What You Need To Know About Government Manipulation Of Free Markets | Cashflow Hacking Ep #13 Edward Stringham

Edward Stringham, economist and current president of the American Institute For Economic Research (AIER), joins us on the podcast to discuss the current state of our economy, and how history is the ultimate indicator of stock market trends. As a career economist and New York Times bestselling author, Edward is well versed in predicting economic trends, and shares his vision for the future of the economy under President Trump as we move into the 2nd quarter of 2018.

Video Version Of Podcast

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People & Resources Mentioned

• American Institute For Economic Research
• Private Governance

Podcast Transcript

Intro: 00:00

This is the Finance and Markets Cashflow Hacking Podcast. Streaming to you live. Teaching the methods behind unlocking long-term wealth. Your host Casey Stubbs.

Casey Stubbs: 00:25

Hello, this is Casey Stubbs for the Finance and Markets Podcast.Today our guest is Edward Stringham, the president of the American Institute for Economic Research. He's a professor at Trinity College and also the author of Private Governance from Oxford University Press. Edward, thanks for being on the show today.

Edward Stringham: 00:44

Hey Casey, how are you? Thanks for having me.

Casey Stubbs: 00:46

You're welcome. And, uh, can you give us a little bit of background, tell us a little bit about yourself.

Edward Stringham: 00:51

Sure. I'm an economist. I run an 85 year old economics institute, which was founded as people were worrying about the monetary policy in the 1920s leading to what ended up happening, The Great, you all know the Great Depression. I'm the founder of the institute, created it in 1933, right as the federal government was confiscating Americans called and to basically just be warning the public, educating the public about what can go wrong when we give the regulators or the government too much power over our money. So we are a educational research institute to educate Americans about the benefits of things like markets, private property and sound money.

Casey Stubbs: 01:44

Excellent. So I'm just gonna jump right into it because you just said what happens when the government has too much power? I wanna ask you does the government have too much power right now?

Edward Stringham: 01:54

I would say so. I would actually argue that the downturn of 10 years ago not only was caused by government officials, specifically various regulations to mandate more loans to people who could not afford those loans and then caused by various regulations, uh, with accounting, there was this thing called the market to market (MTM) accounting standard and then huge fluctuations by the Federal Reserve of interest rates for the banks. And then all of a sudden things came crashing down and I think it was not so bad though, until government got really involved when they started nationalizing banks, nationalizing certain financial institutions. I think that actually made it much worse. So it started out bad and I would say the solution was what way worse than the symptoms of the preliminary disease that the government also cost.

Casey Stubbs: 02:56

Okay. So the government has too much power, they're making bad decisions, and these decisions are actually hurting businesses. Too much regulations are choking businesses. I'm in the finance industry and I see business after business after business going out of business until only the strong can survive the ones that can afford the massive lawyer teams, the ones that have the big budgets. What can we do right now to help turn the tide back towards individual consumers and give them some power, not let the government have all power?

Edward Stringham: 03:31

Sure yeah. So the Consumer Financial Protection Bureau. I would actually argue was a huge power grab. It created a largely unaccountable government agency as part of the Dodd-Frank regulations and these regulations actually had the effect of harming smaller banks, community banks. The large banks like Citi Bank, they can actually, you know, they're not happy about it, but they can bear the cost, the brunt of these regulations in a much better way than the smaller banks. Now it's not helping anybody in the financial sector, but it's really hammering the smaller guys and we see a huge increase in market share of the large banks ever since we've been ramping up regulation of the past 10 years, so it's really just ah, I would say counter productive. I would say it's not good for the big banks, but it's especially bad for the smaller banks. Now, I think that luckily there are some people out there who've realized that it's a disaster. Dodd-Frank is a disaster crafted by people who frankly, frankly, I would suggest don't really know too much about economics or financial services and I'm not trying to single out, uh, these two people specifically. But I think this problem is fairly wide spread when we have government officials regulating markets without actually understanding them that well.

Casey Stubbs: 05:01

Yeah, well I think they probably had some really good advisors that we're telling them how it would benefit them and not how it would benefit the economy or the American people.

Edward Stringham: 05:10

Oh yeah. It's a huge, I would argue a huge power grab and uh, it just made things very difficult. You know, there's the classic story of Ben Bernanke. He could not even have refinance Islamic. He couldn't qualify. So I do think people are smartening up that this promise, this panacea of regulations is gonna solve everything. It's just frankly not true in my humble opinion. And a lot of people are realizing that it's not stimulating business and it's only adding red tape to the economy.

Casey Stubbs: 05:46

Okay. So I want to switch gears a little bit and talk about now, what's happening now. How do you feel like the market is moving and the economy, what do you think is gonna happen for the future and also the future for regulations?

Edward Stringham: 06:01

Sure. Yes. So I always view current market state as a race, uh, between the productor sector of the economy. Just call that the market and the state and at certain times the state becomes more powerful and drags down the market. On the other hand, we do see a relaxation of regulation or the past year, which I would argue is very good, especially financial regulations. The uh, uh, a lot of these positions are just not getting filled. The head of the consumer financial protection bureau said, I'd like to request money now and it is $0. I care about the tax rate, which is just really unheard of for a, a government official to say that, I, I just was job playing, so that's good. On the other hand, we do have increases in government regulation, specifically regulation of international trade, which includes all types of tariffs and various proposed trade barriers and I think that's pretty market. So you've got, you know, these good policies is bad policies and it's like, okay, which one's more important overall markets are up, but I think, you know, these policies don't meet to continue to be so anti-business. Just let American businesses do what they do best, help the consumer, help advance our economy. Don't drag them down all the time. That's my, my suggestion.

Casey Stubbs: 07:31

And the funny part about dragging down consumers is it seems like it's always champion to be the best interest of the consumer. We're here to help you. We're here to protect you. We're here to make your life great when really they're just putting up a heavy burden on them.

Edward Stringham: 07:47

That's right. I'm from the Regulation Agency and I'm here to help. Uh, in reality, a lot of these regulations, fortunately they get crafted by certain special interests. So some companies or financial institutions who are otherwise great companies, they have an incentive unfortunately to work with the regulators to say, okay, here's what we're doing. Maybe we can help crafted in this way. And then all of a sudden all the other people say, well, wait, why? Why do we want to comply with Citi Bank's internal compliance standards? Will Citi Bank says, oh, this is great. Cool. We just have these in place already. And everyone else is like, oh my goodness, now this is just so costly. So the people I talk to, they just say, one, one of my friends, she said, yeah, they're turning my world upside down. Uh, on the other hand, I do. I am guaranteed this job forever of having to do all this crazy regulatory compliance.

Casey Stubbs: 08:46

That is the thing is with regulations in the tax industry and all of these massive of bureaucratic things is they do create jobs for those industries. You know, you got an attorneys in and so it's a massive industry in itself, but do you think that in itself is healthy for the economy?

Edward Stringham: 09:03

I would say it's a, it's unnecessary. So you can hire 20 armed guards to uh, you know, stand around your house if you're afraid that all your neighbors are burglars, but if you don't have a bunch of burglars around your house, you don't have to waste money on all of these armed guards. So I just take certain amount of security are always going to be necessary. Everybody else was. I always have a lock on their home and that's good, but people are always gonna have to hire accountants to make sure they are complying with the latest, you know, tax rules. They're gonna have to hire other types of internal compliance people to help deal with the latest regulatory state. Uh, but you know, how much of this do we need? Is, is it good? Is it necessary? I would argue that the more red tape that we have to deal with, the more it's gonna be distracting us so another guy no said that when he first got involved with financial services deal making, it was 90 percent of his time was deal-making. Ten percent compliance. Guess what? Now reverse. So who wants to get into this industry to just, "oh my goodness, not gonna deal with this regulation or not regulation data. Let's try those. This and that. ok, ok, ok". It's like they can't actually be the productive financial sector, but they used to be and at this point frankly we're faced with a lot more international competition than we might have been just even in the eighties.

Casey Stubbs: 10:36

As a business man, I'll tell you, I would rather spend my time deal making then compliance. I love deal making. I like creating stuff. That's what entrepreneurs are, they're creators, they like to build and we like to tear through obstacles to. But when the compliance is a little little more than what we wanted to deal with. So Edward, what do you think is a really good economic policy that would promote the most growth? Like what type of economic stuff should we really be trying to promote?

Edward Stringham: 11:07

I would say we should look simply back into our history and look at why this country became the financial capital of the entire world and this was just very quickly, this basically a by world war one. It was clear the United States was the financial capital of the world and I will argue simply it was because of our embrace of capital zone. You can look at all the other countries in Europe, specially in the 20th century, moving towards a socialist policies. Frankly, even in England, they nationalize the London Stock Exchange during war. Not helpful, not helpful to have so much control of the economy versus unleashing the entrepreneur, letting markets work, laying the invisible hand control how people get to interact freely, buyers and sellers getting together, whether that's physical goods, whether that is financial services. I think there's a lot of great things now with Fintech, uh, going on, a lot of things related to blockchain technology. So there's a lot of innovation going on and even a silicon valley style innovation going on in financial services. And that's good. I would just say let's keep it up. Let's keep allowing it, not yet government in the way.

Casey Stubbs: 12:32

Now, do you believe that if the government totally steps back, then the balance of power can get shifted and it can reverse the other way. Like we look at the early 1900s. We had a lot of big businesses like, you know, Carnegie and Rockefeller and those guys were really powerful and the government started to be afraid of those guys. So it can that balance power shift when the markets are too free.

Edward Stringham: 12:55

Oh I mean, I actually think that all those guys, Carnegie, Rockefeller, JP Morgan, I think they were doing tremendous good actually by improving shipping, oil, financial services, , even electricity. So that was great. And I personally have a lot more faith in people like Bill Gates or Warren Buffett or any of the big rich people out there. I'd rather give my money to them rather than to a some bureaucrat who just ah, is power seeking. So, uh, yeah, business is actually big in a free market when it serves the customer. Now in certain restricted economies where we have cronyism, the businesses in cahoots with the government. But we just, I would say you want to eliminate those special president's privileges and open up the free market.

Casey Stubbs: 13:57

Edward, can you tell us a little bit about your book and what you discussed in that?

Edward Stringham: 14:02

Ah, my book, my favorite book (laughs). Private Governance. I publish this with Oxford University Press. It's actually a history of the origin of private rules and regulations and markets that most people don't even realize exist. So for example, the precursor to the London Stock Exchange and the New York Stock Exchange were coffee houses. In London, people traded in Jonathan's coffee house. In New York City on time tavern and coffee house. They didn't have any formally designed place to meet. They ended up showing up there and they created what ended up being a private club to create and enforced rules. They would have a defaulters names put on a blackboard. We can think about this as the first distributed ledger of all time. So if somebody was unreliable, this guy is now have this broadcast to other people, they could kick that person out of the club. And eventually London Stock Exchange adopted as its motto, "My word is my bond", so we have a private certification agency called the London Stock Exchange where the New York Stock Exchange saying we are putting our good housekeeping house stamp of approval on the brokers who meet here and this was self regulating for hundreds of years and by the time the United States government implemented the Securities and Exchange Act, that basically implemented a lot of rules that the private parties already had. So rules and regulations coming from the market. Privately, not from the government.

Casey Stubbs: 15:54

Now which exchange they were both in coffee houses, which one started first day was the London Exchange, right?

Edward Stringham: 15:58

Yeah. So 1600 roughly was around the first Amsterdam. 1,00 roughly was the advent of uh, or the ascent of rounding off of course, of London Stock Markets. And the New York markets really started getting big towards the end of the 1800s and that's why we see their modern building of the New York Stock Exchange built a writer and a hundred years ago I believe in like 1906 or something like that. So that is quite a tremendous achievement that they had by the, by that time.

Casey Stubbs: 16:41

I think that the whole concept is pretty interesting and fascinating and even cool that you got these markets that just develop and then the people that are running them, they're creating rules. They're enforcing those rules that that's pretty cool. And I think we see that now when you talk about blockchain and the bitcoin markets that have been exploding and. But those are. It's cool to see new markets develop.

Edward Stringham: 17:04

That's right. So when a market can provide assurance that people are not gonna be defrauded or defaulted upon, that makes that marketplace value. But we see that with Ebay, the simplest, you know, transactions on Ebay all the way through the most complicated transactions today that you'll see on the futures exchange. The futures exchange manages and assumes scatter counter party default risk. So when you make a transaction there, you don't even have to worry about your counterparty delivering because the exchange is gonna assume that risk. The Blockchain technology, to me, I got really excited about a few years ago when I started realizing that it could be used for all types of transactions to enable people to see that the other party has what they have helped pre reconciled trade and then closer to instantly execute that trade rather than having to wait a few days or even longer sometimes with a lot of these modern stock transactions.

Casey Stubbs: 18:15

Yeah I think that is pretty exciting and so you are a proponent of the Blockchain technology. What do you think about all these new regulations that are coming in? How is that impacting it and is this just like what we saw with the New York Stock Exchange? It's gonna be damaging.

Edward Stringham: 18:26

Yeah, so I do believe that a lot of the products out there are poorly conceived and I wouldn't be surprised if most of them go broke and the exact same way that silicon valley most firms go broke. That is a fact, but Silicon Valley still is tremendously valuable. Even if just a small fraction of these firms go well. We have what we might think about as permissionless innovation in Silicon Valley. You just come up with this new website or whatever you want to do, a new software and then see if it works. In this initial coin offering market got a lot of companies trying to experiment with different technologies, not just currency crypto currency, but using algorithms to enforce contracts. I think it's very exciting. The ICO market, the initial coin offering markets basically surpassing or just leaving the, uh, uh, initial public offering requirements, rules and regulations.

Edward Stringham: 19:36

In many cases, these are done outside the United States. The Securities Exchange Commission has really no idea what most of these entities are. Now that's, you know, an issue. People, I would say I personally don't invest in any of them. I, I'm in my rooms. Investments is a plain vanilla guy. So I'm not giving advice to anybody else. Please don't take this advice is just my own personal opinion. But I do think that it's neat that people are willing to assume weird risks, have the potential to be making a lot of money in certain people have made money. I would say if we start adding huge fixed costs of regulations for all of these products, it just gonna get in the way of a tremendous amount of potential experimentation and I would say that would be bad.

Casey Stubbs: 20:35

Yeah, now.. I agree with you. Totally. And what again, what happens is, okay, so these, ICOs come out and I think it's fantastic that they don't have to go through all the burdens, right? It just, it's opportunity. It gives people the opportunity that an IPO would have. However, there's gonna be people that are excited, right?. They get that fear of missing out. They want to ride the bandwagon, you know, it's hot, they're not going to do research. They're just going to throw their money down. So they're gonna make a lot of mistakes. They're gonna get burned and who are they gonna cry too? They're gonna go cry into the government and they're gonna say, come help me. Really, and and I'm not, I'm not. I get it. It's human behavior. Economics is probably a study of human behavior as well. They want to get in on it so they make bad decisions. So we need to help people not make those bad decisions, but we shouldn't try to control them either.

Edward Stringham: 21:29

Right? I just was in Las Vegas and I just lost a million dollars at the table. It's just kidding. I do feel bad for the people who make those imprudent choices. And I would say the ideal is to help educate people to not do crazy things and one is gonna be investing in what we might call a crazy market realized tech and all of that rate. And it's not for the faint of heart frankly. But, uh, I would still say however, if someone's willing to assume those risks, in many cases people started off with small amounts of money when things were not very high, especially with some of the early cryptocurrencies. And now it's, it's, it's boomed into very high value. So even if certain people lose money in those markets, a lot of it was not a huge initial investment to begin with. So, you know, that's a trade off, I would say. Again, don't tell them, listen, I'm not giving investment advice, but it's not for the faint of heart.

Casey Stubbs: 22:34

Well, here's what I would say is that it's just like anything else in that you don't let your emotions run your investments, do your research, you know, dive in. Your research or that's what you do. You dive in, you study the topic, you call the people that are running it, you go visit them, you see what they're doing, you have them share their vision with you, then you know, if they're a scam or not, when you really pull things back and not just operate on emotions.

Edward Stringham: 23:04

I mean you can learn more, but unfortunately there's just gonna be so much potential problems that we really would have a difficult time even figuring out. And so again, that's why I'm personally just invested in big blue chips, but I'm a kind of urban and invested.

Casey Stubbs: 23:23

And even that is a risk, right? I mean, nothing is guaranteed. Nothing is guaranteed in life. And we don't want to live like that either. You gotta be out looking for opportunities. Very cool. Okay.

Edward Stringham: 23:38

Okay so again, just want to let everyone know this is..

Casey Stubbs: 23:44

We got a big disclaimer. We got a big disclaimer, right? A huge disclaimer that says, uh, investing is high risk. You can lose all of your money. Do they have those disclaimers in Vegas?

Edward Stringham: 23:56

I, after I lost that million dollars, I just went to the, to the, to the deal. I said, you know, could we just take that one back? But for some reason he uh, he said no.

Casey Stubbs: 24:06

Yeah. Right. So going back to the current economy, we've got some good things happening and some bad things happening. How long do you, does it usually take for, looks like these terrorists, you think that's negative, how long does that actually take to have an impact on the economy and how negative of an impact do you think that will be?

Edward Stringham: 24:31

Can be immediate. So if people see that certain products are gonna be more expensive than that will get priced into those products. Stock prices today. So there was a unfortunate story about a, a, an American cake, beer keg manufacturer realizing that the price of, , I guess steel that kegs are made out of, I'm not sure if stainless steel, was gonna go up, even though they were the last American Keg manufacturer, they now can't compete with foreign keg manufacturers because foreign keg manufacturers combine the steel at the world price, the American keg manufacturer can't, and now that companies like on the brink of bankruptcy and that is sad, that is destroying American business as hardworking, uh, individually owned company is getting hammered and that can happen right away. So a lot of the companies that have to deal with international competition, they need to be buying products whether from abroad or from the United States, even if they're buying American steel, if that pushes up the price of steel in general, that companies negatively harm. So I think that the terrorists have actually led to a lot of companies, manufacturers actually being hard already private governance examples. And I would suggest that's one of the reasons why the market has softened. Last year things were going really well and one of the possible reasons is because of this higher deregulatory environment. Now we're in a higher international trade of regulation environment. So it's like good and bad mix at the same time.

Casey Stubbs: 26:26

Now what was the driving factor for pushing for these tariffs? Like what's the end goal and what did the regulators see as the benefits?

Edward Stringham: 26:35

Yeah, so there's this. I would argue this outdated set of ideas which most all economists reject, but it's this idea that when somebody buys something from somebody else because they lose the money, the buyer is somehow worse off. So it would be as if I just got my hair cut yesterday. I just lost money to my barber and I'm somehow worse off. I have a trade deficit with my barber and I'm somehow worse off but that misses is..

Casey Stubbs: 26:35

You're getting the value of the haircut

Edward Stringham: 27:16 I have my haircutt. I'm no longer hippy as I almost was. I'm happy to have a permanent trade deficit with my barber, with whole foods, with the restaurant that is around the corner. I, I've, they've never given me a dollar, but frankly they've given me tons of things. I would argue the same thing is true when an American manufacturer, like apple chooses to buy internal products, chips for its phones from a Chinese supplier, we now have better American produced phones and we now have more as consumers and apple has more as producers, you start hammering apple, they're just going to be more of a disadvantage to the samsungs of the world. So this idea that we need to be hoarding money, never spending money dates back to this old philosophy or economic set of ideas called mercantilism, which really resonates with a lot of people who are obsessed about the trade deficit. We need to get rid of the trade deficit. , in reality I would say anytime we buy something, we're getting something in return. A friend of mine, Don Boudreaux refers to the trade deficit as the goods surplus. We're giving money. We're getting goods

Casey Stubbs: 28:43

now is part of the reason to try to stimulate production here in the United States. They're saying, OK, well if it's more expensive overseas, then we will now produce it here.

Edward Stringham: 28:55

Yeah. That's the basic mentality. And, and you know, I, I kind of understand it. I used to feel that way when I was in high school. I studied economics and I would listen to the news about, oh, we're losing jobs. So yes, that's the motivation is we can somehow ray ray's the trade barriers. We can prevent foreign competition from competing with American companies, but what it misses is all the American manufacturers right now who have to buy inputs, ingredients for their products. Sometimes they need to buy those products from abroad. Even if they're buying those products from their ingredients from America. If trade barriers increased the price of the ingredients, the American manufacturers going to get hammered. So it's not helpful.

Casey Stubbs: 29:49

Now in the situation of this beer company did, do you know if they bought their steel overseas for the kegs?

Edward Stringham: 29:54

My understanding it's American made steel American company, but prospect of terrorist increasing the price of all steel including American steel because now there's this rush to buy American steel because of the prices of all steel goes up including Chinese steel. Then they're like, OK, well we just can't compete with the Mexican cake manufacturing company, and a lot of beer producers went to them to say, Oh, you know, at school we're, we're local beer, we're gonna buy local American made kegs. But for the ones who don't understand that or can't see that, they say they can't justify pricing that giving those higher prices to consumers private governance definition. So really an unintended consequence of the right. Now,

Casey Stubbs: 30:45

if I think another problem with that is the production capabilities for steel here is pretty low. So if everyone tries to start buying in here that we don't have the ability to fill the orders because we don't have the production. Now, if we did ramp up some, some steel creation here than do you think it could be a potential benefit long-term?

Edward Stringham: 31:08

Yeah, of course we could. We could raise silicon valley and Manhattan and, and put up huge steel mills and, and you know, return us to the 19 thirties whenever we're at the apex of steel production. But the fact is a silicon valley jobs are paying much more than steel jobs. Manhattan finance jobs are paying much more than steal jobs and it's unfortunate when people like the old old jobs and those jobs are no longer around, but you know, over time there's been a steady increase in income of American workers and I'm average overall American wages have gone up in Silicon Valley. They used to produce, they used to produce Ford mustangs. They used to produce Chevy, Chevy, Nova, us in Silicon Valley. It's really surprising. Uh, but those jobs just don't make sense to do their anymore. Instead, people can do higher value things.

Casey Stubbs: 32:10

Right. And I also think that if they did start to produce steel, I think it would be hard to fill those positions mainly because people don't really want to do that anymore. The young, the young people don't want to go to work in a steel mill. They want to work in technology.

Edward Stringham: 32:27

Exactly. Yeah. Like we need to bring back the coal mines. That's the worst thing we want to say. Of course I feel bad for the people who have to get new jobs, but there's better jobs available. That's good. We should be celebrating that. Yeah, I mean those were, that was tough work. Blue collar work is tough work and I'm really sure that the guys that do it, and I'm not saying we don't still have blue collar jobs, but , you know, people died in those jobs. No, I would never want to have to do it and I think we should be celebrating capitalism or opening up all these new opportunities that we never had before. Yeah. Excellent. Well, you know, this has been a really good conversation. You brought up some great points, so thanks for taking the time to be on the show today.

Edward Stringham: 33:16

Can you tell us, tell the listeners how they can get in contact with you on how they can, uh, go to your website or get your book. We're going to play to both. We are going to put it below on this site as well. Sure. Yeah. My book's available on Amazon, uh, uh, Edward string strings, private governance. But my real passion right now is the American Institute for Economic Research, aier.org we've got daily commentary on economic issues ranging the spectrum. One of our big areas of focus recently and throughout our history has been sound money and just talking about the importance of free markets, property rights, and generally a free society private governance meaning. Edward, are you creating content for that website? I, I'm creating some content for that and you are going to love it. I probably will. Tell me the, uh, the web address again. OK. And that's the American Institute for Economic Research. Go there right now. Every second. Well, again, thanks so much for being on the show. Great Information. Thank you. Thanks Casey.

Outro: 34:45

You've been listening to the Finance and Markets Cashflow Hacking Podcast. To get all the best financial growth strategies, visit finance marketsfinance.wpengine.com and claim your wealth report strategy.

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