Criminalizing capitalism: blaming corrupt corporate officers for the recent stock market slide, both the White House and Congress are imposing socialist "reforms" that will exacerbate the downturn. (Cover Story: Economy).

"We need to strip corrupt corporate kingpins of their ill-gotten gains," ranted Congressman Tom DeLay (R-Texas) during a July 26th press conference. "We're taking the mansion. We're draining the accounts. And we're coming after the yacht."

Providing a backdrop to DeLay's incendiary remarks was an oversized photograph depicting a $15 million Florida mansion being built for former WorldCom chief financial officer Scott Sullivan, accused of bilking investors out of billions of dollars through dishonest accounting and shady compensation arrangements. Sullivan was just one of many alleged corporate villains -- including executives and financial officers from Enron, Global Crossing, Tyco, Adelphia, and a host of other suspect firms -- whose reported misdeeds have undermined investor confidence and sent the stock market into a tailspin. At least, that's the party line emerging from Washington as both the White House and Congress inaugurate a war on corporate corruption, featuring rhetorical attacks on capitalism worthy of Great Depression-era Marxists.

While a politician playing the "class warfare" card is nothing novel, Rep. DeLay, regarded by many as the definitive small government zealot, makes an unlikely class warrior. What explains DeLay's sudden mutation into an anti-corporate Bolshevik?

Two words: Midterm elections. Republicans and Democrats are engaged in a bidding war to buy the support of voters anxious over the economy's perilous state. In what must rank among the most crassly opportunistic statements ever made by an American politician, House Minority Leader Dick Gephardt (D-Mo.) predicted that if the stock market continues its downward spiral, the Democrats would gain 40 congressional seats in November, thereby reclaiming the House. Indeed, some leftist commentators seized on the market's collapse as evidence that capitalism was experiencing a "systemic crisis" akin to the Great Depression of 1929.

"In a few short weeks, America's political economy has been stunningly transformed," gloated Robert Kuttner, the socialist editor of The American Prospect, in that journal's August 12th issue. "Yesterday's conservative cliches are today's political embarrassments." As they watch their investments dissolve, "Americans are getting a vivid if painful education about the limits of the marketplace and the salutary role of government," Kuttner insisted. "It will be a very long time before anyone can say with a straight face that markets always work better than governments."

Rattled by the market's slide and understandably worried about the health of the larger economy, Americans have been primed for the message preached by the likes of Kuttner. But the truth is that the market bust reflects destructive intervention by the same government that is now using the bust as an excuse to accumulate more power, supposedly to protect investors and workers from corporate corruption and the hazards of the market.

From Boom to Bust

July's terrifying market plunge was part of a prolonged "Bear Market" that has decimated the portfolios of millions of small investors. Many neophyte investors were drawn to the market during the boom beginning in 1997. By the time the market reached its peak, more than 60 percent of Americans were invested in the market, either directly, or indirectly through various mutual funds and pension plans. The exuberance continued after the Dow Jones Industrial Average shattered the 10,000 ceiling in 1999, with many analysts predicting that the markets had achieved weightlessness and would rise in perpetuity. But the laws of the market, like the laws of physics, will not be mocked.

Sober market watchers warned that the much-vaunted, tech-driven "new economy" was actually a classic market bubble created by grotesquely overpriced stocks, and that a painful crash would result from the inevitable bust. Those warnings have been sadly vindicated. The July 17th Christian Science Monitor reported: "Share prices have been tumbling. A broad-based index is down 34 percent from March 2000. The tech-heavy Nasdaq index is down 72 percent -- a collapse of nearly Depression-era magnitude. Some $6.8 trillion of stock wealth has vanished."

An analysis assembled by the research department at Robert Welch University provides a chilling economic damage assessment. During the first half of 2002, 113 companies with $149 billion in assets filed for Chapter 11; during 2001, 225 publicly traded companies placed $260 billion in assets under bankruptcy protection. As profits decline and insolvency looms for many businesses, corporate bonds are suffering their worst crash in 20 years. The damage was particularly severe in the hi-tech sector: Nasdaq companies have lost more money over the past 12 months than they made in the preceding six years.

According to market analyst Larry Kudlow, "[R]isk aversion is clearly sweeping through the markets, and bank requests for fresh money from the Federal Reserve are rising." In fact, reported Kudlow, on July 24th the economy "dodged a bullet" when "a threatened run on the banks -- on top of the plummeting stock market -- was halted." The prospect of a simultaneous market crash and bank run conjures up the specter that some market watchers have started to discuss, albeit in furtive whispers: another great depression.

Creating the Problem

Most Americans have watched the unfolding carnage on Wall Street with anxiety and mystification, believing that the notorious "business cycle" is a force of nature that government must shield them against. But far from being an autonomous force or a product of the excesses of capitalism, the "business cycle" reflects government intervention in the economy, primarily via the quasi-private banking cartel called the Federal Reserve. When the government-abetted boom goes bust, the resulting hardship triggers demands for further intervention in the name of "reform' with the cycle continuing until the state-dominated economy collapses entirely.

In a genuinely free economy, some businessmen and investors will win, and others will lose, but most will either break even or turn a profit. Any businessman or investor takes risks (hence the term "entrepreneur," or "one who takes risks"), inspired by the incentive of profits. The market rewards those who can anticipate future demands and supply the needed goods or services in cost-effective fashion. It also rewards those who invest wisely in entrepreneurial undertakings.

In a non-politicized marketplace, errors by individual businessmen cause localized hardship for them, their investors, and dependents, but they do not lead to severe, widespread economic trauma. "Boom" periods, explains the late Murray Rothbard in his study America's Great Depression, are products of "wasteful mis-investment" by businessmen misjudging the market. A general depression in prices "is actually the process by which the economy adjusts to the wastes and errors of the boom, and reestablishes efficient service of consumer desires," Rothbard continued. "The adjustment process consists in rapid liquidation of the wasteful investments." A depression, "far from being an evil scourge, is the necessary ... return of the economy to normal after the distortions imposed by the boom. The boom, then, requires a 'bust.' "

The corporate trends described above, and the depressed value of the stock market, illustrate that the process of sifting described by R Rothbard is well underway.

It must also be understood that booms and busts aren't natural developments. While business fluctuations are normal in a free market economy, a general downturn reflects a "cluster of errors" in which all, or most, businesses make bad investment decisions and suffer corresponding losses. The single most potent factor inducing such bad decisions, noted Rothbard, is "continually expanded bank credit'' to businesses, which insulates the borrowers from the discipline of the market -- at least, for a while.

Bank credit expansion, wrote Rothbard, "sets into motion the business cycle in all its phases -- the inflationary boom, marked by the expansion of the money supply and malinvestment; the crisis, which arrives when credit expansion ceases and malinvestments become evident; and the depression recovery, the necessary adjustment process by which the economy returns to the most efficient ways of satisfying consumer desires." In depressions occurring prior to the Great Depression of 1929, federal government inaction abetted recovery by allowing the marketplace to work. Capital misallocations were corrected, bad investments perished, debtors reached settlements with creditors, and simple living replaced extravagance.

During the years 19191921, a relatively mild depression occurred as the economy readjusted following World War I. Fueled by the newly created Federal Reserve's expansion of money and credit, the years 1922-1929 saw a tech-driven boom remarkably similar to the hitech boom of the 1990s. Uncannily prefiguring 1990s market gurus who believed that the tech sector had rewritten the laws of economics, Yale University professor Irving Fisher confidently declared on October 17, 1929: "Stocks have reached what looks like a permanently high plateau." Just 12 days later, the market fell hard, wiping out millions of investors and devouring a then unheard-of $40 billion in wealth.

As G. Edward Griffin notes in The Creature From Jekyll Island, the definitive study of the Federal Reserve, it was the Fed that fueled the 1922-1929 "boom" by pumping up the money supply; and it was the Fed that pricked the bubble on August 9, 1929 by raising interest rates and initiating a dramatic contraction of the money supply.

"The securities market reached its high point on September 19 [1929]," notes Griffin. "Then, it began to slide. The public was not yet aware that the end had arrived. The roller coaster had dipped before. Surely it would shoot upward again. For five more weeks, the public bought heavily on the way down.... Then, on Thursday, October 24, like a giant school of fish suddenly turning direction in response to an unseen signal, thousands of investors stampeded to sell. The ticker tape was hopelessly overloaded. Prices tumbled.... Everyone said the bottom had dropped out of the market. They were wrong. Five days later, it did."

Retarding Recovery

Although many regard the market crash of October 1929 as the start of the Great Depression, this is untrue. "The crash, as devastating as it was to the speculators, had little effect on the average American," notes Griffin. "The drop of prices in the stock market was really a long-overdue and healthy adjustment to the economy. The stage was now set for recovery and sound economic growth, as always had happened in the past. It did not happen this time. The monetary and political scientists who had created the problem now were in full charge of the rescue. They saw the crash as a golden opportunity to justify even more controls than before."

In his study of the Great Depression, Murray Rothbard identified five steps that the federal government can take to delay or prevent economic recovery:

* Discourage liquidation of unviable businesses;

* Inflate the money supply;

* Enforce artificially high wage rates;

* Enforce artificially high prices;

* Stimulate consumption and discourage saving.

Following the 1929 Stock Market Crash, the administration of Republican President Herbert Hoover faithfully followed the five steps outlined by Rothbard in the name of economic "recovery." Disdaining what he called the "leave-it-alone liquidationists" who urged that the market should take its course, Hoover initiated a series of wage and price controls, bailouts of failing firms, and public works projects. In 1931, the Fed injected more money into the economy, but the economy -- weighted down with the additional burden of billions in new federal "relief' spending -- refused to revive.

As unemployment and desperation ravaged our nation, Franklin D. Roosevelt was elected in 1932 on a platform properly castigating Hoover for meddling in the economy. Once in power, FDR immediately discarded that platform, choosing instead to build on and expand the Hoover administration's socialist initiatives -- with predictable results. "By every economic measure, the economy was no better or worse in 1939 than it was in 1930 when the rescue began," observes Griffin. Economic recovery didn't occur until the orgy of war production triggered by America's entry into World War II. Yes, our nation recovered its material prosperity, at least temporarily -- but this happened at the cost of millions of lives in a conflict that ended with our nation's entanglement in the sovereignty-sapping United Nations system.

There are striking and unsettling continuities between the Hoover administration's conduct in the years 1929-1932 and the federal government's approach to the current economic downturn, most striking being the Federal Reserve's conduct. From December 2000 to December 2001, the Fed lowered interest rates 11 times to buoy up the market, yet market indices continued inexorably to sink. In July of this year, with the stock market rapidly deflating, Larry Kudlow reported that "the central bank is creating new money and supplying plenty of liquidity to the economy" -- in other words, offering as an antidote a larger dose of the same poison that has sickened the economy. The Fed's loose money policies have encouraged consumption and deterred savings -- which, as Rothbard noted, is the opposite of what should be done to bring about recovery.

The Republican Party's leadership seems determined to follow the Hoover playbook perfectly. Rather than cutting government spending and reducing taxes, the GOP -- supposedly fearful of being tarred as sympathetic to corrupt corporate interests -- is scapegoating businessmen. "Acting on the premise that 'business is theft,' the U.S. government has tarred all corporate executives with the misbehavior of a few," wrote former Treasury Department official Paul Craig Roberts in the July 16th Washington Times. Acting with obscene haste and stunning unanimity, Congress enacted the "Sarbanes-Oxley Act of 2002," intended to fight corporate fraud. The measure whistled through the House on July 25th by a 423-3 margin, and cruised through the Senate 99-0 on the following day.

"Today's message from Congress to CEOs and corporate boardrooms is clear," bleated House Speaker Dennis Hastert (R-Ill.) following the measure's passage. "If you steal, cheat or commit some other white-collar crime, you'll face the same consequences as law-breaking street thugs by spending time behind bars." The president struck a similar pose of steely eyed resolution as he signed the bill into law on July 30th. Invoking the damage done to our economy by the Black Tuesday terrorist attack, President Bush described the Sarbanes-Oxley bill as an act targeting "those who have shaken confidence in our markets, using the full authority of government to expose corruption, punish wrongdoers and defend the rights and interests of American workers and investors."

"My administration pressed for greater corporate integrity," drawled Mr. Bush. "A united Congress has written it into law.... Every corporate official who has chosen to commit a crime can expect to face the consequences. No more easy money for corporate criminals, just hard time."

Lurking behind the president's sound-bites is a stunning expansion of central government control over what remains of our private enterprise system. The law imposes prison terms of up to 20 years for chief executive officers and chief financial officers who file fraudulent financial disclosure statements; it also imposes detailed regulations on the accounting industry. More importantly, it expands the power of the Securities and Exchange Commission (SEC) to conduct investigations and audits of corporate finances, and gives that agency (in the president's words) "the administrative authority to bar dishonest directors and officers from ever again serving in positions of corporate responsibility?"

Mr. Bush did not exaggerate when he called the new law "the most far-reaching reforms of American business practices since the time of Franklin Delano Roosevelt."

The Sarbanes-Oxley law also empowers the government "to seize assets of corrupt corporate executives, prevent those assets from paying the fees of lawyers in such cases, and reduce taxes on retirement investments," reported the July 27th Washington Thnes. Rep. Richard Baker (R-La.) predicts that the "investor relief' measures may "give the SEC seizure powers much like the Drug Enforcement Administration [DEA]." "If you happen to be selling drugs and you're in somebody else's car, that car gets impounded, put in a lot and protected until the issues have been resolved," observed Baker. "So, we [would] seize assets [from suspect corporate leaders] so that they don't run off to the Caribbean or off to trial lawyers, that they [the assets] stay in a bank account so that they can be allocated to their rightful owner."

The key question in all of this is: How does one define "business corruption"? Fraud and embezzlement are easily understood, definable, and punishable under existing state laws. But under the opaque provisions of the "corporate reform" law signed by President Bush, SEC bureaucrats and trial lawyers hungry for prosecutions have an incentive to criminalize honest accounting errors and erroneous growth projections, which (under the law's terms) could be depicted as deliberately misleading investors. Where such errors occur without criminal intent, the market inflicts corrective punishment through failure; where government intervenes to criminalize such errors, the result will be less risktaking, less innovation, less investment, less economic growth, and a less likely prospect of genuine economic recovery.

"While the federal government is frustrating when it treats economic problems with nonchalance, it is terrifying when it gets involved," observed commentator Robert D. Novak. The message sent by the escalating assault on business, notes Lew Rockwell, president of the Ludwig von Mises Institute at Auburn University, is that "all the crooks are in business, and only great government can save us." Save us, that is, from a crisis brought on by the government itself. U