Monday, April 30, 2012

Cato on Traders and Traitors

As Parliament investigated all the sordid details of the South Sea Company scandals,  John Trenchard in  installment no. 12 of Cato's Letters called for treason charges against the perpetrators of the bubble. He argued that just as any disloyal magistrate or general commits treason when they attempt to destroy a commonwealth in wartime, so to do those  who squander the wealth of their fellow citizens and destroy a nation's public credit:

"An attempt to destroy the chief magistrate of a commonwealth, or the general of an army in the field, or the governor of a town during a siege, are certainly treasons every where; because in such attempts, when they succeed, are often involved the ruin of states. They also are doubtless guilty of high treason, who, being entrusted with the wealth, security, and happiness of kingdoms, do yet knowingly pervert that trust, to the undoing of that people whom they are obliged, by undeserved rewards, as well as by all the ties of religion, justice, honour, and gratitude, to defend and protect."

" 'Tis the same, if any number of men, though in a lesser trust, or in no trust at all, should deliberately and knowingly destroy thousands of their fellow-subjects, and overturn the trade and publick credit of the nation, to enrich themselves and their accomplices."

He devoted most of the essay defending the historic right of Parliament to initiate treason charges and praised Parliament for its investigation.

"I observe with pleasure the noble spirit shewn by our legislature, to punish, with an exemplary severity, the murderers of our credit, and the publick enemies of our liberty and prosperity. This revives every drooping heart, and kindles joy in every face, in spite of all our miseries. And this brings terror, trembling, and paleness upon the guilty; to see death and destruction pursuing them close, and besetting them hard on every side. They are in the circumstances and the agonies of the guilty Cain, who justly feared that every man whom he met would kill him, though there was no law then in being against murder."

Trenchard's call for treason charges may have been extreme and perhaps even  a perversion of the law, but it does stand as an enlightening contrast to modern thinking. When irresponsible traders working for our investment banks created a housing bubble that collapsed in 2008, ruining many citizens and the nation's credit, our government did not explore treason charges.

Our government gave them money!!!

Sunday, April 29, 2012

Should Solar Energy Executives Be Hanged?

Should the executives of some of the largest solar energy companies be tried, and if found guilty of wrong doing, be hanged?

Cato might think so.

That is the judgement of Thomas Gordon in his installment number 3 of  Cato's Letters.

In that letter, he savaged the executive of the South Sea Company, who profited from inflated company stock values after assuming part of the British government's debt.

"They are rogues of prey, they are stock-jobbers, they are a conspiracy of stock-jobbers! A name which carries along with it such a detestable and deadly image, that it exceeds all human invention to aggravate it; nor can nature, with all her variety and stores, furnish out any thing to illustrate its deformities; nay, it gains visible advantage by the worst comparisons that you can make: Your terror lessens, when you liken them to crocodiles and cannibals, who feed, for hunger, on human bodies."

"These monsters, therefore, stand single in the creation: They are stock-jobbers; they have served a whole people as Satan served Job; and so far the Devil is injured, by any analogy that you can make between him and them."

So what should be done with them?

"Well; but monsters as they are, what would you do with them? The answer is short and at hand, hang them."

According to Cato, the only thing standing between the South Sea Company and the gallows was their ill-gotten gains.

"All their hopes of safety must consist in their money; and without question, they will try to make the wages of their villainy protect their villainy."  

Today we suffer the spectacle of Solyndra, whose executives filed for Chapter 11 bankruptcy after receiving a $535 million dollar loan guarantee approved by the Department of Energy. Before that filing, they received handsome bonuses.

After the news about Solyndra broke, we learned about the federal loan guarantees for SunPower, $1.2 billion, and First Solar, 3.1 billion. These two companies appear to be in financial trouble. Two other companies, Beacon Power Corp and Enerdel, not only received federal loan guarantees, but also paid company executives large bonuses before filing for Chapter 11 protection.

Perhaps they, too, like the South Sea Company directors, should be forced to spend their bonuses in the nearest federal court.

Friday, April 27, 2012

The Original Cato on Crony Capitalism

In some previous posts, I alluded to a series of essays by Thomas Gordon and John Trenchard on the general topic of liberty. Originally written for magazines between 1720 and 1723, these essays were later collected and published in book form. They became immensely popular among our nation's founders. They not only make great reading supporters of the "Tea Party" movement, but also establish a good Presidential campaign theme that Mitt Romney should wisely adopt--liberty verses power.

The series began, coincidentally enough, because of an eighteenth century financial meltdown caused by an early example of "crony capitalism" involving the British treasury and the South Sea Company.

South Sea Company was formed in 1711 by British Lord Treasurer Robert Harley. The company received a charter from Parliament granting the company a monopoly on trade in the South Seas, which in those days referred to the Spanish colonies of  Latin America. (The British government commonly chartered trade monopolies in that era. The East India Tea Company of the infamous 1773 Boston Tea Party remains the most well-known.) In return, the British government planned to secure revenue from duties collected on goods imported into Britain from South America by the South Sea Company.

The whole arrangement rested on securing favorable trade concessions from Spain in the peace treaty ending the Wars of Spanish Succession. The company expected Spain to open its South American provinces to trade. When that treaty ended the war in 1713, however, the resulting terms proved to be not very favorable. The treaty permitted only one trading ship annually from the South Sea Company.

Robert Harley had less innocent intentions for the company as well. He planned on using the company to fund part of Britain's national debt. The plan worked like this:

The company issued new stock. The government persuaded holders of £10 million of the national debt to exchange their notes for this company stock, transferring their holdings of government debt to the South Sea Company.

In this way, the company not only earned money from the sale of imports from South America., but also secured a steady income in the form of payment of interest on the debt by the British government. This initially amounted to over £500,000 a year of government payments added to the company's books.

Shareholders in company stock received profit from the company earnings derived from trade and the interest earned as the government paid down its debt. Or they could sell their shares if the stock price increased.

Finally, the government raised money through duties collected on imports from South America. The government planned to use the revenue to pay down the debt owed to the South Sea Company and to other holders of government debt.

The plan appeared to be working well enough for the South Sea Company to take on an additional £2 million of government debt in 1717.

The South Sea Company and the British government made a fatal calculation, however, in 1720. The company arranged with Chancellor of the Exchequer John Aislabie to transfer half the government debt—an amount exceeding £30 million to the South Sea Company in exchange for new issues of stock shares. This proved to be the beginning of the “South Sea Bubble.”

The company “loaned” shares to stock to members of Parliament to secure their continued support. The company featured the names of prominent investors in its publicity campaign to attract more investors in the company. As the shares of company stock soared throughout 1720  from £150 per share to over £1000 per share, many investers came aboard with borrowed money.

Of course, anyone can guess what happened next. The spike in stock price eventually sparked a massive sell-off. This caused the value of the stock to plummet, ruining thousands of investors. Parliament began an investigation while treasury officials attempted to restore public credit.

On 12 Novermber 1720, Thomas Gordon published the second of Cato's Letters. The became the first in a series condemning company officials and government ministers for the debacle.

Gordon wrote,

"I think it would have been a symptom of wisdom in us to have chosen rather to fall by the hand of God, than by the execrable arts of stock-jobbers: That we are fallen, is a sorrowful truth, not only visible in every face which you meet, but in the destruction of our trade, the glory and riches of our nation, and the livelihood of the poor."

Gordon demanded vengence without mercy on the company executives involved:

"As never nation was more abused than ours has been of late by the dirty race of money-changers; so never nation could with a better grace, with more justice, or greater security, take its full vengeance, than ours can, upon its detested foes"

And what sort of vengence? The gallows!

"Sometimes the greatness and popularity of the offenders make strict justice unadvisable, because unsafe; but here it is not so, you may, at present, load every gallows in England with directors and stock-jobbers, without the assistance of a sheriff’s guard, or so much as a sigh from an old woman, though accustom’d perhaps to shed tears at the untimely demise of a common felon or murderer. A thousand stock-jobbers, well trussed up, besides the diverting sight, would be a cheap sacrifice to the Manes of trade; it would be one certain expedient to soften the rage of the people; and to convince them that the future direction of their wealth and estates shall be put into the hands of those, who will as effectually study to promote the general benefit and publick good, as others have, lately, most infamously sacrificed both to their own private advantage."

Gordon suggested that until such justice is measured out, public confidence and a restoration of commerce and industry will lag.

"The resurrection of honesty and industry can never be hoped for, while this sort of vermin is suffered to crawl about, tainting our air, and putting every thing out of course; subsisting by lies, and practising vile tricks, low in their nature, and mischievous in their consequences."

Saturday, April 21, 2012

Tuesday, April 17, 2012

The Not-Obama

Now that Rick Santorum, the last viable "Not-Romney" candidate has suspended his campaign, it is now clear that conservatives must unify behind the last viable "Not-Obama" candidate: Mitt Romney.

After a rough, but still on-going primary, Romney seems to be "moving right" to secure the support of the Tea Party movement. He spoke recently at a Tea Party rally in Philadelphia.

Perhaps now might be an opportune time to develop a campaign theme. Although I doubt Romney will ever stumble upon this blog, I would like to suggest one that ties in very well with the ideology of the Tea Party:

Liberty versus Power

This best describe the Obama administration. No administration, in conjunction with its party's representatives in Congress, has ever attempted to sacrifice liberty in the exercise of power to the degree that this one has. And as might be expected, this exercise of power has led to widespread corruption.

This theme resonates with the Tea Party because it resonated so well with our nation's Founders. In his classic book, The Ideological Origins of the American Revolution, historian Bernard Bailyn surveyed the polemical literature consumed by the revolutionary generation. He summarized the theme of these writings as "liberty versus power." Our founders so imbibed the theme of those writings that one sympathetic British MP described the Americans as able to "auger misgovernment at a distance and snuff the approach of tyranny in every tainted breeze."

Does this not describe our current state of affairs?

The next several posts at Right Detour will feature some of those writings on liberty, power, and corruption as published in Cato's Letters.

Thursday, April 5, 2012

Our Constitutional Law Professor in Chief

Probably already aware of the preliminary Supreme Court vote on the constitutionality of his Patient Protection and  Affordable Care Act, President Obama began "working the refs" in a press conference earlier this week in the hopes of securing a change in the outcome.

He knows something about law. After all, he graduated with a J.D. magna cum laude from Harvard Law School and taught constitutional law at the University of Chicago for twelve years. He has chosen to set aside this cap:

for this:

He made a brief allusion to the constitutionality of the PPACA before devoting the bulk of his comments to the utilitarian case for his law: what it will do for the uninsured.

Returning to the question of the acts constitutionality, Obama expressed his confidence that the Supreme Court would not take the  "unprecedented and extraordinary a step of overturning a law that was passed by a strong majority of  a democratically elected Congress."

First, such an action is not even remotely unprecedented. The precedent was established in 1803 in the Marbury vs. Madison case and has been exercised dozens of time since. Moreover, the claim that Congress passed the law by a strong majority is only a half truth. The Senate passed it  by a strong majority of 60-39. The House, however, enacted the law with a slim seven vote majority, 219-212.

Then the President attempted to imply that conservative support for a Supreme Court ruling against PPACA amounts to hypocrisy.

"And I'd just remind conservative commentators that for years what we’ve heard is, the biggest problem on the bench was judicial activism or a lack of judicial restraint -- that an unelected group of people would somehow overturn a duly constituted and passed law. Well, this is a good example."

Actually, it is NOT a good example. The phase "judicial activism" does not have a precise meaning. It gets tossed around whenever a court delivers a decision that someone does not life. Neither conservatives nor liberals like the Supreme Court when it rules contrary to what is desired.  In general, conservatives use the phrase judicial activism in reference to court decisions that create government powers or individual rights that are not even remotely hinted at in the Constitution.

In the last hundred or so years, the Supreme Court has affirmed the tremendous expansion of government power though both acts of Congress and executive orders of Presidents. Nowadays, Congress believes it can legislate on almost anything. And as Congress expands the scope of its legislation, it expands the scope of federal court jurisdiction. The founders established the legislature as the supreme branch of the government. It constitutes the "republican principle" in government. It is NOT co-equal with other branches. That said, the United States is, however,  a constitutional republic. Congress must operate within the bounds of the fundamental laws of the Constitution.

In addition, the court has recognized individual rights that in cases that are difficult to justify on constitutional or any other grounds. Now our rights are not granted to us by the Constitution. Our founders believed in natural rights that we possess by virtue of  being human and receive as a grant from God. On the one hand, we should not confine our rights to those listed in the Constitution. On the other hand, neither the courts or society should feel compelled to recognized every "rights-claim" asserted by every citizen.

The Supreme Court imprimatur on both extra-constitutional legislation from Congress and extraordinary individual rights-claims expands the role of the national government at the expense of state and local governments and  subverts the principle of federalism inherent in our Constitution.

It is this to which conservatives object.