And on those rare occasions when fraud exists, those harmed have every right to seek legal recourse. The end result of dishonesty, as many executives such as Former Worldcom CEO Bernie Ebbers have discovered, is humiliation, bankruptcy and even jail time.
But thanks to publicity-hungry politicians like New York Attorney General Eliot Spitzer or regulators like SEC Chairman William Donaldson, the capitalist has become synonymous with the crook — a dangerous, conniving hustler who'd do anything for a dollar. Capitalism is now seen as something that needs to be tamed or controlled, a mischaracterization born from a handful of scandals and fanned by trend pieces in The New York Times.
The net result is that the economy’s biggest risk has become not crooked CEOs, but a regulatory environment that has spun completely out of control. In reaction to a few isolated cases of fraud, government regulators have quietly enacted the biggest market controls in three generations. Our economy has suffered as a result.
At the heart of our justice system is the presumption of innocence. Everyone, from “alleged” murder suspect Brian Nichols to domestic diva Martha Stewart, is assumed to be innocent until proven guilty in a court of law. To punish citizens for a crime they haven’t committed is downright un-American. But regulation doesn't punish the guilty, rather the innocent. By definition, it restricts the lawful and voluntary exchange that makes a market free.
And while it's fashionable to believe that more regulation will improve the economy, the truth is that it helps just two groups: the regulators, who are applauded for "cracking down," and the lawyers, who reap a windfall as legitimate businessmen are forced to spend millions of dollars just to begin understanding how to comply. Thousands of honest, law-abiding companies have been severely hindered by the cost to comply with Sarbanes-Oxley, the draconian securities regulation signed by President Bush a few years back.
And how effective is the regulation? Take, for example, the demand that companies appoint “independent” directors to sit on their Board of Directors. The expectation is that, because they have no financial interest in the company, they won’t be beholden to the CEO or other influences within the corporation. Yet how can board members represent the interests of shareholders if they are not shareholders themselves? It’s this type of insane micromanagement that is the hallmark of overzealous regulators supposedly out for the “public good.”
Perhaps regulators don't consider the cost of their actions to the private sector because they haven't been in the private sector for quite some time. Just consider the background of Senator Paul Sarbanes and Congressman Michael Oxley, architects of the landmark securities bill that bears their name.
According to his Web site, Paul Sarbanes hasn't had a nongovernmental job since 1966. Before that, he was a lawyer. Congressman Michael Oxley has served 11 terms in the House of Representatives, and from what I could glean from his Web site, hasn't been in the private sector since 1972. Before that he was — you guessed it — a lawyer.
Beyond the expense, the most troubling outgrowth of this attack on business has been philosophical. There's now a consensus opinion that free markets, and indeed capitalism itself, are inherently destructive, immoral and criminal. The belief is that without "public servants" like Spitzer or Donaldson "protecting" the masses, business would run wild with fraud, looting America down to its last penny. Our population now accepts, by and large, that capitalism needs to be corralled, controlled and otherwise centrally planned.
Consider that you now need government permission to open a restaurant, deliver a letter, drive a taxicab or become a dentist, just to name a few examples. Every piece of property you buy, every dollar you make and every worker you employ must duly be reported and registered with the State. In most cases, the process involves paying a tax or filling out a stack of forms that nobody will ever read. Most citizens, the business community included, now completely accept that the government has a right to regulate, orchestrate and otherwise micromanage their affairs in any fashion it sees fit.
It's a reality that damages not only our economy, but the very philosophical framework on which our Republic is based. And although it might still be a few years into the future, it is that assault on free-market capitalism which will eventually herald the collapse of liberty itself.
This weekend our Business Block has much more on how government involvment affects YOUR investments. Tune in Saturday 10am — noon ET.
Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC and is a markets columnist for Smartmoney.com. He appears regularly on FNC's business program Cashin' In.