Pangaean Government, Part 2

Yesterday’s short piece centered in on a quote from a meeting with the leaders of the world’s 20 largest economies. The quote, relayed to us by the EU Commission, de facto the executive office of the EU. Here is what the Commission said:

The G20 summit in Washington (2008) aimed to ensure that no institution, product or market was left unregulated at EU and international levels. The EU Regulation on Credit Rating Agencies (Regulation 1060/2009), in force since December 2010, was part of Europe’s response to these commitments. The Regulation was amended in May 2011 to adapt it to the creation of the European Securities and Markets Authority (ESMA) which has been attributed all supervisory powers over credit rating agencies since July 2011.

The highlighted part is the dynamite in this. According to the EU Commission, the leaders of the 20 largest economies in the world made a decision back in 2008 to not leave any institution, product or market unregulated.

Does this sound too technical? Does the language they use may you yawn? No? Good, because this is one of the most important revelations of government power intentions over our economy that we have seen in a long time.

It is bad enough when one government says it wants to regulate every corner of the economy within its jurisdiction. But here we have a coalition of governments, the 20 biggest ones in terms of the size of their economy, conspiring to regulate every aspect of our economic lives.

Here is what they are after. An institution is a non-personal economic agent, plain and simple. There is a myriad of different institutions in the economy, from small mom-and-pop stores to multinational giants like Microsoft, Apple, Siemens, Wal-Mart, IKEA, Ford and Toyota. But the concept also spans across the financial industry, covering banks and credit rating agencies. By wanting to regulate these “institutions”, government wants to effectively decide how they go about their business, including what contracts they sign with, e.g., their employees.

In addition, the regulation of a business involves who owns it and where it is supposed to pay its taxes.

Next comes the product. Business exists to produce things and make good money. By vowing to regulate every product that businesses put out, the G20 governments have given themselves the right to tell businesses what their products can and cannot do. This includes seemingly harmless things like requiring a car to not pollute more than a certain amount per mile driven. But it also includes regulations of more intellectual products – such as the credit rating reports produced by credit rating agencies.

More on that in a moment.

Market regulations delve into price setting, product advertising, accountability rules for sellers, in some cases the ability of buyers to finance their purchase – in other words most of what goes on between buyers and sellers in a supposedly free market.

I am not suggesting that this is exactly what the G20 meeting in 2008 decided on. My point is simply that government regulatory incursions can penetrate our economic lives in all these aspects, thus essentially dictating what we can buy, when, how and from whom.

But what is really scary about this is that governments around the world have formed a regulatory coalition where every one of those countries will impose regulations on all these parts of our economic lives. The free market will only exist at government’s mercy. Economic freedom will be severely crippled.

Among the most troubling regulatory initiatives is the attack on credit rating agencies. As I mentioned yesterday, the EU is now launching a campaign and a legislative initiative to curtail the activities of businesses that rate, among other things, the credit status of government. By giving itself the right to regulate those businesses and their products, the G20 governments – and now the entire European Union – seize power to dictate how credit rating agencies can rate – you got it – government.

The true meaning of this regulatory assault on credit rating agencies is that governments want to be able to gag them. It is not more complicated than that. Governments in Europe have taken a bad beating by how credit rating agencies have downgraded them; the U.S. government has suffered two credit downgrades but has not yet paid a tangible price for it. But for small European welfare states the downgrades have translated into significantly higher borrowing costs. The governments of those welfare states are not too happy about that, but instead of fixing their economies – instead of getting rid of their welfare states and putting economic freedom first – they go after the little boy who pointed out that the emperor indeed is naked.

This assault on the free speech of the free market is troubling, to say the least. If all the G20 governments do what the EU is now doing and put tight regulatory leashes on credit agencies, it will have serious implications for the very basics of our financial markets. In plain English: if governments gag credit rating agencies and prevent them from speaking freely about the credit risks that come with treasury bonds, then how are you going to be able to tell whether or not your money is in jeopardy if you buy a certain country’s t-bonds?

Instead of fixing their ailing economies, the governments of the world’s most troubled welfare states are trying to force people to speak well of them.

But regulating credit agencies is not the only way they do this. There is more. A lot more; for a hint, check out this article on Basel III. Stay tuned for the next installment in this series.