He Who Pays The Piper Calls the Tune

A reminder that, in real life: “He who pays the piper calls the tune”.

The mandatory implementation of fully-negotiated brokerage commissions [May Day 1975] and shortly thereafter, The U.S. Congressional approval of Section 28(e)* created an environment in which institutional ‘order flow’ became a vastly more important component in the profitability of full-service brokerage firms. [‘order flow’ = code words for undisclosed institutional soft dollar commissions]

Given the implications of fully-negotiated (retail client) commissions and 37 years of serial interpretations and uneven enforcement of Section 28(e), should anyone expect the brokerage industry to look any different than it does today?

* Section 28(e) of the Securities Exchange Act of 1934 [Also, go to linked letter requesting substantial revision or repeal of section 28(e). The letter is from past SEC Chairman Christopher Cox to former Chairman of the Senate Banking Committee, Senator Christopher Dodd, a similar letter was sent to then Chairman of the House Financial Services Committee, Barney Frank > http://www.scribd.com/doc/13752510/Cox-Requests-Legislative-Action 

Links to two related New York Times newspaper articles of interest follow:


Not All Investors Are Equal

Published: July 17, 2012

* http://www.nytimes.com/2012/07/18/opinion/not-all-investors-are-equal.html?_r=1&nl=todaysheadlines&emc=edit_th_20120719


Surveys Give Big Investors an Early View From Analysts

Published: July 15, 2012
* http://www.nytimes.com/2012/07/16/business/in-surveys-hedge-funds-see-early-views-of-stock-analysts.html


· Fair Disclosure, Regulation FD - SEC

http://www.sec.gov/answers/regfd.htm - 5k - similar pages

Aug 30, 2004 ... On August 15, 2000, the SEC adopted Regulation FD to address the selective disclosure of information by publicly traded companies and other ...

The Means of Production

On the subject of capital investment, and the taxation of capital gains, it seems to me that almost all of the media has missed an important point, and several lesser points that flow from that central point.

The Central Point: 

Capital investment pays for (or finances) what Karl Marx called “the means of production”.


Other Points:

In a free capitalistic market individual investors decide where they want to invest their money, how much risk to take with their money, and whether they are going to invest in, for instance, the manufacture of cell phones or the activities of grocery stores. Or, they can decide if they want to invest in solar panel manufacturers (like, Solendra?).

If individual investors are not incented to invest their capital in “the means of production” it seems the alternative is for government to use taxpayer funds for investment and use some form of ‘central planning’ to decide in which enterprises the taxpayers taxes will be invested.

It’s been pointed out by several in the media that capital investment actually produces taxable revenue when the enterprise must pay a tax on revenue. And, it’s been mentioned that the investor then pays another tax (the capital gains tax) - if the investor is fortunate, or smart, enough to make a capital gain.

However, I’ve not seen any media (or reporters) mention that there is usually another source of taxable revenue which flows from capital investment. Capital investment generally contributes to job creation. Most of the people who are employed in the investors’ enterprise will have an income – some of which is taxed. And another point, which also seems subtle to the press, the part of those workers’ income which is not taxed can be used by the workers to consume, save, or invest. These worker activities (consumption, saving and investing) all add value to the economy, and they produce jobs and more (downstream) revenues which are taxed.

I believe myriad individuals participating in a relatively free market, and making judgments about products to be offered while making judgments about demand levels for those products, and evaluating risk-and-reward payoffs, is a far more efficient, objective, and practical way to finance ‘the means of production’ than any central planning scheme.


Ron Paul's Chrystal Ball

Government Mortgage Schemes Distort the Housing Market

Congressman Ron Paul U.S. House of Representatives July 16, 2002*

Mr. Speaker, I rise to introduce the Free Housing Market Enhancement Act. This legislation restores a free market in housing by repealing special privileges for housing-related government sponsored enterprises (GSEs). These entities are the Federal National Mortgage Association (Fannie), the Federal Home Loan Mortgage Corporation (Freddie), and the National Home Loan Bank Board (HLBB). According to the Congressional Budget Office, the housing-related GSEs received $13.6 billion worth of indirect federal subsidies in fiscal year 2000 alone.

One of the major government privileges granted these GSEs is a line of credit to the United States Treasury. According to some estimates, the line of credit may be worth over $2 billion. This explicit promise by the Treasury to bail out these GSEs in times of economic difficulty helps them attract investors who are willing to settle for lower yields than they would demand in the absence of the subsidy. Thus, the line of credit distorts the allocation of capital. More importantly, the line of credit is a promise on behalf of the government to engage in a massive unconstitutional and immoral income transfer from working Americans to holders of GSE debt.

The Free Housing Market Enhancement Act also repeals the explicit grant of legal authority given to the Federal Reserve to purchase the debt of housing-related GSEs. GSEs are the only institutions besides the United States Treasury granted explicit statutory authority to monetize their debt through the Federal Reserve. This provision gives the GSEs a source of liquidity unavailable to their competitors.

Ironically, by transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market. This is because the special privileges of Fannie, Freddie, and HLBB have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. As a result, capital is diverted from its most productive use into housing. This reduces the efficacy of the entire market and thus reduces the standard of living of all Americans.

However, despite the long-term damage to the economy inflicted by the government’s interference in the housing market, the government’s policies of diverting capital to other uses creates a short-term boom in housing. Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing.

Perhaps the Federal Reserve can stave off the day of reckoning by purchasing GSE debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing market forever. In fact, postponing the necessary but painful market corrections will only deepen the inevitable fall. The more people invested in the market, the greater the effects across the economy when the bubble bursts.

No less an authority than Federal Reserve Chairman Alan Greenspan has expressed concern that government subsidies provided to the GSEs make investors underestimate the risk of investing in Fannie Mae and Freddie Mac.

Mr. Speaker, it is time for Congress to act to remove taxpayer support from the housing GSEs before the bubble bursts and taxpayers are once again forced to bail out investors misled by foolish government interference in the market. I therefore hope my colleagues will stand up for American taxpayers and investors by cosponsoring the Free Housing Market Enhancement Act.

See transcript at: http://paul.house.gov/index.php?option=com_content&task=view&id=323&Itemid=60