<font face="Verdana" size="1" color="#002864">http://www.mises.org/fullstory.asp?control=999</font>
<font face="Verdana" color="#002864" size="5"><strong>Congress, Accounting,
and the Free Market</strong></font>
<font size="4">by William L. Anderson</font>
<font size="2">[Posted July 11, 2002]</font>
<font size="3">[img][/img] The
argument may be tired and hackneyed, but advocates never grow weary of
presenting the same scenario, which goes as follows: Free markets are desirable,
and unnecessary government regulation may stifle business growth, but we are
living in a period of the Big Exception. Today, markets are in trouble,
betrayed by the very practitioners of capitalism, and only new, outside
regulations imposed by the state can bring back investor confidence and permit
free markets to flourish once again.</font>
<font size="3">The latest self-appointed “savior” of capitalism is Sen.
John McCain of Arizona, who likes to speak of himself as “straight talking,”
but who actually is nothing more than one of the many gasbags of Congress
producing enough hot air to warm the planet many times. In a New York
Times op-ed, McCain declares that the latest “string of corporate failures
and scandals from Enron to WorldCom” have occurred because of lax regulation.<a title href="http://www.mises.org/fullstory.asp?control=999#_edn1" name="_ednref1"></a> Thus,
McCain intones, while being reluctant to impose even more regulations on the
system, he believes the time is ripe to burden the system with, well, more
regulations.</font>
<font size="3">Before examining McCain’s proposals, I think it appropriate
to ask why a member of Congress, of all people, believes he has the right to
demand standards of accountability from anyone, let alone U.S. businesses. For
example, he declares that corporations have “fabricated revenues, disguised
expenses, and establish off-balance-sheet partnerships to mask liabilities and
inflate profits.”</font>
<font size="3">This statement is breathtaking, because he is describing
current accounting practices of the U.S. government. Remember the
nonexistent “surpluses” that seem to have disappeared? It seems
that for political purposes, Congress fabricated revenues. Is there a
greater scheme of financial fraud than Social Security, a Ponzi construction
which, if practiced in the private sector, is a sure ticket to prison? Ever
hear of “off budget” agencies like Ginnie Mae, Freddie Mac, and Sallie Mae? These
outfits are created precisely to hide the trillions of dollars of financial
obligations that ultimately fall upon U.S. taxpayers.</font>
<font size="3">To put it bluntly, McCain is party to what can be considered
the greatest set of financial frauds in world history, something that puts the
collapse of Enron and WorldCom in better perspective. It might seem more
instructive for the physician to heal himself than for him to try to impose his
will upon other parties.</font>
<font size="3">However hypocritical McCain and his congressional mates might
be, I realize there is still the need to answer his criticisms and to examine
his proposals to “bring back confidence” to free markets. In other
words, just because McCain may personally be a fraud does not automatically make
his proposals fraudulent.</font>
<font size="3">Unfortunately (or fortunately, as one might see it), McCain
misdiagnoses the patient and calls for prescriptions which, if not killing it,
will certainly do great harm.</font>
<font size="3">Let us begin. McCain and all of the modern critics are
absolutely wrong when they declare that a “crisis of ethics” exists. McCain
is hardly alone here, as I have read columns by people of all political and
religious stripes declaring that what is needed is a new batch of ethical
standards.</font>
<font size="3">In one sense, the problem is ethical, but not in the way the
critics think. The current wave of “scandals,” if I may call them that, did
not emanate from dishonest motives per se, but rather from the business climate
brought about by the reckless efforts by Alan Greenspan’s Federal Reserve
System to expand credit and create an unsustainable boom.</font>
<font size="3">Because people are trained to view the Fed’s credit
expansions as beneficial to the economy, they are unable to understand just how
such actions create opportunities for financial shenanigans. The first
thing to remember here is that the Fed’s efforts are absolutely dishonest in
themselves, creating monetary reserves literally out of thin air. Once that
is done systematically for a long time, it is inevitable that the rules of the
game will change as well.</font>
<font size="3">An atmosphere of reckless credit expansion creates all sorts
of incentives for “creative” accounting practices. Take McCain’s
accusation of false revenue projections, for example. It is little wonder that,
during a credit-induced artificial boom, firms caught up in the financial
madness will be much less careful in projecting future revenues than they would
be in normal economic times or during a bust.</font>
<font size="3">This is because the economic rules that apply during the boom
are not the same rules that exist during the bust, when the realities of
malinvested resources come to the fore. The boom permits business owners to
play much faster and looser with assets and equity, since it seems that whatever
decisions they make are good ones. This is the characteristic of the boom,
in which most business owners look like financial geniuses; it is only during
the bust that what Ludwig von Mises calls the “cluster of errors” made by
businessmen are made known.</font>
<font size="3">Right now, it is impossible to know if the overprojections
made by executives at WorldCom were the result of deliberate fraud or simply
came about because of boom-induced calculations. Everyone now knows that
those calculation were in gross error, yet under the conditions that existed
because of the Fed-caused artificial boom, WorldCom’s projections might very
well have been reasonable.</font>
<font size="3">That does not mean those projections were a good thing, given
the conditions of the boom. Credit-induced booms are unsustainable, and
someone must ultimately pay the piper. Furthermore, since they were based
on an unreal state of the economy, one can say they were fraudulent in the
larger sense of the word, although not fraud as McCain would define it. (Since
the write-downs are in the billions of dollars, I doubt that anyone in his right
mind would have cooked up such a scheme as a deliberate criminal fraud, since
the market in the end always has a way of bringing such things into balance.)</font>
<font size="3">If McCain wishes to hold Congress and the U.S. government to
the same standards that they wish to impose upon private enterprise, perhaps his
rhetoric should be aimed at Alan Greenspan, or even himself and the politicians
and staff members that populate Capitol Hill. For example, he writes:</font>
[i]
<font size="3">Top executives should be required to certify personally that
the company’s public financial reports are accurate and that all information
material to the financial health of the company has been disclosed. If their
certification is false, they should go to jail.</font>
<font size="3">This is a stunning statement--one that deserves thorough
debunking--not to mention being one that is a sign of depraved hypocrisy. Does
McCain mean that if a business makes revenue projections that do not pan out,
then the executives should be imprisoned? How does one determine the
“financial health of the company,” since those standards change drastically
with business conditions and also with the latest set of regulations that come
from the government?</font>
<font size="3">For example, “tax reform” of 1986, as well as regulatory
“reform” in 1989, exacerbated the collapse of many savings and loan
institutions which otherwise were relatively healthy. When Congress, by the
stroke of a pen, changed tax laws regarding real estate holdings, a number
of thrifts which one day were healthy the next day became insolvent. Like the
WorldCom and Enron debacles of today, many members of Congress, not to mention
their media amen chorus, blamed the entire episode upon criminal fraud and were
ultimately able to railroad innocent people, such as Charles Keating, into
prison.</font>
<font size="3">To put it otherwise, to implement such a policy would
devastate American businesses, as every executive in this country would be in
danger of being imprisoned because his or her company did not meet financial
expectations. Such people would be prey for politically minded federal
prosecutors, who have a vast array of weapons at hand to make people bow down to
the criminal law apparatus of the government. It is easy for people like McCain,
who do not have to meet a payroll or make important decisions regarding the life
and health of an institution, to demand accountability standards that he himself
would refuse to meet. Unlike Congress, businesses cannot take in revenues upon
coercion. If I refuse to shop at Wal-Mart, for example, that is my right; if I
refuse to give Congress the financial support it demands, then I go to jail.</font>
<font size="3">Furthermore, if McCain really wants to impose these standards
upon U.S. businesses, perhaps he first should begin with his own legislative
house. After all, in calling for the resignation of Securities and Exchange
Commissioner Harvey Pitt, McCain declares, “Government’s demands for
corporate accountability are only credible if government executives are held
accountable as well.” Does that mean U.S. senators? Should McCain be held
criminally liable for campaign promises that he fails to honor? Should he
be held criminally liable when he fails to keep his oath to “protect and
defend” the U.S. Constitution?</font>
<font size="3">These are questions I doubt the good senator would want to
answer. Instead, we see the moral grandstanding that seems to be an occupational
disease in Washington, D.C. One could only hope that real justice would prevail,
and that the John McCains of this world would have to be subject to the same
sets of laws and penalties they impose upon everyone else. Instead, we have
legislation that will devastate private enterprises concocted as a scheme to
“save capitalism.” Senator, we do not need to be protected from “predatory
capitalism.” The real predators are in Washington, and they are you and your
political allies.</font>
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<font size="2">William Anderson, an adjunct scholar of the Mises Institute,
teaches economics at Frostburg State University. Send him <font color="#000080" size="2">MAIL</font>.
See his Mises.org <font color="#000080" size="2">Articles
Archive</font>.</font>
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<a title href="http://www.mises.org/fullstory.asp?control=999#_ednref1" name="_edn1"><font size="2"></font></a><font size="2">
John McCain, “The Free Market Needs New Rules,” [i]New York Times op-ed,
July 8, 2002.</font>
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