Capitalism Needs Regulation – Why Max Keiser is Correct and Libertarians are Mistaken

One of my colleagues, Jeff Berwick, recently appeared on the program “On the Edge with Max Keiser.” The end of the interview featured a brief disagreement between Max and Jeff regarding whether the markets need a “referee.” I have generally been of the Libertarian mindset for most of my adult life, but this question provoked a debate that led me to disagree with Jeff, anarcho-capitalists and some Libertarians that are revered in the precious metals world.

While these types of debates often degrade into personal attacks, I will try to avoid this trap and simply focus on the ideas being proposed and explanations of why I believe some of the ideas are far superior to others. In the end, my motivation is simply to see a shift away from our current economic and political trajectory, in favor of a system that maximized prosperity, respects the environment and permits the long-term sustainability of our planet and species. I would think this could be a common goal, regardless of which political party or economic system you support.

Let me first say that I acknowledge the system is broken, the government has been corrupted and there has a been a great overreach into our personal lives. I am in favor of a smaller government, a non-interventionist military policy, the repeal of the Patriot Act, an end to the “war on drugs” and many of the other common sense positions trumpeted by Libertarians.

I can also understand the demand for lower taxes, especially given the way our government wastes taxpayer dollars on illegal and immoral wars, foreign aid (buying political favor), bank bailouts, no-bid contracts and other kickbacks to their campaign contributors. Also, I believe the idea of sound money that is finite and cannot be printed out of thin air would be vastly superior to our current debt-based fiat money system.

Placing Blame – Corporations or Government?

But many of the free market capitalists and libertarians completely lose me when they fail to acknowledge the role that corporations and private enterprise have played in the deterioration of our political and economic systems. They see the government corruption and nothing else, as if wearing blinders to the entire other side of the coin. They make the case that the government is to blame for everything, while failing to acknowledge the role private enterprise has played in the meltdown of our financial system and political process. It is an odd form of intellectual denial.

After all, it was the banks and large corporations that bought off the politicians with campaign contributions (legal or illegal), donations to their “charities”, promises of cushy jobs once they leave the public sector and all of the other influence yielded through the K Street mafia that are now estimated to outnumber elected Congressman by more than 25 to 1.

If you ask me to kill someone that you don’t like and you corrupt me into doing it by paying me $50,000, just like banks, corporations and their lobbyists buy corruption from politicians, is it solely my fault for committing the crime (becoming corrupted) or do you also share in the blame for paying me to do so?

We should not pretend that the corporations are innocent victims and only the government is to blame. These multi-national corporations aggressively moved in to rig the system, buy off our elected representatives and create an environment where it is nearly impossible to get elected without corporate sponsorship and the political paybacks that are expected for said sponsorship. The politicians may have allowed themselves to be corrupted, but the corporations certainly share in the blame for turning the American political process and lawmaking bodies into an auction to the highest bidder.

Corrupting the Referee and the Revolving Door

This corruption has spread to the regulators, who are often promised high-paying jobs after they leave government by the very corporations they are supposed to be regulating. The revolving door works both ways with the regulators being “selected” from the exact industrious they are expected to regulate. This conflict of interest should be obvious and makes it glaringly clear that the regulation system is completely broken.

I certainly realize that many of the current regulations are overly burdensome and create conditions where certain corporations get preferential treatment over others and use the regulators to limit their competition or otherwise procure competitive advantage. It is therefore easy to understand the hatred that many business leaders have for the regulation system and the crony capitalism that has resulted.

The “referee” has been bought off. One solution would be to fix the regulation system by hiring new regulators, seeking to eradicate the corruption from the system and building safeguards against future corruption. Common sense steps such as not allowing bankers to take positions regulating themselves and not allowing regulators to pass through the revolving door and take future jobs from the industries they were suppose to be regulating could have a substantial impact.

One could make the argument that such an overhaul of the regulation process and campaign finance reform will not work in the long term and will always revert back towards corruption. And while this may or may not be true, we did have a long span of history with a relatively uncorrupted political system that functioned as intended by representing the interests of the people. By learning from our mistakes, applying new safeguards and implementing some of the solutions suggested at the end of this article, I believe we can transcend this broken system.

But Jeff Berwick and many of his fellow libertarians believe that a better solution would be to get rid of the referees and regulations all together. I realize this does not apply to all libertarians, but many support taking our dog-eat-dog system where the number one over-riding objective is to increase profits above all else and then telling the participants to simply “have at it” with no rules or regulations. It doesn’t take much of an imagination to see how this is doomed to go dramatically wrong and in my view, this is one of the most dangerous and short-sighted solutions that one could propose. In addition, there is no historic precedent or proof that the markets can regulate themselves effectively. While I can understand why many in private enterprise would like to do away with regulations, it is my belief that we would all be better off fixing the system rather than trashing it.

Free Markets are Self-Regulating, Competition is the Best Referee and Spontaneous Order

I’ve read a good amount from Mises, Rothbard, Rockwell and other free-market thinkers and believe they have salient points regarding coercive and monopoly force governments being dangerous to liberty. I also agree with their criticisms of fractional reserve banking, the Federal Reserve and pre-emptive military policies. But it takes a healthy dose of blind faith to go along with the concept of free market capitalism being able to regulate itself effectively, especially within our current monetary paradigm. Jeff Berwick is quick to buy into this theory, stating that:

“The consumer’s best protection from exploitation and other shenanigans has always been competition.”

This is true in the smaller and less significant cases, but does not apply across all sectors. Yes, if my cell phone service provider starts adding ridiculous fees and overcharging, I can go to a competitor. If other customers do the same, the provider goes out of business. Similarly, if my mechanic seems to keep “finding” new things to fix every time I take my car into his shop, I can suspect I am getting ripped off and go to another mechanic. Others will hear about the mechanic’s shady dealings and avoid him, thus causing the mechanic to either change behavior or go out of business.

But what about an instance where a chemical company decides to dump toxic byproduct into a creek that flows through a small town. Over the course of several years, residents start getting sick, contracting cancer and dying. Under Jeff’s desired system, there would be no regulations to prevent the chemical company from dumping and no referee to address the injustice until it is too late.

How exactly would the free-markets regulate themselves in this case? Would competition provide the necessary referee as Jeff states? Well, the locals that were directly impacted by the dumping of toxins might be able to stop buying products from that company, but they probably represent less than 1% of the company’s revenues and thus a boycott would be inconsequential. That is assuming that the people would have the time and resources to figure out the source of the pollution, which is unlikely. They may never know where it was coming from and even if they figured it out several years later, what is their redress?

Jeff might say that private property rights would allow the family to sue the company, but this is introducing the referee that Jeff says we don’t need. The last time I checked, the judicial system was one of the three branches of government. Or maybe Libertarians would argue it could be a trial by peers, but this would both be inefficient and completely impotent without the force of government behind it. Who would make sure the corporations show up at court or pay the penalty?

How about a bank that takes extremely risky leveraged bets with depositor money and loses it all? Jeff would like a system with no regulations to prevent this and thinks the markets would magically sort it out through competition. Sure, the banks would go under and people would no longer bank there in the future, but what about those that lost their life savings. Tough luck?

Jeff says: “there would be no investment banks that were massive and highly leveraged without the “referee” protecting them from competition and offering them the backstop to cover their losses when they do ultimately collapse.”

But this is nothing more than speculation. If the system demands that a bank executive increase profits perpetually and leverage allows him to do so, that is encouragement enough. The banker does not need the backstop of the corrupt referee. He will gamble regardless, make his commissions, take his bonus check and ride off into the sunset. One day the toxic assets will be exposed, the depositors will lose their money and perhaps the bank will collapse, but who cares? Not the executive that already made the money. This is where common sense regulations, such as Glass-Steagall, could have saved the depositor from the loss.

MF Global is now thought to have co-mingled depositor funds with their risky bets of Eurozone debt, potentially leaving a lot of missing cash. Bank of America depositors are now at similar risk after the bank moved Trillions in toxic derivative assets to the depositor side of their business. If we eliminated regulations and let the free market regulate themselves would depositors at MF Global be saved? Would depositors at Bank of America be in any better condition? Maybe after these banks implode and lose customer money and with perfect information flow for everyone to understand what went wrong could the public decide not to bank with them.

But this type of free market regulation is a completely reactive system that does nothing to actively prevent these types of things from happening. By the time we all understand that MF Global is gambling with depositor money or a certain chemical company is dumping toxins, it is already too late. So how exactly does the free market regulate itself or stop the same mistakes from happening again? It is a clever argument put forth by those wishing to increase their own personal wealth, but when the rubber hits the road, this system offers no true forward-looking protection. “Free markets,” as romantic and appealing as the name may sound, are not capable of regulating themselves effectively. It is literally asking the fox to guard the henhouse.

Let’s consider another example. Would it be wise to remove all regulations in the logging industry and allow the clear-cutting of entire forests for short-term profit gain? Should we sit back and watch entire species go extinct, as the industry disrupts nature’s food chain and threatens our future food supply and entire ecosystem? This free market model of endless growth on a finite planet is bringing about mass species extinction, mass pollution, and is certainly linked to the nihilistic value system that mortgaged the future of the planet for the instant gratification of the lucky few. In a system that demands short-term profits above all else, would the industry really regulate itself? Would competition be a good referee? I have my doubts.

Competition might be a good referee in the less consequential sector of the economy, such as which cell phone carrier or mechanic that I select, but fails dramatically in the more consequential matters that threaten our sustainability. Competition as the referee is backwards-looking, reactive and ineffective, especially when the buyer does not have access to all of the relevant information needed to make decisions.

The same would be true in food safety issues, especially if we expect the companies that are standing to profit to offer full disclosure. How about a milk company that uses Bovine Growth Hormone (rBGH) or other dangerous chemicals to increase their yield? Should there be regulations that require them to disclose their use of rBGH in their milk? Should the government require any testing before the milk hits the grocery store shelves or just let the free market sort it out in the form of birth defects, disease and death?

When does removing all rules and regulations actually benefit the people within any particular system? How about no rules or regulations on the roadway? Would it be good if anyone could drive any speed and at any age? How about a basketball game with no rules? What about no regulations for the pharmaceutical companies? Just put out a drug if you think it will be profitable and see what happens? No regulations to test the side effects before selling it? Would that be good? How about no regulations on where and how oil companies can drill or requiring safeguards when transporting that oil in our oceans? Does anyone really think that would produce positive results? How about in the stock market? Insider trading and front running are fine? No need to disclose positions or conflicts of interest? No need for fiduciary duty, just trust the investment professionals and hope that competition sorts it all out?

I can agree that we are over-regulated as a society and that government often oversteps their bounds, but the notion that we would be better off with zero regulations is quite a leap of faith. It would likely be better for the big corporations and their short-sighted, short-term profit aspirations, but disasturous for the rest of society, not to mention the impact to the ecosystem that we rely on for our very survival. Their compensation schedules give them rich rewards for short-term financial results but fails to impose heavy penalties for the long-term harm their actions might inflict on shareholders, the wider economy and the planet. That anyone would put short-term profits over the long-term sustainability of the Earth and our species is sickening and reinforces the need for us to quickly rethink and remodel our economic system and the incentives that are built into it.

Further complicating the issue, what happens when a corporation decides to swallow up all of the competition and create a monopoly? Competition within itself contains the tendency to destroy competition and leads to monopoly. Don’t we need a regulation against monopolies in order for the “competition as referee” concept to be valid?

I realize that as long as there is the profit motive and a monetary system with an increasing interest burden and diminishing resources, the referees will always be tempted towards corruption. As long as money is so critical to our well being and increasingly difficult to obtain, people will tend toward dishonest activity to attain it.

However, this same train of thought applies to businesses, which will also continue resorting to abhorrent behavior in order to fulfill their objective of continually increasing profits. This could mean cutting costs by dumping toxins into the river, taking risky bets with depositor money to grow faster, drilling in delicate ecosystems without the proper (costly) safeguards, injecting food with cancer-causing chemicals in order to increase yield, etc.

Too often in our current economic system it is those willing to act the most dishonestly, those willing to exploit and cheat others, those willing to take dangerous bets, those willing to act in their own short-term self-interest with little regard to the impact to others that are rewarded. We have seen this play out in countless ways over the past several decades and this is why capitalism requires a referee, however imperfect that referee turns out to be. Eliminating whatever weak and watered-down regulations that remain is not going to help the situation, it will only worsen it.

Resource-Based Economy

If our ultimate objective is the long-term sustainability of the species and our environment, we really need to step back and question if there might be a better economic and political system to achieve these ends and provide a greater level of prosperity and abundance for all.

The libertarians would suggest the anarcho-capitalist model, whereby we just need to get government out of the way in order to resolve our problems. While I share their view that our government is too big and too invasive, it seems to me that the removal of regulations and the “referee” would only increase the level of corruption, destruction of the environment and concentration of wealth. It might make the richest few percent in society a bit more rich, but the rest of the population will have to keep waiting for that trickle-down effect that Reagan promised. And even if you are in the top 5% of wealthiest people in the world, you should still consider the consequences for mankind of the rapidly widening wealth inequality.

Instead, I believe that we need an economic and political system that does not encourage and reward such abhorrent and destructive behavior. We should also aspire to a system that does not concentrate wealth in the hands of a few to the extent that 1% of the nation owns over 40% of the wealth, while a large number are left living in poverty and dying of starvation and preventable disease. It is surely a failure of our society and our economic system that we have enough resources and the proper technology to provide for all and create an abundance of the necessities of life, yet six million children die of hunger every year. Furthermore, 15% of the global population is undernourished and 4 billion people live on less than $2 per day (source). Even in the United States, it is now estimated that 25% of children live in poverty.

I don’t hate freedom or liberty, but it is difficult to follow the train of thought that suggests if only we removed the regulations everything would be peaches and cream. In my industry, I don’t mind a regulation stating that analysts must disclose if they are compensated to promote a stock and if they own shares. I can support eliminating bureaucracy, onerous and complicated tax systems and unnecessary regulations that slow progress. But the entire Modus operandi for many capitalists is short-term profits with no consideration for the long-term implications, the impact on others in their community or the impact to the environment. Does it really seem to be a good idea to give this system and the most exploitative participants within it more free reign via the elimination of all regulations?

I think a better solution, albeit difficult for many to imagine, is the elimination of money and transition to a resource-based economy. The monetary market system at its core must change, not just the rules that regulate it. If you aren’t yet familiar with this concept of a resource-based economy, please keep an open mind as you read on.

Moving towards a resource-based economy is a logical step that would not only ensure the sustainability of our environment and species, but also holds the promise of creating abundance for all. It seems idealistic and fanciful, but the rapid advance of technology has brought civilization to the point where such lofty ambitions are indeed possible. We need not live in a world with such a high degree of corruption and suffering. A better world is possible and it requires a complete paradigm shift, not just a change to the regulatory structure of an already flawed system.

A resource-based economy is a system in which all goods and services are available without the use of money or any other system of debt or servitude. The premise upon which this system is based is that the Earth is abundant with plentiful resources and advancing technology to the point where there can be abundance for all if we want it. Our practice of rationing resources through monetary methods creates artificial scarcity that otherwise would not exist and is counter-productive to our survival.

Modern society has access to highly advanced technology and can make available food, clothing, housing and medical care; update our educational system; and develop a limitless supply of renewable, non-contaminating energy. By supplying an efficiently designed economy, everyone can enjoy a very high standard of living with all of the amenities of a high technological society.

A resource-based economy would utilize existing resources from the land and sea, physical equipment, industrial plants, etc. to enhance the lives of the total population. In an economy based on resources rather than money, we could easily produce all of the necessities of life and provide a high standard of living for all.

Consider the following example: At the beginning of World War II the US had a mere 600 or so first-class fighting aircraft. We rapidly overcame this short supply by turning out more than 90,000 planes a year. The question at the start of World War II was: Do we have enough funds to produce the required implements of war? The answer was No, we did not have enough money, nor did we have enough gold; but we did have more than enough resources. It was the available resources that enabled the US to achieve the high production and efficiency required to win the war. Unfortunately this is only considered in times of war.

It should be emphasized that this approach to global governance has nothing whatever in common with the present aims of an elite to form a world government with themselves and large corporations at the helm, and the vast majority of the world’s population subservient to them. The vision of globalization empowers each and every person on the planet to be the best they can be, not to live in abject subjugation to a corporate governing body.

The proposals would not only add to the well being of people, but they would also provide the necessary information that would enable them to participate in any area of their competence. The measure of success would be based on the fulfilment of one’s individual pursuits rather than the acquisition of wealth, property and power.

At present, we have enough material resources to provide a very high standard of living for all of Earth’s inhabitants, even as we reach a population of 7 Billion. Only when population exceeds the carrying capacity of the land do many problems such as greed, crime and violence emerge. By overcoming scarcity, most of the crimes and even the prisons of today’s society would no longer be necessary.

A resource-based economy would make it possible to use technology to overcome scarce resources by applying renewable sources of energy, computerizing and automating manufacturing and inventory, designing safe energy-efficient cities and advanced transportation systems, providing universal health care, relevant education, and most of all by generating a new incentive system based on human and environmental concern.

Many people believe that there is too much technology in the world today, and that technology is the major cause of our environmental pollution. This is not the case. It is the abuse and misuse of technology that should be our major concern. In a more humane civilization, instead of machines displacing people, they would shorten the workday, increase the availability of goods and services, and lengthen vacation time. If we utilize new technology to raise the standard of living for all people, then the infusion of machine technology would no longer be a threat.

What else would a resource-based economy mean? Technology, intelligently and efficiently applied, conserves energy, reduces waste, and provides more leisure time. With automated inventory on a global scale, we can maintain a balance between production and distribution. Planned obsolescence would be unnecessary and non-existent in a resource-based economy.

Our only shortage is the lack of creative thought and intelligence in ourselves and our elected leaders to solve these problems. The most valuable, untapped resource today is human ingenuity, which is often wasted in careers with the military-industrial complex and financial careers that add little or no value to society.

We also need to approach the unemployment issue from a different angle. Consider the fact that more and more people are losing their jobs, not only because our unstable economy but also because of automation in production. For even when an economy is healthy, technologic advances in a ‘free-market system’ (which promotes the ‘maximizing of profits’) means that business, in order to stay competitive, will replace their workers with machines. This natural process of technological unemployment will eventually need to be addressed in a new way.

Also consider that the system of ‘fractional reserve banking’ and ‘debt’ make sure that there is always less money in society that is owed to the banks. The gap between rich and poor grows while the value of money decreases and the cost of living increases. Of course this system cannot be sustained and we are finally seeing signs of it self-imploding.

Before you write off these ideas as anything similar to the forms of Communism practiced by Stalin, Mao or others, consider that these forms of Communism used money and labor, had social stratification, centralized power, media censorship and elected officials to maintain the communist traditions. Most importantly, Communism did not eliminate scarcity, nor did the system have a blueprint or the methods for the production of abundance.

To learn more about the concepts behind a resource-based economy, check out www.thezeitgeistmovement.com or www.thevenusproject.com

Whether it is a resource-based economy or another solution, we must move past the outdated, wasteful and destructive economic system that currently exists. I encourage you to let your guard down, open your mind and consider some alternatives. Simply removing regulations is not the panacea that the libertarian crowd believes it to be. Our problems are not left vs. right and until we break out of this narrow mode of thinking, we will not be able to progress as a society.

By | 2017-03-23T14:06:29+00:00 November 1st, 2011|Gold & Silver Commentary|

About the Author:

Jason Hamlin is the founder of Gold Stock Bull and has been investing in precious metals for over 20 years. Jason spent nearly a decade in analytics for the world’s largest market research firm, before finding success investing full time. He launched Gold Stock Bull in 2005 and turned his focus from helping fortune 500 companies to helping individual investors. Jason is a student of Austrian economics and a proponent of cryptocurrencies such at bitcoin.