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Free enterprise and government regulation

By Thomas E. Brewton
web posted July 30, 2007

Lawmakers can dismount from their soak-the-rich hobby horses.  Reality curtails business excesses; no need for help from Congressman Barney Frank.

The free marketplace has chastised hedge fund managers more effectively than any taxes or regulations congressional socialists might have concocted.

The Wall Street Journal in its July, 27, 2007, edition reports:

As flagging debt markets bring the private-equity boom to a halt, the likelihood that Kohlberg Kravis Roberts & Co. will have to postpone its initial public offering is increasing.

Jeff Arricale, who runs a financial-stock mutual fund for T. Rowe Price Group Inc., said he doubts KKR will be able to find enough investors to pull off an IPO if current market conditions continue. "Sure, at some price it is possible to do it, but I'd be shocked if they end up doing this IPO."

Five blocks south of KKR's New York headquarters overlooking Central Park, rival firm Blackstone Group LP is learning just how tough this market has become. Shares of its own initial public offering -- priced just over a month ago -- are now 17% below their $31 debut, and closed yesterday in 4 p.m. New York Stock Exchange composite trading at $25.70, up 19 cents, or 0.7%.

In recent weeks, news articles have described the decline in home sales and the back-up effects on other sectors of the economy: junk bonds, LBOs and hedge funds investing in those securities and various forms of derivatives.  Heading a very lengthy list of troubled entities was Wall Street brokerage firm Bear Stearns, whose two hedge funds, with $10 billion in funds under management before the blow-up, are now worthless.

Led by Massachusetts (where else?) Congressman Barney Frank, lawmakers have been imitating a pack of hyenas on the prowl, eagerly surrounding hedge funds and circling for the kill.

Stirring their populist, class-warfare hormones was the huge personal profits made by hedge fund managers like Blackstone's Steve Schwarzman.  At the IPO price for Blackstone when it recently went public, Mr. Schwarzman's net worth ballooned to a reported $7.5 billion.  Many other hedge fund managers also ranked among the most highly compensated individuals in the country.

This display of income inequality was too much for Congressman Frank.  Under the Keynesian and socialist economic doctrines of the liberal-Progressives, business profits can only have been made by stealing from the workers.  Thus the Feds had an obligation to snatch those profits from hedge fund managers and return them to the labor unions.  In a good socialist state, everybody is equally poor.  (See Economic Class Warfare).

In the real world, the capitalist free-market works far more decisively and effectively than ham-handed government regulation and taxes.  As I wrote in The Economics of Liberal Values:

The critical point is that the capital necessary to start and to run a business is separated from the business people.  Businesses want money to expand.  Lenders and investors want to lend money to businesses only when they can be reasonably sure of getting it repaid, plus a profit reflecting the risk incurred in lending and investing.  Capitalism thus has a built-in regulator, a system of internal checks and balances.

To get money, businesses must first convince hard-eyed lenders and investors that a market exists for their products and that they can satisfy that market’s demands.  Lenders and investors have strong incentives to avoid bad loans and investments: they lose their jobs and their own money if they don’t.

Contrast this with the never-ending torrent of federal spending to buy voters' loyalty.

...Businesses approved by the state-planners don’t have to compete with rival businesses to get funds.  They get funding directly from the National State, in accordance with a master plan for the economy.  Individuals play no role at all in the process, since their product preferences have no effect.  Planners make all the decision about what is produced, how much of it, and where it is to be delivered.  Grossly inefficient and outmoded business enterprises, for that reason, survive decade after decade in a socialist economy. ESR

Thomas E. Brewton is a staff writer for the New Media Alliance, Inc. The New Media Alliance is a non-profit (501c3) national coalition of writers, journalists and grass-roots media outlets. His weblog is The View From 1776. Email comments to viewfrom1776@thomasbrewton.com.


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