Gyroscopic Investing

I listened to a few HB political episodes today and one of them he mentioned that the only laws that should be in place are ones that involve violence against another person. A caller asked "well how about fraud?" to which HB replied, to the effect of:

"That's a long subject for another day. I don't believe the government should have laws surrounding fraud and people aren't necessarily worse off because of fraud."

Does anyone have info on HB's position? Perhaps he wrote an essay? Or maybe he discussed it in one of the political podcasts that I haven't yet listened to?

Sounds like the typical Libertarian "people will be more cautious if theres no big bad three fingered agency to protect them" position.

Of course, that doesn't work in the real world.  People are stupid, en masse, requiring political action to "do something".

MachineGhost wrote: Sounds like the typical Libertarian "people will be more cautious if theres no big bad three fingered agency to protect them" position.

Of course, that doesn't work in the real world.  People are stupid, en masse, requiring political action to "do something".

Oh my,you are correct that most folks have grown stupid and have to be looked after.
Thanks for getting this out there..

annieB wrote:

MachineGhost wrote: Sounds like the typical Libertarian "people will be more cautious if theres no big bad three fingered agency to protect them" position.

Of course, that doesn't work in the real world.  People are stupid, en masse, requiring political action to "do something".

Oh my,you are correct that most folks have grown stupid and have to be looked after.
Thanks for getting this out there..

Our economy functions better because there are laws against fraud. Ive heard one of the biggest obstacles to growth in many countries is that you can only do business with family and close friends because everyone else will try and swindle and cheat you.

Our world has grown way too complex for the average citizen to navigate without consumer protection.

doodle wrote: Our economy functions better because there are laws against fraud. Ive heard one of the biggest obstacles to growth in many countries is that you can only do business with family and close friends because everyone else will try and swindle and cheat you.

Unfortunately, in those places the government is included in the category of people who will try to cheat and swindle you. In the African village I lived in, the villagers were terrified of the police because they would periodically rape village women unless their husbands gave up all their money. I'm not making this up.

In the end, I think a country's laws tend to reflect its culture. Places populated predominately by basically trustworthy people tend to have laws punishing cheating and fraud, while those populated by unscrupulous thieves will lack those laws, but even if they had them, they would be enforced by other unscrupulous thieves!

A culture has to accommodate its laws. I would say that the presence of anti-fraud laws is a sign of a trustworthy culture much more than it's an example of laws making people trustworthy.

Pointedstick wrote: A culture has to accommodate its laws. I would say that the presence of anti-fraud laws is a sign of a trustworthy culture much more than it's an example of laws making people trustworthy.

So the presence of extreme gun control in Chicago is the sign of a safe, violent-free city?

TripleB wrote:

Pointedstick wrote: A culture has to accommodate its laws. I would say that the presence of anti-fraud laws is a sign of a trustworthy culture much more than it's an example of laws making people trustworthy.

So the presence of extreme gun control in Chicago is the sign of a safe, violent-free city?

No, it's the sign of a voting public that detests firearms and is frightened of violent African-Americans (real or imagined) but could not admit it for fear of seeming racist. Much gun control in the USA has been driven by fear of racial minorities, more recently coupled with the desire not to appear racist.

Perhaps I ought to have written, "I would say that the presence of anti-fraud laws coupled with an absence of fraud is a sign of a trustworthy culture much more than it's an example of laws making people trustworthy." Because adding anti-fraud laws will not, in my opinion, make untrustworthy people trustworthy, any more than adding some of the most draconian gun control laws in the country has made violent Chicago into a safe city.

Perhaps that's the message that HB was alluding to.

I don't think that a law against dishonesty is going to make people more honest, but a law against dishonesty WILL cause a dishonesty prevention bureaucracy to grow up around it.

The question is whether the actual amount of dishonesty prevented by the existence of the anti-dishonesty bureaucracy justifies the resources that such a bureaucracy consumes to maintain itself. 

Ironically, the anti-dishonesty bureaucracy is often discovered to have used dishonesty in its approach to abolishing dishonesty, which it justifies as a necessary means to an end.

Each person has to make up his own mind about the extent to which human nature can be improved upon through government action.  Everyone seems to mark the line in a different place.

It's not surprising that Harry Browne would have drawn the line closer to human nature not being subject to improvement through additional government regulation.

One interesting question to ponder is whether throughout history government has prevented more dishonesty among people than it has caused, considering that some of the most large-scale lies ever told (with some of the most tragic consequences) have been told by politicians and other government officials. 

Remember the old line about absolute power?  Typically, the only place in society that you see concentrations of power like that is in the government, and thus one perspective might be that only the abolition of government could really result in the abolition of fraud in society, and there are obviously other problems built into that line of thinking.

What you can pretty well depend on is that whatever social/cultural problem that the government sets out to solve will eventually make the problem a lot worse (there are exceptions, but this pattern seems to repeat itself pretty consistently in most spheres of life).  I don't have any reason to think that this isn't the case with fraud prevention efforts as well.

I think that the politicians simply underestimate the difficulty involved in improving upon human nature, while often overestimating their own ability to avoid the same flaws in human nature that they wish to correct in others.

MediumTex for President 2016 

MachineGhost wrote:Sounds like the typical Libertarian "people will be more cautious if theres no big bad three fingered agency to protect them" position.

Of course, that doesn't work in the real world.  People are stupid, en masse, requiring political action to "do something".

Actually, one of the Libertarian positions is that people should honor their contracts, and fraud is essentially someone breaking their contract with another person, which can indirectly be construed as using force against another person (either by subterfuge, withholding vital information, or another imbalance of power).  So AFAIK, the Libertarian position is that fraud should be punished by gov't. 

rocketdog wrote:

MachineGhost wrote:Sounds like the typical Libertarian "people will be more cautious if theres no big bad three fingered agency to protect them" position.

Of course, that doesn't work in the real world.  People are stupid, en masse, requiring political action to "do something".

Actually, one of the Libertarian positions is that people should honor their contracts, and fraud is essentially someone breaking their contract with another person, which can indirectly be construed as using force against another person (either by subterfuge, withholding vital information, or another imbalance of power).  So AFAIK, the Libertarian position is that fraud should be punished by gov't.

I would say that the government should provide a means for enforcing private contracts, as opposed to the government punishing people who breach contracts.

If the consequences of breach are stipulated in the contract, the government shouldn't have a lot of discretion in deciding what the "punishment" will be.

MachineGhost wrote: Sounds like the typical Libertarian "people will be more cautious if theres no big bad three fingered agency to protect them" position.

Curious to know why you don't think that is true, if you really don't - and especially in the world of investing. If there had been no SEC which is supposedly overseeing these things don't you think all those people who got screwed by Bernie Madoff would have been more cautious? The problem with government oversight, as I see it, is that they lull people into a false sense of security which can prove to be only a mirage.

Having said that, I do think what Bernie Madoff did should be against the law. It was theft, pure and simple.

Here's an interesting thought:

Suppose the government got out of the fraud-enforcement business and eliminated all laws against it. Some investors would be hesitant to invest capital into places because of the risk of fraud. Thus, organizations would have to prove their worthiness to potential investors. If those investors couldn't do it, then people wouldn't invest capital and the economy would be at a standstill.

However the potential benefit for being that marginal organization that is able to prove worthiness is so valuable because investors would be flocking to the perceived safety of investing with that group, that it would strongly incentivize figuring out how to demonstrate worthiness to the public.

And suppose a group is lying about it to steal money. Well that happens right now with the government in charge.

And we all pay a cost in tax dollars to allow the government to do it for us. As opposed to keeping more of our own money, and requiring organizations to prove their worthiness to us before we invest capital or buy a product from them.

If a certain industry is unable to prove their worthiness, a new competitor will spawn and be able to do it. If the government is unable to prevent fraud, we're screwed, because the government has a monopoly on fraud-protection regardless of how bad of a job they do.

TripleB wrote: Here's an interesting thought:

Suppose the government got out of the fraud-enforcement business ...

They seem to already have done this, as demonstrated by their lack of enforcement in almost every market-crushing financial fraud since the 1980s.  This, even when alerted by interested and knowledgeable observers.  If insiders had not come forward and revealed what was happening (Enron), or even the crooks themselves confessed (Ivan Boesky about Michael Milken, Madoff about himself), or officials in other countries had not detected wrongdoing (Marc Dreier, by Canadians), the government would have nothing to investigate.

It seems that the financial products have become so complex that a typical regulator cannot understand most of them, and don't seem to know how to tell  if something is wrong.  How much success would an individual investor have?

In theory, private organizations to certify trustworthiness should spring up. But the rating firms seem as in the dark about the true risk of the products as the rest of us, and on top of that, they're as in bed with the financial companies as the regulators are.

It certainly works in other industries, though. Electronics are typically certified by Underwriters Laboratories or another private firm. Seems to work fine there.

Things may have turned out differently if S&P and other ratings agencies had been firms whose ratings were paid for by the users. 

I think that one of the problems with the ratings agencies was that companies issuing the bonds and other paraphernalia they wanted rated (CDOs, MBSs, a bunch of other alphabet soup stuff) were paying them. 

Telling the truth might have meant a shortfall in the agencies' own earnings, which would have affected its parent company, McGraw-Hill, which is traded on the NYSE.

The SEC bans rating agencies that aren't suffering a conflict of interest anyway, i.e. Egan Jones.

MediumTex wrote:I would say that the government should provide a means for enforcing private contracts, as opposed to the government punishing people who breach contracts.

If the consequences of breach are stipulated in the contract, the government shouldn't have a lot of discretion in deciding what the "punishment" will be.

Agreed, but there isn't always a contract in place.  We operate in society largely without formal contracts.  And even when there is a contract, most people aren't savvy in a legal sense and so it would be very easy for a contract to be written to heavily favor one party over another.  Witness the mortgages that blind-sided many home buyers who later defaulted on their payments and began the implosion of the economy.