2002 Ron Paul 24:1
Mr. PAUL. Mr. Chairman, seldom in history
have supporters of increased state power
failed to take advantage of a real or perceived
crisis to increase government interference in
our economic and/or personal lives. Therefore
we should not be surprised that the events
surrounding the Enron bankruptcy are being
used to justify the expansion of Federal regulatory
power contained in H.R. 3763, the Corporate
and Auditing Accountability, Responsibility,
and Transparency Act of 2002 (CARTA).
2002 Ron Paul 24:2
So ingrained is the idea that new Federal
regulations will prevent future Enrons, that today’s
debate will largely be between CARTA’s
supporters and those who believe this bill
does not provide enough Federal regulation
and control. I would like to suggest that before
Congress imposes new regulations on the accounting
profession, perhaps we should consider
whether the problems the regulations are
designed to address were at least in part
caused by prior government interventions into
the market. Perhaps Congress could even
consider the almost heretical idea that reducing
Federal control of the markets is in the
public’s best interest. Congress should also
consider whether the new regulations will have
costs which might outweigh any (marginal)
gains. Finally, Mr. Speaker, Congress should
contemplate whether we actually have any
constitutional authorization to impose these
new regulations, instead of simply stretching
the Commerce Clause to justify the program
de jour.
2002 Ron Paul 24:3
CARTA establishes a new bureaucracy with
enhanced oversight authority of accounting
firms, as well as the authority to impose new
mandates on these firms. CARTA also imposes
new regulations regarding investing in
stocks and enhances the power of the Securities
and Exchange Commission (SEC). However,
Mr. Speaker, companies are already required
by Federal law to comply with numerous
mandates, including obtaining audited financial
statements from certified accountants.
These mandates have enriched accounting
firms and may have given them market power
beyond what they could obtain in a free market.
These laws also give corrupt firms an opportunity
to attempt to use political power to
gain special treatment for Federal lawmakers
and regulators at the expense of their competitors
and even, as alleged in the Enron
case, their employees and investors.
2002 Ron Paul 24:4
When Congress establishes a regulatory
state it creates an opportunity for corruption.
Unless CARTA eliminates original sin, it will
not eliminate fraud. In fact, by creating a new
bureaucracy and further politicizing the accounting
profession, CARTA may create new
opportunities for the unscrupulous to manipulate
the system to their advantage.
2002 Ron Paul 24:5
Even if CARTA transformed all (or at least
all accountants) into angels, it could still harm
individual investors. First, new regulations inevitably
raise the overhead costs of investing.
This will affect the entire economy as it
lessens the capital available to businesses,
thus leading to lower rates of economic growth
and job creation. Meanwhile, individual investors
will have less money for their retirement,
their children’s education, or to make a down
payment on a new home.
2002 Ron Paul 24:6
Government regulations also harm investors
by inducing a sense of complacency. Investors
are much less likely to invest prudently and
ask tough questions of the companies they
are investing in when they believe government
regulations are protecting their investments.
However, as mentioned above, government
regulations are unable to prevent all fraudulent
activity, much less prevent all instances of imprudent
actions. In fact, as also pointed out
above, complex regulations create opportunities
for illicit actions by both the regulator and
the regulated, Mr. Chairman, publicly held corporations
already comply with massive
amounts of SEC regulations, including the filing
of quarterly reports that disclose minute
details of assets and liabilities. If these disclosures
rules failed to protect Enron investors,
will more red tape really solve anything?
2002 Ron Paul 24:7
In truth, investing carries risk, and it is not
the role of the Federal Government to bail our
every investor who loses money. In a true free
market, investors are responsible for their own
decisions, good or bad. This responsibility
leads them to vigorously analyze companies
before they invest, using independent financial
analysts. In our heavily regulated environment,
however, investors and analysts equate SEC
compliance with reputability. The more we
look to the government to protect us from investment
mistakes, the less competition there
if for truly independent evaluations of investment
risk.
2002 Ron Paul 24:8
Increased Federal interference in the market
could also harm consumers by crippling innovative
market mechanisms to hold corporate
managers accountable to their shareholders.
Ironically, Mr. Chairman, current SEC regulations
make it difficult for shareholders to challenge
management decisions. Thus government
regulations encourage managers to disregard
shareholder interests!
2002 Ron Paul 24:9
Unfortunately, the Federal Government has
a history of crippling market mechanisms to
protect shareholders. As former Treasury official
Bruce Bartlett pointed out in a recent
Washington Times column, during the 1980s,
so-called corporate raiders helped keep corporate
management accountable to shareholders
through devices such as the “junk”
bond, which made corporate takeovers easier.
Thanks to the corporate raiders, managers
knew they had to be responsive to shareholders
needs or they would become a potential
target for a takeover.
2002 Ron Paul 24:10
Unfortunately, the backlash against corporate
raiders, led by demographic politicians
and power-hungry bureaucrats eager to expand
the financial police state, put an end to
hostile takeovers. Bruce Bartlett, in the Washington
Times column sited above, described
the effects of this action on shareholders,
“Without the threat of a takeover, manaagers
have been able to go back to ignoring shareholders,
treating them like a nuisance, and
giving themselves bloated salaries and perks,
with little oversight from corporate boards.
Now insulated from shareholders once again,
managers could engage in unsound practices
with little fear of punishment for failure.” Ironically,
the Federal power grab which killed the
corporate raider may have set the stage for
the Enron debacle, which is now being used
as an excuse for yet another Federal power
grab!
2002 Ron Paul 24:11
If left alone by Congress, the market is perfectly
capable of disciplining businesses who
engage in unsound practices. After all, before
the government intervened, Arthur Andersen
and Enron had already begun to pay a stiff
penalty, a penalty delivered by individual investors
acting through the market. This shows
that not only can the market deliver punishment,
but it can also deliver this punishment
swifter and more efficiently than the government.
We cannot know what efficient means
of disciplining companies would emerge from
a market process but we can know they would
be better at meeting the needs of investors
than a top-down regulatory approach.
2002 Ron Paul 24:12
Of course, while the supporters of increased
regulation claim Enron as a failure of “ravenous
capitalism,” the truth is Enron was a
phenomenon of the mixed economy, rather
than the operations of the free market. Enron
provides a perfect example of the dangers of
corporate subsidies. The company was (and
is) one of the biggest beneficiaries of Export-
Import (Ex-Im) Bank and Overseas Private Investment
Corporation (OPIC) subsidies. These
programs make risky loans to foreign governments
and businesses for projects involving
American companies. While they purport to
help developing nations, Ex-Im and OPIC are
in truth nothing more than naked subsidies for
certain politically-favored American corporations,
particularly corporations like Enron that
lobby hard and give huge amounts of cash to
both political parties. Rather than finding ways
to exploit the Enron mess to expand Federal
power, perhaps Congress should stop aiding
corporations like Enron that pick the taxpayer’s
pockets through Ex-Im and OPIC.
2002 Ron Paul 24:13
If nothing else, Mr. Chairman, Enron’s success
at obtaining State favors is another reason
to think twice about expanding political
control over the economy. After all, allegations
have been raised that Enron used the same
clout by which it received corporate welfare to
obtain other “favors” from regulators and politicians,
such as exemptions from regulations
that applied to their competitors. This is not an
uncommon phenomenon when one has a regulatory
state, the result of which is that winners
and losers are picked according to who
has the most political clout.
2002 Ron Paul 24:14
Congress should also examine the role the
Federal Reserve played in the Enron situation.
Few in Congress seem to understand how the
Federal Reserve system artificially inflates
stock prices and causes financial bubbles.
Yet, what other explanation can there be when
a company goes from a market value of more
than $75 billion to virtually nothing in just a
few months? The obvious truth is that Enron
was never really worth anything near $75 billion,
but the media focuses only on the possibility
of deceptive practices by management,
ignoring the primary cause of stock overvaluations:
Fed expansion of money and credit.
2002 Ron Paul 24:15
The Fed consistently increased the money
supply (by printing dollars) throughout the
1990s, while simultaneously lowering interest
rates. When dollars are plentiful, and interest
rates are artificially low, the cost of borrowing
becomes cheap. This is why so many Americans
are more deeply in debt than ever before.
This easy credit environment made it
possible for Enron to secure hundreds of millions
in uncollateralized loans, loans that now
cannot be repaid. The cost of borrowing
money, like the cost of everything else, should
be established by the free market — not by
government edict. Unfortunately, however, the
trend toward overvaluation will continue until
the Fed stops creating money out of thin air
and stops keeping interest rates artificially low.
2002 Ron Paul 24:16
Finally, Mr. Chairman, I would remind my
colleagues that Congress has no constitutional
authority to regulate the financial markets or
the accounting profession. Instead, responsibility
for enforcing laws against fraud are
under the jurisdiction of the state and local
governments. This decentralized approach actually
reduces the opportunity for the type of
corruption referred to above — after all, it is
easier to corrupt one Federal official than 50
State Officials.
2002 Ron Paul 24:17
In conclusion, the legislation before us today
expands Federal power over the accounting
profession and the financial markets. By creating
new opportunities for unscrupulous actors
to maneuver through the regulatory labyrinth,
increasing the costs of investing, and
preempting the market’s ability to come up
with creative ways to hold corporate officials
accountable, this legislation harms the interests
of individual workers and investors. Furthermore,
this legislation exceeds the constitutional
limits on Federal power, interfering in
matters the 10th amendment reserves to state
and local law enforcement. I therefore urge my
colleagues to reject this bill. Instead, Congress
should focus on ending corporate welfare programs
which provide taxpayer dollars to large
politically-connected companies, and ending
the misguided regulatory and monetary policies
that helped create the Enron debacle.
