LESSONS LEARNED #59: “When the Right partners with business the Left calls it crony capitalism. When they partner with business the Left calls that smart government.” -Old Pithy

Posted by PITHOCRATES - March 31st, 2011

Microsoft Learns the hard way to Lobby Congress

Microsoft was a rogue corporation.  A big, profitable, rogue corporation.  And it was in the government’s crosshairs.  With all of their going about their business.  Alone.  Without any federal assistance.  Who did these people think they were?  They didn’t spend a dime lobbying the federal government for anything.  As if they could just go on about their business competing in the free market.  Scoffing at the government’s business resources.  All those things they could bring to the table.  To make an unorganized market organized.  Make Microsoft better.  Make Microsoft’s products better.  All for a nominal fee.  Some campaign contributions.  A vacation junket or two.  A little monkey business with someone you’re not married to.  A Roman indulgence of intoxicating substances and flesh.  You know, lobbying stuff.  But no!  Not Microsoft.  Those holier than thou sons of bitches.  Who did they think they were?

Well, Microsoft went too far.  Pissed off the wrong people.  People with friends in Washington.  People with power.  And a justice department.  Empowered with antitrust legislation.  Big, nasty, legal teeth.  Their crime?  They gave away Internet Explorer free.  And that was unfair to their competitors.  But it was a sweet deal to the consumer.  None of them complained.  They were happy to get IE free.  It saved them money.  It was their competitors that were pissed.  Because they couldn’t sell something that Microsoft was giving away free.  So the Department of Justice (DOJ) sued Microsoft claiming they violated the Sherman Antitrust Act.  Which Congress passed in 1890 to protect consumers.  And here the DOJ was fighting a case.  And if the DOJ won, the consumer lost.  They would have to pay for IE or a web browser from one of Microsoft’s competitors.  Which just goes to prove that it is never a consumer that complains about ‘predatory’ pricing.  It’s always a competitor that can’t compete at the same price that runs to the DOJ crying for antitrust protection.

Microsoft learned a very important lesson.  When you sit on big piles of money you don’t dis the federal government.  You show them the proper respect and give them some of that money. For your own protection.  For if you don’t they will go after you.  Like they did with Microsoft.  Who is smarter now.  Today, Microsoft spends millions on lobbyists.  To pay tribute for the pleasure of being left alone to operate in the free market.

Money Corrupts, Big Piles of Money Corrupt Absolutely

Microsoft is not alone.  There are a lot of honest companies out there.  But, sadly, there are a lot that aren’t.  Especially if they have a friend in Washington.  Because Washington sits on great big piles of money courtesy of the tax payers.  And a select few spend that money.   Put these two together and it’s a recipe for corruption.  Because one person can skim a little off the top of a huge transaction that is all but impossible to see.  Unless you start living like a Rockefeller on a government salary, that is.

The Teapot Dome scandal was the biggest government scandal of its time.  It involved leases to oil reserves transferred from the Navy to the Department of the Interior.  These were strategic reserves for our navy in case we went to war.  Important to have.  Because you don’t want to run out of oil during a war.  Albert Fall was the Secretary of the Interior.  And it was his job to lease those oil reserves.  Which he did.  But they didn’t go to the low bidder.  They went to the one that made it most worth his while.  Ultimately it was all that ‘making it worth his while’ that did him in.  He became a very rich man.  Which was impossible on his salary.  So they caught him.

Congressmen profit as Shareholders in Crédit Mobilier

The Teapot Dome was a big scandal perpetrated by a few players.  The Crédit Mobilier scandal, on the other hand, had far greater tentacles.  And is a good example of how government partnering with business goes wrong.  It involved the Union Pacific Railroad.  A sham company they created called Crédit Mobilier.  And some 30 Congressmen. 

The railroad to the pacific was a risky proposition.  It would take a very long time to build.  It would go through some very difficult terrain and hostile Indian country.  And there were few shippers on the proposed road.  In other words, it would take a long time to earn any revenue on this line.  And it was possible that they would never complete it.  Or ship enough freight to operate it profitably.  So the government stepped in and partnered with the Union Pacific.  And the fraud began.

The trick was how to make this loser a winner.  Railroad profits weren’t the answer.  So how can a railroad company make a profit without running any trains?  Why, from construction, of course.  That’s where Crédit Mobilier came in.  They built the railroad.  Billed Union Pacific.  Who then billed the government.  And, surprise, surprise, construction costs went way over budget.  Because they were overbilling Union Pacific.  Who then overbilled the government.  But the government just kept on paying.  Why?  Because they had shares in the very profitable Crédit Mobilier.  You see, when you share in the obscene profits of a government contractor you have little incentive to see or stop the fraud.

Government Steps into the Mortgage Business and Gives us the Subprime Mortgage Crisis

For years the federal government implemented policies to increase home ownership.  In their models, this was the driver of all economic activity.  A lot of material and labor builds a house.  And a lot of material and labor builds the things that furnish a house.  Ergo, the more people who bought houses the greater the economic activity.  And that meant everyone.  Even the people who couldn’t qualify for a mortgage.  A lot of which were minorities.  So if a bank denied anyone a mortgage, it just reeked of racism.  So lenders had to find a way to make the unqualified qualified before the DOJ charged them with discrimination in lending.  So, in the mid 1990s, they figured out how to make the unqualified qualified.  Along with a little help from the government.

The subprime mortgage was the vehicle.  Adjustable Rate Mortgages (ARMS).  And No Income No Asset (NINA, aka, Ninja) loans.  Of course, these by themselves didn’t solve any problem.  Because no respectable lender would ever approve such risky mortgages.  This is where government came in.  Or, rather, the Government Sponsored Enterprise (GSE).  Better known to you and me as Fannie Mae and Freddie Mac.  Here’s how it worked.  The GSEs bought those risky loans from the lenders.  Then sold them to Wall Street.  Where investment bankers packaged them into Mortgage-Backed Securities (MBS) and Collateralized Debt Obligations (CDO).  High risk loans became low-risk, high-yield securities.  The risk was transferred from the bank to the taxpayer and then to the investor.  And back to the taxpayers when they had to pay for the bailout of the subprime mortgage crisis.

The enabler for this great financial crisis was the government.  First ‘encouraging’ banks to loan to the unqualified.  And then by their partnership with the GSEs.  Encouraging more and more risky behavior because they were getting a piece of the action.  So they turned a blind eye.  Even when some warned the committees responsible for their oversight.  They laughed.  Said they were just mean racists trying to deny fair and affordable housing to minorities.  And they insisted that these GSEs were financially strong and healthy.  Up until the world learned they weren’t.

Crony Capitalism can be Smart Government if it Saves the Environment

There’s one reason why government partners with business.  Corruption.  Crony capitalism.  Either an unscrupulous business trying to buy favors for personal gain.  Or an unscrupulous politician trying to sell favors for personal gain.  And good luck if you run an honest business.  Because the buying and selling of favors simply becomes paying tribute to be left alone.

Both sides are guilty of this.  Though the Left says it’s the Right that is in the pocket of the corporations.  Which is funny.  Because the Left is just as guilty.  But when they do it, it serves a higher purpose. So it’s smart government.  Such as when one of the world’s largest corporations, GE, doesn’t pay any income taxes.  By using some creative accounting practices.  But they’re very cozy with the current administration.  So they get a pass.  And they’re eager to cash in on all that green legislation.  To help them sell their green products.  You see, that’s good for the environment.  So it’s okay that they don’t pay income taxes.  And, more importantly, they have lobbyists.  They know how to play the game.  And they play it well.

But when the Right wants to cut the corporate income tax to stimulate the economy to create jobs, that’s just corporate welfare.  They’ll fight that every day of the week.  But if a corporation’s lobbyists treat them well, they’ll make the incandescent light bulb illegal.  So that corporation can sell more of their compact fluorescent lamps.  But that’s not crony capitalism.  That’s just smart government.  Because it saves the environment.



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FUNDAMENTAL TRUTH #56: “It’s competition in the private sector that makes life better. Not government regulation.” -Old Pithy

Posted by PITHOCRATES - March 8th, 2011

Government caused the Greatest Recession since the Great Depression

You hear it all the time from the Left.  If it wasn’t for all those government regulations those on the Right bitch about we wouldn’t have safe food, safe medication, safe transportation, safe merchandise, fair prices, a clean environment, quality education, etc.  It’s rather amazing to hear people in government say this.  And people on the Left say this.  Because people are people.  And people regulate people.  So why are some people better than other people?  Just because they say they are?  I find that a bit specious.

Government caused the greatest recession since the Great Depression.  It was their economic policies that put people into houses they couldn’t afford.  It was Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac that enabled the approval of very risky mortgages by buying them from the lenders.  It was the GSEs that had Wall Street create vehicles to sell these risky mortgages as high yield, low risk investments (i.e., derivatives).  It was Congress that refused to stop this risky behavior of the GSEs because Congress members were getting sweetheart mortgage deals and campaign contributions.  And it was Congress that bailed out the GSEs with our tax dollars after their dirty politics crashed the economy.  If you go down the chain of events you see one constant behind every step in the process that gave us the Great Recession.  Government, government, government.  And yet we are to trust government people every time over the private sector people.

If you remove government from the mortgage picture, though, it’s a different story.  Instead of discrimination it was just poor credit and insufficient earnings that denied mortgages for some blacks, Hispanics, single mothers, etc.  And these people wouldn’t have been in houses they couldn’t afford.  Lenders would have had far fewer risky mortgages on their books.  The GSEs would have bought far fewer risky mortgages.   Wall Street wouldn’t have spread the subprime mortgage contagion worldwide by selling boatloads of their complex derivatives.  There would have been no Great Recession.  There would be no double digit unemployment (U6 – a truer unemployment rate than the ‘official’ U3) today.  And all of this by just removing government from the beginning of this process.  And yet we are to trust government people every time over the private sector people.

A Business must please the Consumer to Survive

Let’s look at another example.  Let’s take food.  The Left say that if it wasn’t government regulation our food would be unsafe.  So let’s imagine a world where there is no government regulation.  And only two meat packing plants.  A devious, archetypical corporate villain (as the Left believes runs all corporations) runs one plant.  Let’s call him Mr. Devious.  A true free market capitalist runs the other.  Mr. Devious reinvests no money into the plant.  Doesn’t even clean it.  Has a rat infestation.  Uses rat poison to control the rat infestation.  Doesn’t care.  And sends out tainted meat that kills hundreds of people.  The true free market capitalist keeps reinvesting in his plant.  Keeps it clean.  Has no rat infestation.  And strives to put out the best quality product.  It’s not tainted and people eat it without dying.

Now suppose you’re putting together your shopping list.  You have meat on your list.  And on the television news is a story about still more deaths that are traced back to Mr. Devious’ plant.  Now, in our imaginary world, there is no government.  No government inspectors to step in to inspect Mr. Devious’ plant.  He broke no law and did not fail to maintain any regulatory standards.  No one files any legal actions against Mr. Devious because he broke no law.  Now tell me, where are you going to go to buy your meat?  Well, if you’re sane, you’re going to make damn sure the meat you buy didn’t come from Mr. Devious’ plant. 

Even in a world that has no government regulation, a Mr. Devious cannot exist.  Because there’s competition.  And the last thing a true free market capitalist wants is bad publicity.  If consumers have an unfavorable view of your company they’ll shop elsewhere.  And if you’re killing people with the food you sell, you couldn’t make a more unfavorable view of your company in the eyes of consumers.  So they won’t be buying what you’re selling.  Ever.  But guess where they will be buying from?  That’s right.  The business that puts out the best quality.  And the best price, of course.  In other words, the one that best pleases the consumer.

Competition Makes Everything Better

Hey, you’re thinking, that makes sense.  So maybe the big corporate giants care about us.  If only for their greed.  Well, greed is a powerful motivator.  You see, a profit is an incentive to do good.  And pleasing consumers it the key to profitability.  So you do everything within your power to please as many consumers as possible.  Before another business pleases them better.  We call this tug of war in the market place competition.  And you win this game by pleasing consumers better than your competitors do.  Because competition makes everything better.

Now think about the things you hate to do.  Deal with the cable company.  A utility.  Getting your driver’s license renewed.  Getting a building permit.  Getting your tax assessment reduced because your house isn’t worth as much as your city says it is.  Filling out your income taxes.  Going through airport security.  Etc.  And what do all of these things have in common?  Little to no competition (although cable companies have competition today but making a change is a pain in the you know what).  There is little need to please consumers.  And it shows.  Customer service isn’t the greatest.  And the processes are often long, complex and exasperating.  Why?  Because they can be.  Where else are we going to go?

These things also have another thing in common.  Government heavily regulates them.  Or they’re simply government itself.  Government people.  Those people we are always to side with over the private sector.  And many of us do.  Despite our not liking to do any of the things we have to do with them.

Competition can even Clean the Environment

Okay, but what about the environment?  There’s no profit in spending more money to keep the environment clean.  Surely that’s something only government regulation can do.  Well, let me ask you something.  Where are you more likely to litter?  In your backyard?  Or in the National Mall after a rally?  The National Mall, yes?  Because we take care of what we own. 

Yes, there have been polluters in the past.  And, yes, government regulations have cleaned them up.  But back when they were polluting, few cared.  Because it was normal.  I mean, once upon a time, human feces used to cover our sidewalks and streets.  And that was normal.  It isn’t anymore.  So we don’t do it anymore.  This is more a process of civilization.  A company today that leeches toxic chemicals into the ground water that kills people who drink well water is going to get a lot of bad PR (public relations, i.e., favorable publicity).  And we know what bad PR does to private companies.  So they are going to try everything in their power to not leech toxic chemicals into the ground water so they can avoid the bad PR.  Before we knew the affect of some of these chemicals, though, some companies did unknowingly kill people.  Now that we know better, they handle their chemicals differently.  In a way that will help to keep consumers as customers.  Not push them away.

BP and Exxon both suffered in the eyes of the consumer after their spills.  And a lot of consumers refused to buy their gasoline anymore.  Not only that, the BP spill shut down all offshore oil drilling in US waters.   At great cost millions of dollars of equipment had to be shipped elsewhere where they could drill.  They would have made more profits without the spill and the bad PR.  So they have a very strong incentive to prevent these environmental disasters from happening.  And considering the amount of oil they pump up from these offshore wells, their environmental record is pretty good.

Companies even look at the little things that add up.  McDonalds used to sell their hamburgers in hard, foam cartons.  They don’t anymore.  Because they felt they could please more consumers by being more environmentally friendly.  Starbucks sells their hot coffee in paper cups to be environmentally friendly.  And the sleeves they use so you can hold those hot cups of coffee contain recycled material.  You can still use foam cups by law.  But they choose not to.  To please their consumers.  So they can keep them as customers.  And be more profitable.

Without Competition Little Changes

Corporations survive on profits.  Maintaining profitability means pleasing consumers.  When something bad happens they have a powerful incentive to act fast.  Before the problem spirals out of control causing bad PR.  Making consumers go elsewhere.  They will act faster than any government bureaucracy in identifying and correcting the problem.  To limit their damages.  Because the more damage they cause the harder it will be to regain the consumers’ confidence.  And lost consumer confidence equals fewer profits in the private sector.

It’s a little different with government.  Without competition little changes.  Fannie Mae and Freddie Mac are still here.  They may go away but there is talk about replacing them with something similar.  To make sure the same housing policies that caused the Great Recession will continue.  To make sure that some people who can’t afford a house can buy a house.  And if it all blows up again, they will just pass the cost onto the taxpayers.  Again.

And yet we are to trust government people every time over the private sector people.



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