Finance and Entrepreneurship | Publications | Competitive Enterprise Instittue

Overregulation Shackles Next Facebook

John Berlau — Fri, 18 May 2012 20:59:02 +0000

Today, Facebook finally goes public with a market capitalization of $104 billion. Its initial public offering (IPO) is the capstone of its amazing ascent that changed the way the world communicates.

By contrast, other top American companies went public at much earlier stages in their growth. Barely anyone outside of the Atlanta area had heard of Home Depot when it went public in 1981 with just four stores in its name. The difference? Much of it has to do with the layers of regulation from the past decade that have made going and staying public so costly for smaller companies.

These rules are always justified as needed to go after “fat cats.” When George W. Bush signed Sarbanes-Oxley in 2002 and Barack Obama signed Dodd-Frank in 2010, both men cited scandals involving large corporations. After the JPMorgan Chase loss of $2 billion, the Beltway elites are painting any criticism of financial regulation as siding with the “big banks.”

But it’s smaller firms and smaller investors who have been the most burdened by these costly and complex rules, including the firms that could be the next Facebook or Home Depot. Home Depot co-founder Bernie Marcus has said many times the company likely never could have gotten off the ground if Sarbox, Dodd-Frank, and other of today’s regulations had been in effect. “We could never succeed today,” Marcus bluntly told radio host Hugh Hewitt last June.

Even a firm as big as Facebook had difficulty navigating this regulatory maze, stating in its initial IPO filing that “compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming, or costly, and increase demand on our systems and resources.” But what’s “not seen,” in the words of classical economist Frederic Bastiat, are the innovations from the number of firms that could never have launched due to the prohibitive costs of these rules.

These regulations have also robbed ordinary investors of the opportunity to grow wealthy with Facebook in its early stages. Ditto with other recent IPOs like LinkedIn, Pandora, and Zynga.

IPOs of the past few years can be called “Cheers IPOs” because to paraphrase the theme song of the 1980s television sitcom, everybody knows their names. But what a healthy economy needs is IPOs of companies you have never heard of, which go public not to realize market value for the shares of their founders, but to raise money to expand operations and jobs.

Unlike the case with the Cheers IPOs and similar to that of Home Depot, no one outside of certain regions had heard of Starbucks and PetSmart when these retailers went public in the early 1990s. These firms used the money raised from the IPOs to become the dominant national chains they are today, creating thousands of jobs along the way. The relative ease for companies to go public in the 1990s helped the economy power out of its recession early in that decade and move toward the boom in the latter part.

But as Marcus has noted, firms as small as Home Depot in 1981 could never go public today with the costs of Sarbox and Dodd-Frank weighing them down. The SEC has calculated that the average annual costs of one Sarbox provision alone — the “internal control” mandates of Section 404, come to $2.3 million.

Statistics on both the reduced number and increased size of IPOs show the dramatic effects of these regulatory costs. In the years since Sarbanes-Oxley was passed in 2002 — a span that included good economic times as well as bad — not once has the number of IPOs come close to the numbers recorded during the slow-growth years of the early 1990s, let alone the boom years of the later part of that decade.

As I noted in February testimony to the House Energy and Commerce Committee, there were about 50 more IPOs in 1991 than there were in 2006 or 2007, relatively good years for economic growth.

The decline is especially severe among small firms. Even Obama’s Council on Jobs and Competitiveness has noted that “the share of IPOs that were smaller [in market capitalization] than $50 million fell from 80 percent in the 1990s to 20 percent in the 2000s.” In fact, in addition to Facebook, LinkedIn, Zynga, and Pandora all had market capitalizations that exceeded $1 billion when they went public.

But there is some good news. Since the slightly deregulatory Jumpstart Our Business Startups (JOBS) Act passed Congress and was signed by President Obama in early April — after much stalling from statist liberals in the Democrat-controlled Senate — there has been a trickle of smaller firms returning to the IPO market.

Among other things, the JOBS Act creates a five-year “on-ramp” for most firms going public in which they are exempt from the Sarbox internal control mandates, the Dodd-Frank proxy provisions and other burdensome regulations.

Despite Obama’s signature, the JOBS Act has been bashed by the usual suspects to whom regulation is religion — i.e., The New York Times editorial page and Rolling Stone’s Matt Taibbi — as somehow benefiting giant corporations and the “big banks.” But the data show the first firms taking advantage of this law are the very emerging growth firms supporters of the law had pointed to as beneficiaries. ClearSign, a Seattle-based firm that makes energy-efficient furnaces, launched an IPO with a market cap of just $12 million and cited the JOBS Act as allowing it to do that.

This is good news, because every dollar a smaller firm can raise by going public is one less dollar that firm has to beg and grovel for from a bank. This extra cash can be used to expand the business faster with many more employees added to the firm. As the Obama jobs council and others have noted, 90 percent of a public company’s job creation occurs after it goes public.

For ordinary investors, small-cap stocks are high-risk but potentially high return. And these high returns shouldn’t be restricted to the 1 percent of wealthy investors by burdensome regulation justified ironically as going after the “big guys.”

Facebook’s stock market launch should be celebrated, but the mini-IPOs enabled by the JOBS Act are the wave of our entrepreneurial future.

John Berlau

Fri, 2012-05-18

Citation Source:

NewsMax

http://www.newsmax.com/JohnBerlau/Overregulation-Next-Facebook-IPO/2012/05/18/id/439568

Forget France, the Greek Elections Are the Beginning of the End for Europe

Iain Murray — Tue, 08 May 2012 18:46:37 +0000

While much of the world's attention was concentrated on France's presidential election last Sunday, the real action was in Greece. French President-elect François Hollande may be promising 75 percent income tax rates and a renegotiation of the European Union's fiscal treaty, but it was the result of the Greek elections that will determine the future of Europe.

The irony is that Greece should never have been allowed into the euro in the first place. It did not meet the entrance criteria, but Eurocrats in Brussels turned a blind eye because they viewed the creation of a European identity as more important than financial stability. When the process began to unravel, a panicked EU, along with the International Monetary Fund, responded by throwing money at the problem, in exchange for a promise of austerity.

The result of the Greek elections was a resounding rejection of the coalition government -- comprised of mainstream socialists and conservatives -- that engineered an EU/IMF bailout. The Conservative New Democracy (ND) party, the junior party in the coalition, received the most support of any party, but only 20 percent of the total votes cast. The coalition socialist party, PASOK, placed third, behind a coalition of other leftist parties calling itself Syriza. The Independent Greeks, a pro-Russian, anti-Turk conservative group led by a former ND legislator placed fourth, with the Communist KKE in fifth, the neo-fascist Golden Dawn sixth, and yet another leftist block seventh. No other parties achieved enough support to gain representation in parliament. Fully 66 percent of votes cast were for anti-bailout, anti-austerity parties.

Thanks to a bizarre quirk in the electoral system, ND gained 50 extra seats in parliament for coming in first. This measure, designed to aid the creation of coalition governments, could plausibly have resulted in a pro-bailout government forming despite the overwhelming rejection of the bailout parties. By Monday afternoon, however, ND leader Antonis Samaras had conceded defeat in his efforts to find a majority, which will allow the Syriza faction to attempt to form a coalition of the anti-bailout groups.

The upshot? Greeks have exchanged a democratic crisis for a financial crisis with far-reaching implications. If an anti-bailout government is formed -- a big if, as that would require the various anti-bailout groups to overcome their considerable ideological differences -- the subsequent rejection of the austerity policies demanded by the EU and IMF would almost certainly lead to a Greek sovereign default, Greece leaving the Eurozone, and the return of the Drachma.

If this happens, Greece will experience severe short- and medium-term financial pain, likely exacerbated by confiscatory leftist or autarkic policies -- or some combination thereof.

However, there is some good news. By leaving the euro, Greek living standards will eventually reach a market-clearing level, and, assuming that the Greeks have fully appreciated the problems caused by statist policies during this process, they may be well placed to welcome industry back to their country with low costs and barriers to entry. How urgent is market liberalization? A recent Financial Times column tells of one entrepreneur who was asked to provide a stool sample to the government before he was allowed to start an online business.

Add to reform Greece's unique national assets -- an amazing history and climate -- and tourism should also boom, raising Greek living standards once more.

Yet if the future for Greece in this scenario looks potentially fine in the long-term, the same cannot be said for the euro. It recently become obvious to everyone that the Eurozone's Target-2 system of payments between central banks tuned out market signals that otherwise would have warned that a crisis was coming. This system places the euro in very grave risk if a country were to default.

Financial journalist Martin Hutchinson described the system very well:

When a Greek makes a large euro payment to a German, his Greek bank makes a payment to the Greek central bank, which makes a payment to the Bundesbank, which pays the German bank, which pays the German. This is quite different to the U.S. system. There is no central bank of Alabama intermediating dollar payments between Alabama and New York, and there was equally no need for such intermediation in the [E]urozone -- it just gave the otherwise redundant national central banks something apparently useful to do.

This means that the effects of capital flight are doubled. Not only does the central bank of Greece have an existing imbalance with the Bundesbank, the German central bank, but when a Greek moves his money from Greece to Germany, the imbalance grows larger.

Now consider what would happen if Greece were on the verge of default. The fear of successive default by the other shaky economies -- Spain, Portugal, and Italy -- would lead to rapid capital flight from those countries to Germany. The Bundesbank is probably able to absorb the effects of Greek default and capital flight, but it simply could not absorb the capital flight from other countries. Germany may well be forced to leave the euro rather than subject itself to this risk. This could all happen extremely quickly.

Should Americans be worried? Yes, because the United States will be caught up in a crisis it could have helped prevent. The European Project that now stands on the precipice of self-inflicted destruction was enthusiastically supported by successive U.S. presidents, who all urged Europe down the path to union for the simple reason of diplomatic convenience. If the scenario I have outlined above comes to pass, we may see a banking crisis that could make 2008 look like a walk in the park.

Iain Murray

Tue, 2012-05-08

Citation Source:

The American Spectator

http://spectator.org/archives/2012/05/08/forget-france-the-greek-electi

Refinery Not a Well

John Berlau — Mon, 07 May 2012 19:09:16 +0000

From Chris Woodward's article on OneNewsNow:

John Berlau, senior fellow for finance and access to capital for the Competitive Enterprise Institute's (CEI) Center for Economic Freedom, says this is not the first time a non-oil business has bought a refinery.

"There have been some farm co-ops [and] private equity firms, but this is a new trend that's being driven both by high oil prices and also new regulations forcing businesses to come up with strategies to handle rising oil costs," he explains.

John Berlau (CEI)According to Berlau, those problematic regulations prevent the exploration for more oil. Also, many lawmakers and policy experts argue that the Dodd-Frank Wall Street Reform and Consumer Protection Act amounts to overregulation.

"Dodd-Frank prevents manufacturers, airlines [and] others from buying derivatives to hedge oil prices so they don't have to pass on the higher price to the consumers," Berlau details.

Regardless, he notes that this is only a refinery, not an oil well, which means "if oil keeps going up, if you keep preventing drilling in American lands, it's going to be of limited assistance."

John Berlau

Mon, 2012-05-07

Citation Source:

One News Now

http://www.onenewsnow.com/Business/Default.aspx?id=1591780

Lending Cap Is Unfair to Small Business

John Berlau — Mon, 07 May 2012 19:36:41 +0000

The recent viral video sensation “If I Wanted America to Fail” confirms that the regulatory state is a major focal point for the center-right movement, and indeed much of America. Produced by Free Market America, a project of Americans for Limited Government, the video garnered more than 1 million views in a span of just five days.

While mostly concerned with environmental regulation, the video voiced its objection to all types of mandates. Narrator Ryan Houck posits that if he wanted America to fail, he would “create countless new regulations and seldom cancel old ones.” He surmises correctly, “That way, small businesses with big ideas wouldn’t stand a chance — and I would never have to worry about another Thomas Edison, Henry Ford or Steve Jobs.”

It’s this very issue of access to capital for entrepreneurs who could be the next Jobs or Edison that has increased the focus by advocates of limited government on financial regulation. Frequently justified as needed to rein in Wall Street, these countless new and old regulations are having a pernicious effect on Main Street businesses, consumers, and investors.

The crushing accounting mandates in Sarbanes-Oxley Act of 2002 raise the cost of capital by making it extremely difficult for smaller companies to raise funds through the public equity markets. Even the Obama administration admitted Sarbox was chilling the entrepreneurial sector when it signed the JOBS Act last month granting limited but significant relief from the law for emerging growth firms.

Similarly, the Dodd-Frank so-called financial reform of 2010 greatly raises the cost of borrowing. The Durbin Amendment provision of that law, imposing price controls on what banks can charge retailers to process debit card transactions, has eliminated free checking and added fees to many consumers’ and entrepreneurs’ accounts at banks and credit unions.

Now, the center-right coalition is focusing on a rule that specifically burdens credit unions and the entrepreneurs among their members, from veterans to doctors. The cap on a credit union’s member business lending, enacted in 1998, has severely restricted the ability of credit unions to make small business loans to their members. And credit union regulators agree there is no safety or soundness justification for this rule, as business loans are not inherently more dangerous than car loans or — as we’ve seen during the financial crisis — mortgages.

So it should come as no surprise that leaders of 14 center-right groups — including the Competitive Enterprise Institute, Americans for Tax Reform, the Heartland Institute, the 60 Plus Association, American Commitment, Citizens Against Government Waste, and Campaign for Liberty — have signed on to a letter supporting S. 2231, a bipartisan bill that would substantially ease — but not eliminate — these restrictions on credit unions’ lending to the businesses of their members.

“The bottom line is this,” the letter states. “The bill is a sound, free-market, deregulatory action that will create jobs, help small business and assist veterans.” As to the latter point, the letter notes that “since two of the largest credit unions focus their efforts largely on military populations, veteran-owned businesses are also likely to reap particularly large benefits if this bill becomes law.” The two credit unions that serve military populations are Navy Federal Credit Union and Pentagon Federal Credit Union.

Given the legislation’s deregulatory approach and the fact that it helps veterans who are entrepreneurs, it should also come as no surprise that some of the most conservative and free-market minded members of Congress are co-sponsoring this bill and its companion House version, H.R. 1418. These include Rand Paul, R-Ky., in the Senate and his father, Ron Paul, R-Texas, in the House, as well as chief House sponsor Ed Royce, R-Calif., and Reps. Dana Rohrabacher, R-Calif., and Allen West, R-Fla.

But what might be surprising is that some of the House and Senate’s most liberal members are also co-sponsors. These would include Reps. John Conyers, D-Mich., Marcy Kaptur, D-Ohio, and Sen. Mark Udall, D-Colo., the lead Senate sponsor of the bill. Part of the reason for this strange bipartisan outbreak of common sense in viewing this regulation as outdated is that credit unions are so well received by their customers. A recent survey by the Temkin Group found credit unions to be among the businesses that “consumers are most likely to trust.”

What is also surprising is if not the opposition from banks — who compete with credit unions – the degree of it. It has been remarked that if banks’ opposition to the Durbin Amendment price controls from Dodd-Frank (which also hurts credit unions) were this intense, that provision would have been repealed.

In their intense lobbying campaign, with ads in Capitol Hill newspapers such as Politco and The Hill, bank trade associations have put forth two easily rebutted arguments. One is the aforementioned claim that business lending is somehow inherently dangerous for credit unions.

This was effectively refuted by Debbie Matz, President Obama’s chairman of the National Credit Union Administration, the federal agency that oversees credit unions.

Matz told the House Financial Services Committee last October business lending “did not have a major impact on the safety and soundness of the vast majority of credit unions” during the downturn.

Matz added further that an increase in “business lending is another way in which to prudently manage risk.” As she explained in her testimony, “An increase in the member business lending cap would allow credit unions to diversify the risk of their loan portfolio, with MBLs typically involving less interest-rate risk than long-term, fixed-rate mortgages. This change is particularly important given the present low interest rate environment.”

As to the “tax fairness” argument, in which the bank lobby sounds nothing so much like liberal supporters of the Buffett rule in its tax envy, a few points that I’ve made elsewhere. Yes, credit unions have an exemption from taxation at the corporate level because they are member-owned cooperatives that don’t have the many means that banks have to raise money such as the issuance of shares of stock.

Credit union members, however, are fully taxed on the dividends on their accounts, and are taxed at the “ordinary income” rate for interest and not the lower rate for dividends. Conservatives and libertarians have long argued that business income should only be taxed once, and credit unions provide a successful example of single taxation.

So it’s consistent to argue for expanding this structure, rather than for unduly restricting credit union activity simply because the tax system for all businesses hasn’t yet been reformed.

In fact, credit unions’ single taxation structure is similar to those of some community banks that are subchapter S corporations. There are some so-called tax reformers who want to kill or restrict S-corps and subject them to double taxation. This should be opposed as well, because both S-corps and credit unions are not “loopholes,” but way stations to a successful system of single taxation.

It’s unfortunate that some in the bank lobby find it — in the words of the Free Market America video — “more fashionable to resent success than to seek it.” Thankfully, 14 leaders of center-right groups have proven that they are pro-market — rather than just pro-business — and want America to succeed.

John Berlau

Fri, 2012-05-04

Citation Source:

Newsmax

http://www.newsmax.com/JohnBerlau/credit-unions-banking-regulations/2012/05/04/id/438064

Groups Call on Senate to Lift Regulations Stifling Credit Unions, Entrepreneurs

Christine Hall — Thu, 03 May 2012 21:41:11 +0000

Washington, D.C., April 24, 2012 - Leaders of 14 conservative, libertarian, and free-market groups are calling on the U.S. Senate to lift regulations keeping the nation’s credit unions from lending to entrepreneurs.

“Doing away with these regulations would inject over $13 billion into the economy and foster the creation of up to 140,000 new jobs in its first year, all at no cost to taxpayers,” say the groups -- including the Competitive Enterprise Institute, Americans for Tax Reform, the Heartland Institute, the 60 Plus Association, American Commitment, Citizens Against Government Waste, and Campaign for Liberty – in a letter to Senator Majority Leader Harry Reid and Minority Leader Mitch McConnell.

The letter calls on the Senate leaders to bring to the floor the bipartisan Small Business Lending Enhancement Act (S. 2231), which would lift the arbitrary cap on credit unions’ lending to the businesses of their members put in place in 1998. The bill, and its companion version in the House, are co-sponsored by some of Congress’s most conservative and free-market minded members, including Sen. Rand Paul (R-Ky.), Rep. Ron Paul (R-Texas), Rep. Allen West (R-Fla.), and lead House Sponsor Ed Royce (R-Calif.). But co-sponsors also include some of the most liberal members of Congress, such as Reps. John Conyers (D-Mich.), Marcy Kaptur (D-Ohio), and Sen. Mark Udall (D-Colo.), the lead Senate sponsor of the bill.

For John Berlau, CEI’s Senior Fellow for Finance and Access to Capital and a signatory to the letter, the reason for Center-Right support of such legislation is simple. “The regulatory state is a major focal point for the center-right movement, and indeed much of America,” he says, “so supporting this deregulatory action regarding credit unions and their ability to lend to the entrepreneurs among their members is entirely consistent.”

In fact, the ones being inconsistent in this debate, Berlau writes at OpenMarket.org, are the banks that rightly complain about over-regulation from Dodd-Frank but want to shower regulation on their credit union competitors. Invoking the recent viral video sensation, “If I Wanted America to Fail,” Berlau concludes: “It’s unfortunate that some in the bank lobby find it — in the words of the Free Market America video — ‘more fashionable to resent success than to seek it.’ Thankfully, 14 leaders of center-right groups have proven that they are pro-market — rather than just pro-business — and want America to succeed.”

Link to letter http://cei.org/coalition-letters/coalition-letter-small-business-lending-enhancement-act

Link to blog post http://www.openmarket.org/2012/05/03/center-right-coalition-calls-for-credit-union-deregulation-to-lift-lending/

Christine Hall

Fri, 2012-05-04

Sub Title:

Letter to Senate Leaders Urges Vote on Small Business Lending Enhancement Act

The European Central Bank vs. Reality

Nicole Ciandella — Wed, 02 May 2012 19:33:47 +0000

The four-year charade of central bank bailouts is starting to come undone. Reacting to rising European bond yields in a Saturday meeting with world leaders, U.S. Treasury Secretary Tim Geithner called on the European Central Bank (ECB) to "aggressively" support Europe's insolvency as its various countries try to "stay ahead of markets." Blind to the sinking ship upon which he stands, he threatens to take everyone down with him by clinging to the false hope of monetary stimulus.

Europe's problem is the same as the U.S.'s - insolvency. The past 17 years have seen the greatest expansion of global credit in the history of the world. But this didn't happen because the world economy became more prosperous. While the world was sleeping, central bankers around the globe have been printing money to fuel the booms of the past two decades. The inevitable result will be an even greater bust than the current one.

The ECB has more than doubled the supply of Euros since its inception in 1999, according to OECD data. Interest rates have plummeted accordingly. The European interbank rate fell from 5 percent in 2000 to a low of 2 percent throughout 2003-05. Despite allowing it to gradually ratchet upward towards 4 percent in 2007-popping the very bubble created from the low interest rate policy of the mid 2000's-the ECB has since torpedoed the rate to stay below a rock bottom 0.5 percent.

What Geithner and the European Central Bank don't understand is that manipulating the interest rate through monetary policy has immense distortionary consequences. The interest rate is the price of borrowing money. The amount of savings in an economy determines that price. But when central bankers set an interest rate, they decouple the interest rate from savings and replace it with politics.

The problem with an artificially created interest rate lies in the disruption of a basic economic principle. Savings equals investment. Peoples' savings are an economy's source of finance. The interest rate rises as savings become more scarce and falls as savings become more abundant.

But the interest rate has fallen despite a shrinking pool of real savings. The Euro Area savings rate persistently decreased from 7.5 percent in 2000 to 5.8 percent in 2007. Europeans are saving less, but the interest rate - controlled by the central bank instead of by market forces - says they are saving more. This paradox is fatal.

Businesses take advantage of the lower interest rate to invest in long-term projects that would never seem like good ideas at their true prices. This is malinvestment. People aren't saving more of their income to finance these new business ventures. They aren't cutting back on present consumption to finance future consumption. In the boom, the businessman does not know that his previously unprofitable project was indeed unprofitable. The prices lied to him. This false optimism doesn't come from consumer behavior, but from a central banker's printing press.

Data from the OECD show a steady increase in the growth rate of Euro Area prices of capital goods - used for long-term projects - after the recession in the early 2000's until the 2008 crisis, when it plummeted. Eurostat reports steadily increasing consumer good prices during the same period. Despite declining savings and rising present consumption, Europe experienced greater long-term investment. This was not sustainable. Enter the bust.

The solution is to (pardon the cliché) stop the presses! Instead of being bailed out, malinvestment must be liquidated before Europe and the rest of world can hope to end the stagnation that almost two decades of excessive monetary expansion caused.

Political leaders and Eurocrats would rather the ECB dish out another round of stimulants so they can put off the painful restructuring they never allowed to happen in 2008. This cannot continue indefinitely. Despite printing over 1 trillion Euro since the crisis began, the Eurozone repeatedly faces financial turmoil through its weakest link: the periphery.

Trying to beat markets is a losing game. Geithner and his European cohorts have yet to realize that. As central bankers continue to expand their balance sheets in pursuit of an impossible goal, they worsen the impending crisis during which their mistakes will be corrected.

Matthew Melchiorre

Mon, 2012-04-30

Citation Source:

Real Clear Markets

http://www.realclearmarkets.com/articles/2012/04/30/the_european_central_bank_vs_reality_99643.html

Coalition Letter on the Small Business Lending Enhancement Act

John Berlau — Mon, 30 Apr 2012 17:35:58 +0000

Full Document Available in PDF

As conservative, libertarian, and free-market organizations concerned about government regulatory overreach, we’re writing to you to urge that you bring up for consideration the Small Business Lending Enhancement Act, the credit union deregulation bill (S. 2231) co-sponsored by Mark Udall (D-Colo.) and Rand Paul (R-Ky.), or any similar measure lifting the arbitrary cap on member business lending by credit unions.

John Berlau

Mon, 2012-04-30

Occupy Protest of Wells Fargo is An Attack on Shareholders, Middle Class Investors

Christine Hall — Tue, 24 Apr 2012 20:10:04 +0000

Washington, D.C., April 24, 2012— John Berlau, Senior Fellow for finance and access to capital at the Competitive Enterprise Institute, issued the following statement on Occupy Wall Street's planned "major disruptions" today at the Wells Fargo shareholder meeting in San Francisco.

Today's planned "major disruptions," in the words of Occupy activists, of the Wells Fargo annual shareholder meeting in San Francisco should not be characterized as an action against the "1 percent." Instead, it is an attack on all shareholders, especially middle-class savers and investors.

These disruptions by outsiders over issues with nothing to do with shareholder return -- indeed many of Occupy's demands will greatly diminish shareholders' returns -- reduce ordinary investors' ability to give those who run their companies feedback on improving performance for shareholders. Indeed, Occupy's implied threats to physical safety may intimidate many middle-class shareholders into not attending.

Occupy's demands would also deprive middle-class savers and investors of their rightful returns. Across-the-board principal reduction for mortgages to address one group's "social justice" demands make no more sense than an across-the board half price sale to address the so-called food price increases. There are cases in which stores might find it to their advantage to reduce food prices, and there are cases in which banks might find it prudent to reduce principal, but that should be up to the individual company and its shareholders. The mass principal reduction that Occupy is demanding could wipe out billions from the nest eggs of Wells Fargo shareholders and mortgage bond investors, including pensions and 401(k)s that serve the middle class.

Hopefully, Wells Fargo shareholders will be able to get on with their business. In the meantime, the SEC should lift barriers to companies holding virtual meetings, so that companies could utilize this as an option to prevent such disruptions from occurring.

Christine Hall

Tue, 2012-04-24

Sub Title:

Statement by John Berlau

Super Mario Talks a Good Game But Italy's Entrepreneurs Have Lost Out

Nicole Ciandella — Fri, 27 Apr 2012 15:43:48 +0000

ITALIAN Prime Minister Mario Monti recently proclaimed “historic” labour reform and even declared the “financial aspect” of the crisis to be over. But don’t pop the Prosecco yet. Italy’s biggest impediments to business – rigid labour rules and uncertain contract enforcement – are alive and well.

Monti’s upbeat attitude should be tempered by Italy’s ongoing economic stagnation. Total production in Italy still hasn’t recovered to its 2007 peak, while the unemployment rate – 9.3 per cent in February – continues to rise. On ease of doing business, the World Bank ranks Italy at 30 out of the 31 OECD high-income countries. It is only beaten to worst place by Greece.

This spring’s labour reform battle was a lost opportunity at turning that situation around. The government and party leaders came to a fragile agreement with Italy’s largest unions. Businesses would be allowed to lay off workers for “economic reasons,” meaning financial distress, while paying up to an exorbitant 24 months of severance. But firms still would not be allowed to fire employees for incompetence.

The centerpiece of Italy’s rigid labour market, and the main issue of contention, is Article 18 of the Worker’s Statute. Under it, “poor performance” is not grounds for employee dismissal. Only “concrete and wanton negligence” justifies that. If a labour court finds a business guilty of firing an incompetent employee, the firm must rehire the worker and compensate for lost pay. If an entrepreneur has fewer than 15 employees, he faces a choice between rehiring or paying up to 14 months of severance. Article 18 protects 87 per cent of private sector workers, according to numbers from Datagiovani – a statistical agency that studies Italian youth.

Then there’s Italy’s two-tier labour market, an unintended consequence of Article 18. The law shields older workers, who already have regular contracts, from the competition of new job seekers: the young. Because they are shut out from regular employment, 17 per cent of employed Italians under 35, more than any other age group, work on short-term contracts exempt from protection. The rest not on protected contracts remain unemployed. Italy’s youth unemployment averaged 5.8 percent above the EU average from 2001 to 2010.

Recent reform makes it even less attractive to hire the young because social and retirement contributions for short-term contracts would increase. Young qualified Italians just cannot find jobs, because businesses won’t take the risk of hiring an employee for life.

Entrepreneurs are afraid to grow. Within the EU, Italy boasts the highest proportion of employment in both micro-firms – businesses with fewer than 10 employees – and micro and small firms combined. It also faces the lowest proportion of employment in medium-sized enterprises.

Compounding the problem of an inflexible labour market is a slow legal system not known for its impartiality. On average, it takes almost 3.5 years to adjudicate a lawsuit, according to the World Bank. Italy ranks dead last among OECD countries in efficiency of contract enforcement.

Making matters worse, entrepreneurs don’t find much sympathy in Italian courts. Economist Andrea Ichino of the Center for European Policy Research found that every percentage point increase in regional unemployment correlates with a 2.5 per cent reduction in an employer’s chance of winning employee dismissal cases in that region.

Fiat, Italy’s iconic car manufacturer, has already moved production to Poland and is threatening to shift more to Eastern Europe and North America. While allaying fears recently that Fiat would leave Italy entirely, chief executive Sergio Marchionne didn’t hesitate to criticise Italy’s impossible regulatory environment: “The rules that were thought to defend jobs have brought us to a situation in which the hardest thing is to create jobs.”

Rigid labour markets and a broken court system make doing business in Italy a gruelling ordeal. Recent reforms merely placate intransigent unions and cowardly party leaders. Super Mario should not be surprised when financial chaos returns as markets lose confidence in Italian prosperity once again.

Matthew Melchiorre

Tue, 2012-04-24

Citation Source:

City AM

http://www.cityam.com/forum/super-mario-talks-good-game-italy-s-entrepreneurs-have-lost-out

Supply-Side Critics Offer Only Trickle-Down Inflation

William Frezza — Mon, 23 Apr 2012 17:11:36 +0000

Economics is not called the dismal science for nothing. Many professional economists go to great lengths to obscure simple truths inconvenient to their political masters. The media then promote these obfuscations, which are designed to appeal to a misinformed electorate. And that is the truly dismal part.

Much of the economics politicians peddle - and voters think they know - is pure bunk. For a different perspective, here are 10 common sense propositions I challenge political economists to refute.

1) Money is not wealth, but merely a claim on wealth. Printing more money does not create more wealth.

2) Counterfeiting money steals wealth from others. The theft is no less when a government does it.

3) Moving money from one pocket to another does not create wealth. This is true even when small amounts of money are quietly siphoned from the pockets of the many and loudly deposited into the pockets of the few.

4) Before wealth can be consumed, invested, or redistributed, it has to be created. Consuming existing wealth does not create more of it, nor does borrowing against future wealth.

5) Wealth is created when consumption is deferred in favor of profitable production. Profits generally require selling something for more than it costs to make.

6) Profits are rarely a sure thing. Every decision to forgo consumption and invest in production seeking future returns is a gamble.

7) Private investors investing their own money generally seek to maximize after-tax profits balanced against a chosen degree of acceptable risk. Investment decisions are sensitive to policies that affect this equation.

8) Private investors that consistently make bad decisions, thereby squandering their wealth, eventually lose the ability to make more investments.

9) Politicians often "invest" other people's money seeking to maximize the number of votes they can garner. Whether or not these "investments" generate a future return, or are just thinly veiled redistributions, is secondary because a politician's time horizon extends only until the next election.

10) Politicians acting as public investors who consistently make bad decisions can remain in office and continue making more "investments" as long as they convince enough voters to shift the blame for their failures onto others.

Are these propositions really so radical? It seems that way, given the remarkable persistence of inflationary Keynesian policy, the popular indifference to the risks posed by regulatory uncertainty, and the interminable calls for higher taxes on productive investments.

It's a pity that the Reagan-era supply-side policies that rekindled an economy mired in malaise, unemployment, and stagflation continue to be ridiculed as "trickle-down economics." As an alternative, we now have moved into the era of "trickle down inflation." Here's how it works.

Hundreds of billions of dollars counterfeited by the government and handed over to banks deemed too big to fail earn riskless returns from the carry trade, generating paper "profits" fueled by an explosion of government debt. These "profits" do nothing to create wealth as they merely move money from the pockets of all the taxpayers into the pockets of a few crony capitalists. But they do deliver a temporary illusion of false prosperity, which helps boost the reelection chances of political incumbents - even as they rail at the bonuses of the fat cats their policies are enriching. When this money explodes off balance sheets, as it one day must, double-digit inflation will have trickled down, but only after the bankers and politicians have profited from it.

Meanwhile, young companies that need cash to grow are starved of credit while mature companies sit on mountains of cash they are afraid to invest. In both cases, job growth is stifled, expanding the ranks of the unemployed to whom politicians can promise extended unemployment benefits in return for the votes necessary to maintain the policies that keep them out of work.

But wait, there's more.

"Investments" in unproven green energy technologies are being showered on companies run by politically connected campaign donors that sell products for less than it costs them to make. This produces nothing but a string of predictable bankruptcies. None of these failures reduce the ardor of government "investors" to do more of the same. Why? Because with the help of certain economists, failure can always be blamed on not spending enough.

Nothing seems to put a dent in the eagerness of politicians to throw other people's money at the next hare brained scheme promising renewable energy independence. Never mind that we are awash in domestic energy supplies spouting from newly drilled gas wells that these same politicians have been trying to plug.

Then there's the pipeline from friendly Canada, which has been blocked in a futile effort to keep that oil in the ground. Instead the oil will be diverted to China, which has been accused of manipulating its currency to commit the dastardly crime of selling us more for less as they lend us the money to make it possible.

All of the above will continue as long as politicians believe it will buy votes. Voters will be unlikely - or unwilling - to figure out what is really going on as long as court economists and their media enablers succeed in misleading them.

To paraphrase the Gumpster, that rare American immune to bamboozlement, dismal science is as dismal science does.

William Frezza

Mon, 2012-04-23

Citation Source:

Real Clear Markets

http://www.realclearmarkets.com/articles/2012/04/23/supply-side_critics_offer_only_trickle-down_inflation_99632.html