JAN 2016
Practical, provocative thoughts on business, economics, education and government policy.
And whatever else is on our mind.
THE CURRENCY OF
SAVVY
The Big Lie
It has long been said that the bigger the lie the easier it is for people to believe it.
Perhaps this truism is a truism because it’s true. Evidence in our current world would
certainly suggest that there is a lot of truth that the bigger the lie the easier it is
for people to be deceived. Take for instance the big lie being told repeatedly in the
mainstream media and neighborhood gatherings and restaurants all over the United
States of America today.
What is this big lie and what is it that Americans are being
deceived by? The big lie is that the recent near collapse of
the American economy and our current economic malaise
are problems that stem from free-market capitalism. The
economic system currently operating in the United States is
Hell and gone from free-market capitalism. Without getting
into all the details, all the economic nuances and all the
financial theory, let’s just take a couple of interesting anecdotes
that illustrate this point with a clarity that is undeniable.
Interestingly, the biggest financial issues that our country
faces, the biggest problems resulting from the meltdown
or the stock market crash, are in areas where government
involvement, interference and regulation are the heaviest. Is
it surprising to you that the largest single failure in the last
few years was AIG, a huge insurance conglomerate?
The insurance industry is one of the most heavily regulated,
highly overseen industries in the world. In the United States
alone, every insurance company is subject to the regulation
of the state insurance commissioner as well as regulation by
the Feds. These regulations run thousands and thousands of
pages of Byzantine rules and mazes of policies and procedures,
requirements and constraints, capital rules and sales guidelines
and investment restrictions. How ironic it is that in this highly
regulated industry, where all minutiae is subject to the secondguessing of a government worker — a Monday morning
quarterback on the dole — would become the largest bailout
debacle in the history of the United States of America?
What is the big lie
and what is it that
Americans are
being deceived by?
1100 Boulders Parkway, Suite 605, Richmond VA 23225 allegiancy.us
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NEWS SAVVY
not able to magically overcome the laws of physics, gravity
and friction and he has not seen fit to create the technology
and innovation that would allow for his regulatory decree
to be met without crippling effects on the manufacturers
themselves.
The human cost of regulation
To take it one step further, let’s look also at the impact
these regulations have on the actual consumers, the people
our government is supposedly protecting. Over the course
of the last few decades, automobile industry standards for
mileage have resulted in numerous technological innovations.
But the single largest factor in the increasing gasoline mileage
averages is the weight of the vehicle.
I would like to mention the failure of General Motors and
Chrysler. Hold on, you say, these guys are not a highly
regulated industry. Really? Let’s take a look at the various
ways the federal government and the state governments
interfere with the smooth operation of the automobile
industry.
Regulations or restrictions?
First, think for a moment about “CAFE” standards —
which stands for Corporate Average Fuel Economy —
or all those mileage and emission requirements foisted
upon car manufacturers by various regulatory agencies
from the state of California to the federal EPA. Now at first
blush these regulations may seem in fact to be very beneficial.
What is often misunderstood however, or neglected, is
to account for the enormous investment required for the
companies to reengineer their automobile design, engine
design and their manufacturing processes in order to meet
these requirements by the EPA.
Recently Pres. Obama declared that new mileage standards,
the so-called CAFE standard, would be raised significantly
with a fairly short two-year timeline for compliance.
Unfortunately Pres. Obama with that stroke of the pen was
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As manufacturers have been forced to skinny down the
weight of the vehicles, we are replacing steel with plastic
and — shocking but true — the number of highway fatalities
continues to rise. An even cursory examination of the data
would lead you to an inescapable conclusion that pound for
pound nothing protects a passenger or driver like a heavy
steel cage.
Unfortunately, that same heavy steel cage causes the mileage
efficiency of the vehicle to drop, leaving the manufacturer
in grave jeopardy of regulatory interference. So essentially,
what I’m saying is that the American driver in the American
passenger car is being sacrificed on the regulatory altar of
mileage standards.
This sacrifice of the consumer is antithetical to free
market capitalism. Without direct, persistent and
aggressive government interference and intervention in
the marketplace, this result would never have happened.
Now back to my main point, which is the big lie. As you can
see, we have discussed very briefly the regulatory interference
in the insurance industry and the regulatory interference in
the automobile industry. No doubt you will recall that General
Motors and Chrysler were among a group of auto industry
manufacturers and suppliers that received almost $80 billion
through the federal Auto Industry Financing Program. The
“rescue program” cost taxpayers $9.3 billion, according to the
U.S. Treasury. That’s $38 from all 245 million adults in the U.S.
Except those 245 million adults weren’t asked if they wanted
to “donate.”
1100 Boulders Parkway, Suite 605, Richmond VA 23225 allegiancy.us
NEWS SAVVY
When regulation doesn’t work
Next, let’s talk briefly about banks. Everybody loves big
banks, right? Well, we seem to own most of the big banks
in the country — that is the U.S. taxpayer does. In the
midst of the financial crisis of 2007-10, we saw a government
intervention in the marketplace of the financial institutions
that has never been seen before in the history of this country.
Now a reasonable person would probably ask themselves,
“Why is this necessary?” Why is it that the one industry that
is more directly controlled and more directly under the sway
of federal and state regulators — from the Federal Reserve
Bank, to the Federal Deposit Insurance Corporation, or the
old Office of Thrift Supervision that was the successor to
the Federal Home Loan Bank Board but was rolled into
the Office of the Comptroller of the Currency, or the U.S.
Treasury Department, or the Federal Reserve system —
why is it that this industry is the one that always gets in
trouble?
With federal regulatory standards for everything from
how a loan is made to the disclosures required on the
forms signed by investors, from federal involvement in
the creation of currency to the establishment of reserve
requirements at banks, to the delineation of acceptable
investments and leverage ratios and interest rates, one
would think — if you believe the big lie — that “regulation
creates safety, stability and security.” That is that the banking
industry would be a panacea of placidity.
That’s not the case, is it? Our friendly financial institutions
are a bloody mess. At every turn, the federal regulatory
overlay introduces perverse incentives that are completely
antithetical to free market capitalism. From Fannie Mae
and Freddie Mac loan requirements, to the securitization
of various losing loans, the ‘too big to fail’ banking system
is nothing but an enormous fraud perpetrated on the
American people by the worst elements of Wall Street and
orchestrated by federal regulators.
So far we’ve touched briefly on the insurance industry
with the AIG debacle, automobile manufacturing with
General Motors and Chrysler, and the financial services
industry with Citibank and Wells Fargo, not to mention
Merrill Lynch and Lehman Brothers and Bear Stearns and
so many more. But what have we not talked about?
These are but examples, albeit high profile ones, of the
actual result of regulatory interference in free market
economies. Despite the so-called good intentions of
our friends in Washington D.C., despite the best efforts
of Barney Frank, or Christopher Dodd or John Paulson,
or John Snow, or Henry Paulson, the regulatory regime
does precisely the opposite of what it advertised to do.
Regulatory interference by government fiat creates
uncertainty, instability and risk. The big lie is revealed.
Now a reasonable
person would probably
ask themselves,
“Why is this
necessary?”
Why is it that the one
industry that is more
directly controlled and
more directly under the
sway of federal and state
regulators ... always gets
in trouble?
1100 Boulders Parkway, Suite 605, Richmond VA 23225 allegiancy.us
3
NEWS SAVVY
In reality, the truth is that regulation makes us lazy and
vulnerable. Any time you cede power to a faceless third
party bureaucrat, there is a reasonable chance that you
will be worse off in short order. Who cares about you, your
family, your prosperity more? That guy behind the counter
at the DMV? Or you? And don’t kid yourself, the folks at the
FCC, DOJ, IRS, SEC, EPA, or any other alphabet soup agency,
are not much different from the people at DMV. They’re
unaccountable bureaucrats with power over you. Sounds
appealing, does it not?
When free market shines
In an effort to illustrate the magnitude of the big lie, let’s
review briefly an industry that is enormous and critical for
the economic functioning of our nation — not to mention
the world — that has largely escaped intensive regulatory
interference.
It is my favorite example of an industry that has become
essential to the smooth operation of the entire world and
yet has escaped intensive regulation would be the computer
industry. Take a look at the evolution of Microsoft and Apple
and the applications of all of these technologies into various
aspects of our lives and note the distinct absence of regulatory
requirements for the amount of memory in your computer, the
speed of your processor, on the size of your keyboard, or the
size of your display.
Regulatory requirements for the functioning of software, or
pricing, or many other aspects of technology have largely
been absent. Microsoft and Apple, and there are many others,
have been allowed to operate in a relatively free market way.
Is it any coincidence that the computer industry has
grown by leaps and bounds, impacted our daily lives in
an enormous and positive way and created millions of
millionaires? Coincidence I think not. Oh yeah, and don’t
forget that the cost of computing power has been in steep
decline for decades.
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MEET STEVE
Stevens Sadler, CFA
Chief Executive Officer
Steve Sadler is a serial entrepreneur with
deep experience in finance and financial
services. He has raised Venture Capital,
completed over $300 million in Reg D
private placements and led Allegiancy to be one of the first
companies to leverage Regulation A
to raise equity.
Steve is an innovator who challenges the status quo to
deliver superior results. He questions the experts, asks “why”
and bucks the current culture and fashion in so many ways.
Whether it is staying married to his high school sweetheart, or
home-schooling five children, or perhaps his passion in
serving his clients and protecting their investments, Steve
often takes the path less traveled. Steve is an articulate and
vociferous supporter of free markets and entrepreneurs and
his view of investors’ capital as being “the concentrated blood,
sweat and tears of a person” informs every aspect of his
business life.
1100 Boulders Parkway, Suite 605, Richmond VA 23225 allegiancy.us
AS FEATURED IN
Allegiancy NEWS
*Click headline to read complete article.
> Allegiancy to hold webcast for its $30 million IPO Offering
on Jan. 13
> Allegiancy Amends Reg A+ Filing, Taps WR Hambrecht + Co
as its lead underwriter
> View the Allegiancy Reg A+ IPO
> Allegiancy Named 2015 Super Star Entrepreneur
> View the Allegiancy case study on innovation in its Accounting
Department
> Allegiancy expansion continues with hiring of asset manger
> Today’s Community Banker: Crowdfunding
> Allegiancy awarded prestigious Accredited Management
Organization designation by IREM
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Boulders
Parkway, Suite 605, Richmond VA 23225 allegiancy.us