Has Lack Of Regulation Caused This Crisis? Evidence Says No

We find it odd when experts argue of the lack of regulation as the cause of this crisis.

Evidence simply don't support such claims...

Chart From Casey Research

According to Casey Research, ``The Federal Register is a daily publication of all the proposed and final rules and regulations of the U.S. government. The size of the register is often used to gauge the scope of regulation, and it’s been on steroids for decades.

``According to the Washington, DC-based Competitive Enterprise Institute’s 2009 edition of “Ten Thousand Commandments” by Clyde Crews, the cost of abiding federal regulations is estimated at $1.172 trillion in 2008 – 8% of the year’s GDP. This “regulation without representation,” says Crews, enables the funding of new federal initiatives through the compliance costs of expanded regulations, rather than hiking taxes or expanding the deficit."

Imagine, compliance costs at an estimated 8% of the GDP and growing!!! This represents as tremendous burden, since it reduces the productive capacity of the US economy. Money that would have gone into capital investments have been lost due to sheer compliance on the massive regulatory structure.

To add, the Federal Tax Code (see below) which is also incorporated in the Federal Register has also seen a ballooning of pages-67,506.

chart from Don't Mess with Taxes

The tax code had only 400 pages in its inception in 1913!

More from George Reisman [The Myth That Laissez Faire Is Responsible For Our Crisis] (bold highlights mine)

1. Government spending in the United States currently equals more than forty percent of national income, i.e., the sum of all wages and salaries and profits and interest earned in the country. This is without counting any of the massive off-budget spending such as that on account of the government enterprises Fannie Mae and Freddie Mac. Nor does it count any of the recent spending on assorted "bailouts." What this means is that substantially more than forty dollars of every one hundred dollars of output are appropriated by the government against the will of the individual citizens who produce that output. The money and the goods involved are turned over to the government only because the individual citizens wish to stay out of jail. Their freedom to dispose of their own incomes and output is thus violated on a colossal scale. In contrast, under laissez-faire capitalism, government spending would be on such a modest scale that a mere revenue tariff might be sufficient to support it. The corporate and individual income taxes, inheritance and capital gains taxes, and social security and Medicare taxes would not exist.

2. There are presently fifteen federal cabinet departments, nine of which exist for the very purpose of respectively interfering with housing, transportation, healthcare, education, energy, mining, agriculture, labor, and commerce, and virtually all of which nowadays routinely ride roughshod over one or more important aspects of the economic freedom of the individual. Under laissez-faire capitalism, eleven of the fifteen cabinet departments would cease to exist and only the departments of justice, defense, state, and treasury would remain. Within those departments, moreover, further reductions would be made, such as the abolition of the IRS in the Treasury Department and the Antitrust Division in the Department of Justice.

3. The economic interference of today's cabinet departments is reinforced and amplified by more than one hundred federal agencies and commissions, the most well known of which include, besides the IRS, the FRB and FDIC, the FBI and CIA, the EPA, FDA, SEC, CFTC, NLRB, FTC, FCC, FERC, FEMA, FAA, CAA, INS, OHSA, CPSC, NHTSA, EEOC, BATF, DEA, NIH, and NASA. Under laissez-faire capitalism, all such agencies and commissions would be done away with, with the exception of the FBI, which would be reduced to the legitimate functions of counterespionage and combating crimes against person or property that take place across state lines.

4. To complete this catalog of government interference and its trampling of any vestige of laissez faire, as of the end of 2007, the last full year for which data are available, the Federal Register contained fully seventy-three thousand pages of detailed government regulations. This is an increase of more than ten thousand pages since 1978, the very years during which our system, according to one of The New York Times articles quoted above, has been "tilted in favor of business deregulation and against new rules." Under laissez-faire capitalism, there would be no Federal Register. The activities of the remaining government departments and their subdivisions would be controlled exclusively by duly enacted legislation, not the rule-making of unelected government officials.

5. And, of course, to all of this must be added the further massive apparatus of laws, departments, agencies, and regulations at the state and local level. Under laissez-faire capitalism, these too for the most part would be completely abolished and what remained would reflect the same kind of radical reductions in the size and scope of government activity as those carried out on the federal level.

It's incredible to discover how the gullible public falls for such deceptions.

Phisix: The Fantasy Of The 2008 "Window Dressing" Year End Rally

“If most of us remain ignorant of ourselves, it is because self-knowledge is painful and we prefer the pleasures of illusion.” Aldous Huxley (1894-1963), English Writer

We learned that some local experts recently opined that if a rally should occur in the Philippine equity markets this month, this would likely be driven by so called “Window Dressing”.

Window Dressing according to Investopedia.com is ``A strategy used by mutual fund and portfolio managers near the year or quarter end to improve the appearance of the portfolio/fund performance before presenting it to clients or shareholders”.

So after the recent rout, where the Phisix have chalked up 48% losses year to date and 51% since the credit bubble imploded last July, how should we expect “to improve the appearance” of portfolio funds to lift the market?

In our view, either such expert/s have been living on a different planet or have completely lost rationalizations to explain away market actions.

Why?

1. Lost in the understanding is the process called debt deflation or deleveraging.

During the previous boom, asset values in the global financial zoomed due to massive speculations underpinned by an easy money environment or the moneyness of credit. Remember, banks based their lending on the value of the collateral and the lending process enhances the value of such collateral. Hence the entire process of lending and collateral values becomes a self-reinforcing feedback loop.

So in boom periods, rising collateral values allow for more lending which again translates to even higher collateral values…until the whole becomes unsustainable and reverses.

Today, the process of lending and collateral values could be seen as similar to a “global margin call” where falling collateral values compels lenders to tighten either by asking for more collateral to secure outstanding loans or forcibly liquidate assets in order to pay for such loans. The whole feedback loop, thus, accentuate the downward spiral in asset values which all of us have been witnessing today.

2. Lost in the understanding is that the finance industry and fund managers are the main conduits of the deleveraging process.

The unraveling debt deflation phenomenon has basically been vented on the financial markets.

And this has visibly caused the market’s miseries today here or in Asia (see Figure 1) or elsewhere.

Figure 1: IMF: Fleeing Foreign Capital

According to IMF’s Kenneth Kang and Jacques Miniane (all italics mine),

``But given the region's large trade and financial integration with the rest of the world, investors' views of Asia soured as the global turmoil intensified and perceptions grew that the global economy was in for a major slowdown. Large net equity outflows have driven down stock prices sharply. Asia-focused hedge funds have been among the worst performers worldwide, with their returns consistently below those of other emerging market funds.

``Capital outflows have also significantly weakened currencies in some countries, notably India, Korea, New Zealand, and Vietnam. And several countries have responded by intervening to support their currencies, in stark contrast to the past several years, when most Asian countries were concerned about the rapid appreciation of their currencies.

``With the rise in global risk aversion, Asian governments, corporations, and financial institutions have found it more difficult to access the global financial markets. Countries with banking systems that rely more on wholesale financing and less on retail deposits (Australia, India, Korea, New Zealand) have experienced a higher rise in borrowing costs, partly because of concerns they will face difficulties rolling over their debts. As a result of these tightened conditions, the region's private external financing has fallen sharply.”

And because the process of deleveraging equates to forcible liquidations in order to reduce debt exposure, this means that global fund managers have likewise been retrenching to meet redemptions or to simply cut losses.

So we see this in hedge funds…

From Bloomberg, ``The global hedge-fund industry lost $64 billion of assets in November, with an index tracking its performance declining for a sixth month as economies in Asia and Europe joined the U.S. in recession, Eurekahedge Pte said…

``Hedge-fund industry assets peaked at $1.9 trillion in June, data compiled by Chicago-based Hedge Fund Research Inc. show. Investment losses and withdrawals may shrink that amount by 45 percent by the end of this month, according to estimates by analysts at Morgan Stanley.”

And in the mutual funds…

From ICI.org, ``The combined assets of the nation's mutual funds decreased by $1.087 trillion, or 10.2 percent, to $9.600 trillion in October, according to the Investment Company Institute's official survey of the mutual fund industry.”

And we can’t expect the local counterparts to immediately replace them considering that the industry has been quite underdeveloped, where according to Icap,com, ``total of 22 mutual funds in the country. Six (6) of these are bond funds, five (5) are equity funds, while the remaining ten (10) are balanced funds while one is a money market fund” and even if we add the domestic bank based UITF counterparts.

3. Finally, market inefficiencies brought about by the dynamics of the sheer scale of liquidations aside from tax angles could factor in negatively for the US markets which could spillover to other markets…

That’s if we heed former fund manager Andy Kessler who warns the public to ``stick wax in your ears and don't listen to the market until February.”

Quoting Andy Kessler (Wall Street Journal):

``-Tax-loss selling: Whenever you have a loss in a stock -- and who doesn't -- it's always tax smart to sell it, take a tax loss and either buy something similar or wait 30 days and buy the original one back. December can be an ugly month of indiscriminate selling. The December effect will be huge this year.

``- Mutual-fund redemptions: Mutual funds are also dumped for tax losses. When the stock market is down in the morning, it's usually because of mutual-fund redemptions…

``- Mutual fund cap-gain distributions: To make matters worse, in December mutual funds do capital-gains distributions. In a down year like 2008, you would think there are no taxes to pay. Think again. Legg Mason's Value Trust, run by Bill Miller, outperformed the market for 15 years by buying many "unvalue" names like Amazon. As investors redeem, he is forced to sell many of these stocks originally purchased at very low prices, triggering huge capital gains in a year his fund is down 62%. You can almost guarantee investors also will sell more of these funds to pay their unexpected tax bill.

``- Hedge-fund redemptions: Instead of overnight selling like mutual funds, hedge funds typically require 45 days' notice for investors to get out of a fund. They've been furiously selling since September to raise cash to pay investors. This usually shows up as a set of stocks that just go down and down and down with no obvious explanation.

``Rubbing salt in hedge-fund wounds is the fact that Lehman Brothers was a prime broker to many hedge funds, holding their shares. While Lehman's bankruptcy was not a problem in the U.S., in England the policy is to freeze accounts until the mess can be sorted out. There are billions in assets locked in this bankruptcy, and hedge funds are forced to sell positions in the U.S. and elsewhere to raise cash, exacerbating the downside here.

``By the way, when hedge funds are down for the year, they work practically for free until they make up the loss. We'll see hedge funds close and stocks liquidated as -- no surprise -- hedge-fund managers like to get paid.

``- Margin calls: Whenever stocks go down sharply, you quickly find who owns them with debt. We have seen spectacular margin calls, a requirement for more capital to cover share losses. Chesapeake Energy CEO Aubrey McClendon unloaded 33 million shares to cover losses. Viacom CEO Sumner Redstone had a forced sale of $400 million in Viacom and CBS shares because of a margin call on other stocks. You can bet many not-so-public margin calls are behind many huge price drops. These usually take place in the last 30 minutes of trading.”

Overall, the fundamental premise that global and local fund managers will provide for a temporary facelift for the Phisix doesn’t square with global trend of rising risk aversion, client and fund redemptions and or perhaps tax induced selling.

If the Phisix and global markets should rise, it is likely because long term investors will take over short term players or take advantage of the collateral crisis related losses or even perhaps take refuge in stocks as “store of value” in a world where global central banks have been racing to collectively devalue their currencies.

Window dressing could possibly be an issue after the deleveraging phenomenon or when markets stabilize.

To argue otherwise seems living off a fool’s paradise, or as Sigmund Freud once wrote, ``Illusions commend themselves to us because they save us pain and allow us to enjoy pleasure instead. We must therefore accept it without complaint when they sometimes collide with a bit of reality against which they are dashed to pieces."