forced to rescue these firms by Presidents Bush and Obama. They enacted the laws that took our money (actually borrowed China's money) to give to these megaconglomerates so they would not collapse.

Here, President Obama is blaming the financial firms for a decision his administration and the administration before his made. If Goldman Sachs was going under and needed help, they could certainly ask for my help but there is 0% chance I would give it to them without something in return (like stock, or bond). The federal government, on the other hand, forced every one of us to borrow money from China (that our children or children's children) will have to repay in order to give that money to Goldman Sachs and other firms. With all due respect to President Obama, trying to blame the megabanks for your policy decisions is frankly untrue.

At 3:14 he says:

"Never again will the American taxpayer be held hostage by a bank that is too big to fail."

Again, no bank is too big to fail. If it was too big to fail, it wouldn't fail and the bank would still be succeeding. No such bank has ever, or will ever exist. A bank is too big for President Obama and his economic team to feel comfortable letting it declare bankruptcy. This sounds bad on the surface as we are letting one man and his team decide which banks should get which benefits but is even worse considering that this has been an insider politics game for quite some time as outlined in this article.

About how he will prevent future crises:

He proposed two reforms:

1. Banks will no longer be allowed to own, invest in, or sponsor hedge funds, private equity funds or proprietary trading operations for their own profit, unrelated to serving their customers.

Apparently President Obama thinks the banks are doing well enough in the stock market that they can take this hit now. If a bank wants to do any o those things for their "own profit", which is really shareholder profit, they should have the right to. Who is President Obama to tell these firms how to best run their company? He is already trying to change the entire health industry but apparently wants to also bring his desired level of control to the financial sector.

President Obama needs to understand that the markets will work this out. If a firm is taking too many risky bets people won't bet on them (unless they do because there is no longer a fear of losses because his administration has bailed them out). People and firms are value maximizing, not value-minimizing. Let these firms go and people will invest and de-invest based on their desired level of risk, not through Presidential fiat.

2. Prevent further consolidation of our financial system.

He did not go into many details into this so it is tough to know exactly what he means. I will wait to discuss this until the outline is a little more clear.

There are few more things to discuss here but I will have to wait as this article is already getting a little long.

The market for Facebook Privacy

Facebook has finally decided to increase their security standards. (Article is attached) This poses the curious question as to why. The founder and CEO of facebook, a 26 year old billionaire, has publicly said that he does not believe in privacy. Privacy also is not a great business model for a company that hopes to eventually turn their client preferences into advertising dollars, so why increase privacy?

The answer is simple, the people demanded it. We can see through google trends (article linked) that an increasing number of people were attempting to remove their facebook accounts. Facebook had no option but to respond to this, because if they lose their customer base, they have no business. The company listened and is currently increasing security.

This tells us a lot about the market. We have a CEO/Owner who doesn't believe in privacy rights, a company that is based around that lack of privacy yet the consumer of the service wins. Why? Facebook knew people deleting their account were not just leaving facebook but were likely headed to one of their competitors. Web 2.0 is here to stay, and if facebook wants to remain in the lead (no matter their size), they have to give consumers what they want. Customers demand privacy and now they will get it.

Some will claim that since Facebook is trying to gain a monopoly/is market dominant, they will not have to respond to consumers. We know this is false. Monopolies have some great say of prices and the quantity they supply but they cannot dictate consumer preferences. Those preferences belong to the consumer alone.

Economic forces are all around us. Even in privacy settings of facebook, apparently.

Introduction

This will be my personal blog where I will discuss economics, policy and the relation between the two. I am an economist who loves to study government so the fit is a natural one. I will discuss issues mainly from a pro free-trade and more importantly, pro-freedom, stance.

I am mostly libertarian with some conservatism mixes in when I feel the libertarians get a little too out there (like Gold Standard, and Anarchy). I believe that we were all created free and were meant to remain free. We are not meant to be coerced by others. We are not meant to have our actions dictated just because we elected someone.

I will call out both parties on this as I believe both parties have started to say farewell to freedom and have become more interested in standing up for their own beliefs while oppressing those who disagree with them. This will all be discussed in greater detail throughout the posts obviously. Anyway, I hope if anyone chooses to follow this, they enjoy it.