The Triumph of Bureaucracy

A prescient passage from von Mises:

The characteristic feature of present-day policies is the trend toward a substitution of government control for free enterprise. Powerful political parties and pressure groups are fervently asking for public control of all economic activities, for thorough government planning, and for the nationalization of business. They aim at full government control of education and at the socialization of the medical profession. There is no sphere of human activity that they would not be prepared to subordinate to regimentation by the authorities. In their eyes, state control is the panacea for all ills.

-- Ludwig von Mises, Bureaucracy, 1944

Nearly all of the in-depth news articles (here's an example) about recent financial bailouts mention the moral hazard that is created when the government steps in to prevent a private enterprise from failing. The problem is known by various names, in academia it is usually called the Principal-Agent Problem, in financial risk management lingo it is referred to as the Trader's Option. It boils down to people taking unreasonable risks, because they are exposed to all of the upside (profit), and protected against the downside (loss).

It is further true that bureaucracy is imbued with an implacable hatred of private business and free enterprise. But the supporters of the system consider precisely this the most laudable feature of their attitude. Far from being ashamed of their anti-business policies, they are proud of them. They aim at full control of business by the government and see in every businessman who wants to evade this control a public enemy.

-- Ludwig von Mises, Bureaucracy, 1944

Progressive regulators argue that bureaucracy is present in private enterprise too, and because of this they should be regulated and their power limited. Von Mises argues that bureaucracy in private enterprise is basically a survival mechanism against government control of business.

The trend toward bureaucratic rigidity is not inherent in the evolution of business. It is an outcome of government meddling with business. It is a result of the policies designed to eliminate the profit motive from its role in the framework of society's economic organization.

-- Ludwig von Mises, Bureaucracy, 1944

The modern problem is confounded by the acceptance of the 'too big to fail' hypothesis (which has not been tested by the way). The bigness of those too big is inflated greatly by imprudent leverage. The formula is simple in Slashdot-list style:

1. Take out huge loans to become 'too big'
   
2. Invest in risky but possibly lucrative assets
   
3. The investment pans out, or the government bails you out
   
4. Profit!
   

Because investment banks’ trades and investments are typically very highly leveraged—Bear Stearns, for instance, had borrowed thirty dollars for every dollar of its own—the banks need to be exceptionally good at managing risk, and they need to insure that people trust them enough to lend them huge sums of money against very little collateral. You’d expect, then, that Wall Street firms would be especially rigorous about balancing risk against reward, and about earning and keeping the trust of customers, clients, and lenders. Instead, most of these firms have taken on spectacular amounts of risk without acknowledging the scale of their bets to the outside world, or even, it now seems, to themselves. That’s why, since the bursting of the housing bubble, we have seen tens of billions of dollars in surprise write-downs and complete paralysis in the credit markets. When you consider that the banks at the center of the subprime debacle were also at the center of the tech-stock bubble, the surprising thing about the Bear Stearns crisis isn’t that a major investment bank was abandoned by its customers and lenders but, rather, that it didn’t happen sooner.

James Surowiecki, Too Dumb to Fail

Rather than improving the situation, government meddling and bail-outs actually prevent the natural correction mechanism inherent in a free market. Instead of being 'punished' for doing a poor job of managing their risk by going out of business. And the lenders and investors who participated in the venture loosing their capital, they are protected from the full extent of their loss by tax-payer dollars. Money taken from people by the coercive power of the state used to prop up foolish business practices and poor risk management.

Von Mises also argues that modern tax policies limit the growth of entrepreneurial start-ups. So we get stagnation and mega-corporate oligarchies (the very thing that excessive regulation is trying to control).

Modern policies result in tying the hands of innovators no less than did the guild system of the Middle Ages.

-- Ludwig von Mises, Bureaucracy, 1944

The pro-regulators will argue that they are protecting the public from profit mongering capitalists. Yet, who are the great beneficiaries of their bail-out plans? The same corporate oligarchy that took on too much risk that they claim must be regulated and controlled by the government for the good of society. The regulators themselves see a benefit to their pro-government control position, they are buying control of these private institutions through the bail-out.

Spurious legends, popularized by demagogic propaganda, have entirely misrepresented the capitalist system. Capitalism has succeeded in raising the material well-being of the masses in an unprecedented way. In the capitalist countries population figures are now several times higher than they were at the eve of the "industrial revolution," and every citizen of these nations enjoys a standard of living much higher than that of the well-to-do of earlier ages.

-- Ludwig von Mises, Bureaucracy, 1944

It seems the American people (or at least their Congress-critters) have bought the spurious legends as far as government control of private enterprise. Is the past in finance prologue to the future of health care?