The View From 1776

Privileged Private Equity?

Free markets do a far better job of policing than socialistic lawmakers.

Liberal-Progressives’ politics of envy and class warfare, recently aimed at hedge funds and private equity groups, exemplifies the fairy tale nature of socialism. 

As noted in Economic Class Warfare, hedge funds and private equity groups are not the product of privilege.  Paradoxically they result from excessive Federal spending authorized by liberal-Progressives themselves.  The financial world is flooded with excess liquidity, because the Federal Reserve, to fund Congressional spending, keeps pumping out phony money that fuels inflation.

Liberals in Congress have been pompously posturing, purportedly seeking regulations to protect the public, but in reality hoping to extort new taxes and open new avenues for class action suits by their money pals, the tort bar. 

Today’s (June 28, 2007) Wall Street Journal reports that the capitalist free markets have swiftly imposed judgment, more exactly and decisively than intellectual planners ever could manage.  Summarizing an article titled Market’s Jitters Stir Some Fears For Buyout Boom, Journal editors wrote:

Wall Street firms struggled to find buyers for several takeover-related debt offerings. Easy credit has been the driving force behind the rash of buyouts, and investors’ reluctance to buy risky debt could put the boom in jeopardy.

Capitalistic free markets are self-regulating, because lenders and borrowers are two different groups.  Borrowers have to convince lenders that their projects are creditworthy.  If results fail to meet projections, projects are curtailed or shut down.

In contrast, there is no separation in Federal spending between lenders and borrowers.  They are one and the same.  Consequently, Congress seldom is concerned whether a spending program makes economic sense.  The only criterion is how many votes it can buy.  Which means that spending as much money as possible, for as long as possible, is the driving force for Congress.  Once instituted, those spending programs become, like Dracula, the undead.

None of this is to say that capitalistic businessmen are not sometimes as stupid as politicians.  Deal-making in the financial community is faddish.  Recently hedge funds and private equity groups have been the hot spots for placing institutional funds.  Earlier fads have ranged from high-yield junk bonds to REITS.

Inflationary creation of fiat money by the Federal Reserve is the driver.  When institutional investors have large amounts of money to invest, they aggressively seek deals, and Wall Street bankers are there to create the deals.

But, in the real-world, free-market arena, no species of project funding can continue expanding indefinitely.  The financial community are always smashed to a halt when they overload the market with the latest fad deals.  Credit scares or bankruptcies swiftly sober investors and deal makers.

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