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  • The Politics of Economic Destruction

    Posted by David Foster on April 28th, 2010 (All posts by )

    About 3 weeks ago, I wrote about Senator Christopher Dodd’s proposals for increased regulation of venture capital and angel investing and why these are very bad and damaging ideas. WSJ (4/22) makes several points about this proposed legislation:

    Amazon, Yahoo, Google and Facebook all benefited from angel investors, who typically target companies under five years old…such firms are less than 1% of all companies yet generate about 10% of new jobs. Between 1980 and 2005, companies less than five years old accounted for all net job growth in the U.S. In 2008, angels invested some $19 billion in more than 55,000 companies.

    Mr. Dodd’s bill would change all this for the worse. Most preposterously, it would require that start-ups seeking angel investments file with the Securities and Exchange Commission and endure a 120-day review. Rare is the new company that doesn’t need immediate access to the capital it raises, and a four-month delay is the kind of rule popular in banana republics that create few new businesses.

    There’s a lot wrong with Dodd’s ideas on VC and angel investing; see my earlier post and the WSJ article for more details. There’s plenty more to be concerned about in the current approaches to financial regulation being devised on Capitol Hill.

    For example: Mars, the maker of M&M’s and Snickers, is concerned about possible restrictions on its ability to continue “dabbling in the derivatives” market to protect the price of sugar and chocolate for its candies. And eBay is concerned about possible restrictions on its PayPal subsidiary in moving money in the Internet marketplace. I’m sure there are many, many more consequences of the proposed regulations that no one has even realized yet. Anyone who thinks that the only thing this legislation would do is to reduce the incomes of certain big Wall Street players had better think again.

    (via Betsy)

    Once again, we have a huge (1400 page) and overweening attempt to radically change many things at same time, while greatly increasing the power of the political classes relative to other Americans. One of the many problems with this is that most Senators and Representatives demonstrate a vast lack of knowledge of the complex things that they are attempting to micromanage. Writing about the Goldman hearings, PowerLine observes:

    It didn’t appear that a single Senator understands what is involved in making a market in a security.

    Lack of knowledge and a pressure-cooker atmosphere to “get something done,” combined with extreme arrogance, makes a deadly combination.

     

    13 Responses to “The Politics of Economic Destruction”

    1. Alan Says:

      There is a huge sense of irony here. The VC and technology employee class here on the west coast overwhelmingly supported the Democrats in 2008 not believing those of us who said they were about wealth destruction for all but a very few favored cronies. The facts were clearly on the table but they were in love with the fact that they loved Obama…. and these are the people who claim they are the smartest. Clearly, smarts in one are of one’s life doesn’t always translate to other areas.

    2. Tom Holsinger Says:

      Don’t just do something! Stand there!

    3. david foster Says:

      An update on an earlier venture in Congressional hubris and irresponsiblity, the Consumer Product Safety Improvement Act.

    4. david foster Says:

      Several letters in yesterday’s WSJ which are relevant to these issues:

      –from a startup CEO: “Over the past four years, we have raised over $4 million in equity capital from dozens of accredited investors. Many would not have met the new income (nearly doubled) and net worth (more than doubled) standards proposed in the Dodd bill. With any of the proposed changes in place, our business would simply not now exist. Especially onerous would have been the proposed 120-day review period and pre-emption of federal jurisdiction, making such offerings subject to every state’s securities commission. With those provisions in place we certainly would have been unable to raise money, as we did, on an emergency basis during the worst of the financial crisis.”

      –from the managing partner of a “low-leveraged and long-term” private investment fund: “Increasing the accredited investor threshold will push out potential investment from my friends and family (my middle-class parents didn’t work for Goldman Sachs and I didn’t attend Exeter). Equating net worth and income with sophistication and therefore knowledge of securities and investment is horribly flawed logic.”

      –from a reader in Michigan: “Angel investment is to an emerging company what mother’s milk is to a newborn. Mess with it and you are blocking growth if not inviting death. Should Sen. Dodd’s next bill address a mother’s qualification to breast-feed her baby?”

    5. Michael Kennedy Says:

      I watched that scene with Levin and the Goldman Sachs employee. I am no friend of Goldman as they seem to have become a branch of the Democratic Party, going back to Bob Rubin’s Mexican bond bailout that had a lot to do with the moral hazard issues that got us here. Even so, it goes beyond belief, or maybe, to use Hillary Clinton’s term “Suspension of disbelief,” that Senator Levin does not understand that markets need two parties.

      I may want to sell my house because it is about to fall down. I am obligated to disclose all those items because the house is the biggest investment most of us ever make and few home buyers are sophisticated investors, as all these people buying CDOs were supposed to be. The obscenity that Levin so enjoyed using on TV might have referred to the fact that Goldman Sachs lost money on those trades. He seems not to understand that large investors may choose to “go long” on an investment or to “go short” and both are ethical.

      I remember my college roommate’s stories about his real estate developer father. As he put it, the old man had been rich three times and gone broke twice. It was my roommate’s good luck that he was in the final good phase of the sine wave of his father’s fortunes. By the time I knew him, the old man was crabby old guy who looked exactly like Herbert Hoover but had a good heart.

      One of his son’s stories, that bears on this subject, was the old man’s development of the high desert north of Los Angeles. There are two towns named Lancaster and Palmdale. The old man had developed Lancaster. He bought a couple of square miles of desert from some old desert rat. He then laid out roads and building plots and commercial zones. People came up there to buy because it was so cheap. I think you could buy a lot for $3,000 with no money down and no interest on the loan. Anyway, it was just about the time the great 1950s building boom in southern California got going. He made a fortune.

      My roommate said the one thing that irritated his dad the most was when one of the early buyers would come to the office and ask Mr Peters about investing the small fortune that the buyer had made speculating in land. He said his dad considered those early buyers to be suckers buying desert land. That they got rich doing so infuriated him.

      The motives of the seller don’t matter that much. He can be just as wrong as the buyer. Carl Levin will never understand that.

    6. Andrew_M_Garland Says:

      We have entered a new era, completely predictable from past policy directions. Only the timing has been in doubt. It has come faster than people thought.

      Elected experts in Washington will pass bills that give them, finally, the power to run our society in an organized, efficient, and scientific way. The few mistakes, or maybe many mistakes, will be worked out along the way, through vast experimentation and careful observation. They will listen carefully to the pained cries of an upset populace.

      We will get there faster, wherever that is, because we will change everything at once. It is no fun to change a bit here and there. This way, the politicians will be able to view the end result in their lifetimes, and be thanked appropriately for what they have done.

      The “Do the Right Thing” Bill (excerpt)

      Future news:

      “Do The Right Thing” will give us open, consistent, dynamic government. It grants President Michele Obama (now in her 3rd successful term in office) all principles and powers to consider all matters and then “Do the right thing”. The Congress retains the important function of advising on the President’s actions should she desire this.

      The Congress is now free to do what it does best, arrange for hospital admissions and allocate liquor licenses.

    7. Michael Kennedy Says:

      I remember a line form one of my favorite movies, “Dead Again.” “This is far from over.”

      Megan McArdle sense this as she worries about sovereign debt.

      The most terrifying words I’ve seen written so far about the growing crisis in Greece were penned by Yves Smith yesterday: “So the whole idea that the financial crisis was over is being called into doubt. Recall that the Great Depression nadir was the sovereign debt default phase. And the EU’s erratic responses (obvious hesitancy followed by finesses rather than decisive responses) is going to prove even more detrimental as the Club Med crisis grinds on.”

      The Great Depression was composed of two separate panics. As you can see from contemporary accounts–and I highly recommend that anyone who is interested in the Great Depression read the archives of that blog along with Benjamin Roth’s diary of the Great Depression–in 1930 people thought they’d seen the worst of things.

      I think there is another phase that Obama is contributing to, just as FDR contributed. The difference is that Obama has no excuse. He should know what happened before except he knows nothing about economics.

      Personally, I am heading for the hills. I wasn’t this worried in the 1970s.

    8. Jonathan Says:

      Personally, I am heading for the hills. I wasn’t this worried in the 1970s.

      A lot of people are thinking this way and maybe they are right to.

      Nowadays “the hills” are not just local. It will be interesting to see how many businesses and productive people flee this country for Asia and other relative economic refuges in the coming years.

    9. Jim Bennett Says:

      Jonathan,

      Asia is no refuge unless you are Asian and/or married into a properly-connected family. There are no refuges. Maybe Canada or Australia, two of the very few places that ordinary Americans wold consider moving to, will drop some of the nanny-state stuff, in which case they could probably have as many Americans as they wanted. economically, they are probably already better places to be.

      One thing that bothers me about the angel-killer bill is that few Republican senators mention those provisions, or even seem to be aware of them. Scott Brown’s statement on his cloture vote seemed to allude to them, but that’s not clear. They appear to believe that they can negotiate some changes in the bailout provisions and then pass the rest. Nobody is standing up for job creation on this.

    10. Jonathan Says:

      Jim,

      Perhaps there won’t be much migration, but I think that on the margin productive people will eventually start to look for alternatives if the US business climate becomes bad enough. Who knows the extent to which this will occur. As you say, Canada and Australia are already looking attractive, which is remarkable when you consider that only a few years ago American free-market types correctly derided Canada for its lack of economic dynamism.

      Many (most?) of the Republicans are worthless. They still think that they can succeed by cutting deals and being less bad than the Democrats.

    11. Michael Kennedy Says:

      Remember that few Senators are self made men like Corker. Most were staff members and have been politicians all their lives. Some, like Biden and Kennedy, could not even get through school without cheating.

    12. david foster Says:

      The climate for starting a business in many countries…India, for example…has become much more attractive in recent years. If the Obamian economic policies continue, I expect that quite a few high-talent immigrants (and children of immigrants who have family and other contacts in their countries of origin) will pack up and start their businesses somewhere other than here.

    13. Jim Bennett Says:

      Yes, there will be backflow of ethnic immigrants and possibly their children. But any common-law, English-speaking country interested in increasing its rate of GDP growth quickly need only offer some attractive immigration terms, and I suspect they could count American immigrants in the five, six, or even seven-digit numbers per annum.