by Howard Stephenson
Home ownership has long been hailed as a symbol of family independence and self-sufficiency. Today, owning a piece of corporate America through stock ownership has become the next great symbol of prosperity. For years a vast majority of Americans have owned their own homes. But only last year did we reach the milestone of over half of American households owning shares in the stock market.
Home ownership and stock ownership truly advance freedom, independence, and less government. Like homeowners, stockholders are less likely to swallow the arguments for bigger government and more regulations.
At least until now.
Due to the current malaise in the markets, many now question whether owning a piece of the rock was such a good idea after all. With corporate scandals in such giants as Enron, WorldCom, and Arthur Andersen, many investors are thinking they were bilked out of their money and wondering whether it will ever be safe to enter the stock market again.
At times like this, anti-capitalist myths are created, according to Joseph Bast, President of the Heartland Institute. For example, many intellectuals believe that the Great Depression was caused by the failure of the market to regulate itself.
Mr. Bast said Milton Friedman and Anna Jacobson Schwartz effectively rebutted that thesis in 1963 in their book titled A Monetary History of the United States, 1867-1960, in which they identified eleven specific government actions that caused and perpetuated the Great Depression.
As a result of intellectual misinformation, large majorities of the American public believe capitalism is unstable, that it caused the Great Depression and government got us out of it. As Mr. Bast points out, “Three generations have been told repeatedly that government was there for us when capitalism imploded.”
But what about executives at Enron who defrauded millions of investors by falsifying income and profit statements. Doesn’t this scandal and others like it prove that capitalism is not self-regulating after all?
“Enron revealed gaps in the system now in place to ensure that managers focus on maximizing share holders’ interests rather than only their own,” Bast writes, “One gap is the lack of transparency in financial reporting.” He said this gap in the market’s anti-fraud armor is the most discussed but much oversold. For example, Enron’s fraudulent accounting did not conceal that it was operating at a loss well before investors stopped buying its stock. The business press reported problems at WorldCom a year before its meltdown.
According to Bast, what the scandals really prove is that investors are often lazy and sheep-like herd followers who are looking for a free lunch or at least free security in a market that is full of risks. Alan Greenspan said it best when he said investors and analysts were experiencing “irrational exuberance.”
To some extent the problems revealed by Enron were the unintended results of tax and regulatory policies. “If you did not have the convoluted tax law,” says Larry Abraham, publisher of the Insider Report, “you wouldn’t have the limited partners ponying up to become limited partners to shelter their income.”
The double taxation of dividends has led to the use of increasingly complex schemes to, in the words of Steve Stein, “turn equity into debt of the IRS and debt into equity for Wall Street.”
According to Mr. Bast, “Enron’s collapse was a rare incident where four systems that ordinarily protect investors from fraud malfunctioned simultaneously. Auditors, board members, industry analysts, and individual investors all could have prevented the debacle. Complicated federal tax rules and regulations, some of them designed to protect investors, unintentionally smothered or helped lull to sleep these market watchdogs.”
The principle lesson of Enron, according to Mr. Bast, is that capitalism quickly reveals and terminates corruption and fraud. The alternatives to markets – government, socialism, or communism – could not have done as good a job.
by Howard Stephenson