Sunday, 16 February 2014

Regulation vs Freedom

. Which competition do you fear the most? Oracle? Sun Micro-systems?
Answer. The two guys inventing away in a garage somewhere.
A quote from Bill Gates during Microsofts height of dominance during the late 1990's

Human history has been a constant struggle for individual liberty. A belief to allow individuals to make choices for themselves and to allow everyone the right to pursue their own happiness. We should always bear this in mind. In the past the minority used to fight for the abolishment of slavery. They won. They fought for the vote for the common man. Then women. The key word is minority. Liberty is always initially pursued by the minority. The majority get used to the status quo and what is preached by the intellectuals paid for by the centralised powers. The majority of people are passive thinkers. They listen and obey. Then there are people who are able to question conventional intellectual thinkers and critique the theories that are espoused. 

Regulation. We need it. Or so we are told. Do we need central authorities telling individuals what they can and can't do? If people wish to enter into a mutual two way interaction then who has the moral right to stop such a human action? Regulation manifests itself as a third party, dictating to people what actions they can and can not perform. The false promise of regulation is protection. Protection of "consumer rights". Its classic twisted Government logic that in fact tramples on consumers rights and slows the progress of humanity. Big companies love Regulation. Its sold as protection to the little guys from the big guys. In reality it performs the complete opposite function. Bureaucracy in the form of regulation is big corporations way to stop the small competitors from even getting off the ground. It ensures they won't eat their lunch. Some of the most sluggish sectors in Western economies are also some of the most regulated ones.

Finance has become a big web of regulation. I find it embarrassing when people call it a bastion of freedom. During the so called "de-regulation" of the 1980's for every regulation Regan repealed in America, he created several new regulations. Small banks are no longer on the landscape, the megabanks are getting ever more powerful and larger. They can always pay for the armies of compliance officers and mountains of paper work. Small banks have no chance. 

Lets take the Financial Crisis of 2008 (soon to be eclipsed by the next financial crisis due to similar policies that are still in place). Interests rates which many agreed were too low were not just regulated but are set directly by the Government. Paul Krugman, one of the Governments paid intellectuals said at the turn of the century, that the Federal Reserve needs to lower interest rates in order to create a housing bubble to replace the Nasdaq bubble. Prior to this we had the near failure of large fund called LTCM. In a free market it would have failed, ensuring banks would always maintain prudent polices; if they didn't they would go to the wall. Instead, in what became known as the "Greenspan Put", they were bailed out by the Federal Reserve. This also had the effect of ensuring banks would be more reckless as the bigger they were the more likely they would fall into the Federal Reserves "Too big to fail" category.

A lot of media coverage was given to sub-prime, a so called failure of the free market. Yet it was the Government who encouraged reckless lending. From Clinton, to Bush, Acts were passed that actively lowered lending standards. This isn't fiction, feel free to look this up. The Government witnessed banks more prudent lending practices, the type that assesses a persons income, dependability etc as too restrictive in order to "give" everyone a home. Politicians demanded everyone should have a right to a home rather than having to earn one. Acts were passed that instructed banks to lend to people with poor credit histories and no incomes. Sub-prime was a Government initiative.

Large parts of the mortgage market was underwritten by Freddie Mac and Fannie Mae who were in effect backed by the US treasury. The so called "saviours", the guys who are regulating the market, were instead running with more leverage than hedge funds. They lent with complete disregard to credit-worthiness, heck, it was a good old Government Ponzi scheme. Many sub-prime mortgages were pushed through these Government mortgage institutions. Credit Default Swaps, Mortgage Backed Securities, the so called financial instruments of mass destruction, were, you guessed it; Regulated. Of course who was rating all this packaged sub-prime mortgages? The credit agencies who were funded and run by the Government. AAA grade for mortgages that were worth less then the Zimbabwe Dollar. America has several financial regulation (not just one!) institutions all with armies of workers and armed to the tooth with regulation laws. Yet the financial crisis still happened. It happened not from the absence of regulations but from the presence of such distortions. The crisis had been brewing for years. Just like the next one to come (the Government bond bubble).

We could look at a number of other sectors and we would see a long list similar to finance. Medicine continues to have increasing costs and a lack of consumer innovations due to regulation. Drug companies keep the little guy out by ensuring the FDA impose huge barriers for entry; in the supposed interests of the consumer. 

All regulation does is impede the producers, the wealth creators. It stops the trial and error process that creates prosperity. There are regulations to instruct Restaurants what colour tiles they are allowed, as certain colours could "hide" dirt (despite the fact the most deadly "dirt" to humans is invisible bacteria). Many have had to amend under such restrictive planning laws, passing costs onto society. Not contempt with current infringements on liberty the "do-gooders" now want to ban knives that are over 4 inches, ban fast food, ban certain fats to name a few ridiculous ideas. If people wish to eat in a dirty restaurant then they should be free to; likewise to eat so called "junk food". That's personal freedom and choice. To take those away is tyranny; pure and simple. If I wish to harm my body then no one has the right to tell me otherwise (we all do. Alcohol, wheat based food, cigarettes, sugar, man made fats - that's our choice). That's where the majority of passive thinkers give away their liberties. They are mislead into being told it is the duty of others to make decisions on their own behalf. It is supposedly the Government that has the moral right to protect us, despite the fact that freedom has done a far better job of protecting humanity throughout history that centralised authorities. 

What about the oil snake men wouldn't they just run rampant in an "unregulated" market? People like Bernie Madoff? First off all you will always get the con men in any economic system, it is unavoidable  Crooks are just a part of life. Its not freedom that creates such people, but they are who they are. The free market limits their powers. Secondly, Madoff was investigated a number of times by the SEC, the very regulators who "protect" us.
I was astonished. They never even looked at my stock records. If investigators had checked with The Depository Trust Company, a central securities depository, it would've been easy for them to see. If you're looking at a Ponzi scheme, it's the first thing you do.
Madoff was also in bed with the Regulators. He got away with it for so long because of their very existence. The freedom of choice that exists in all us is the ultimate form of regulation  Any rip-off businesses soon get punished with bad consumer reports and with the transparency of the Internet dispersing information in seconds to billions, no business can survive long with such a tool on the side of consumers.

From all the regulations imposed on finance a new digital finance sector is emerging to challenge conventional banking, known as Bitcoin. People involved in such communities are not seeking permissions for their own liberty; they are taking liberty into their own hands. Bitcoin has the potential to revolutionise finance the way the Internet revolutionised information. Finance is just the tip of the iceberg. By solving the Byzantine Generals Problem, Bitcoin will revolutionise anything that involves a trusted third party. "Smart Property" could be held on the blockchain such as the deeds to your house, saving society billions in legal fees. Shares in companies, bonds, tradeable assets such as Gold could be transacted through the blockchain. No need for expensive fraud services that costs the economy trillions, automated mathematics will handle that moving forward. Peer 2 peer lending reducing lending fees and removing the middle man that is banks with all their expensive offices, paper work and high paid staff. Another such example of enriching us all.

Yet with innovation comes the regulators. Usually for technology the Government turns their back but not when the technology imposes a direct threat on their monopoly of money. Their guise will be to protect the people but the real motive is to stop the competitor. Conventional banks will demand regulations as they, like Bill Gates, fear the two guys working in the garage. Its been too cosy for too long. Regulators aren't sure what to do, but they want to regulate something about Bitcoin even if its just to make a name for themselves. The most common slur against Bitcoin is that its used for "illicit" activities. Under such logic the US dollar should be banned as this funds 99% of global criminal activities. The government can not pass moral judgement on free will. Bitcoin is amoral and allows individuals to transfer value as they please. Peoples actions are their own choice. Bitcoin doesn't need regulation. It got here with no regulation. In the space of 5 years a Global Currency run by the free market has been created. Anyone with no documents, can set up an account and transfer money to anyone, anywhere around the globe in minutes. A single unit of the currency has gone from no value to hundreds of dollars in value. The services are increasing in sophistication by the day now that intellectual and monetary capital has started pouring in. When I started with Bitcoin there were very little startups. Now they pop up daily and regularly raise millions of dollars in cash. The accounts ledger is public for all to see, a truly revolutionary concept that has far more security than conventional centrally held ledgers. All of this has been done so quickly because there was no regulation. There were no barriers for entry. People under their own free will used Bitcoin at their own risk. If they didn't like the risk or the eco-system then they were free not to participate. Free Choice. There is no place here for regulation.

One common concern for people outside of the Bitcoin community is stories of Bitcoins being stolen. First off; if you don't like this, then don't use Bitcoin. People have no right telling other people who wish to take such risk that they can't use such a system. Second; in many cases there are some fly-by-night banking setups. Reputable businesses such as coinbase or build a reputation of trust, removing the unreputable con men in the long run. Third; many cases have been poor security implementations. Bitcoin is new, its on the cutting edge; its called growing pains. Market forces without regulation solve such problems. They implement two factor authentication, open source their implementations. They come up with hardware wallets such as the Trezor or paper wallets; pulling the security out of cyber space and into the physical dimension. What would the regulators do to solve such issues? They would shut down such innovations. They don't understand any domain, the wealth producers do and go about solving such problems and create the wealth that the regulators ride along on. 

The Quote at the top from Bill Gates is what happens in the Technology sector. Regulation is minimal. The producers are free to challenge the status quo. There is no rule book to follow; anything goes. Regulators aren't producers. They are not even on the same level as consumers who earn their income. They are parasites, paid for by society. Not contempt with that they go around and stop the progress of human ingenuity, the trial and error process that enriches us all. Regulation will one day be banished, just as slavery was. Liberty; choice; freedom. They are the ultimate forms of regulation.

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