May 1, 2013
Re: [Release No. 33-9354; File No. S7-07-12]
People, in my opinion, all people, have a tendency to recurring crisis.
Therefore, any system that humans create will naturally have a tendency to experience recurring crisis. In my opinion, this is unavoidable in any system created by humans in which humans are also the actors in the system. A healthy business regulatory ecosystem, in a fair and equitable democratic society, characterized by a fair and level playing field, must recognize this systemic risk that people pose to themselves and to other people, and govern accordingly, but it must not deprive the people of their right to pursue economic growth with fair and equal access to the supply of capital.
If the government wishes to prohibit a retired person from over-investing (thus transferring risks for end-of-life care onto the
government) and in other ways micromanage people's life decisions in order to minimize systemic risks, then the government must stop giving social security and other welfare benefits to people who do not legitimately need them. A means test for social security benefits is the corollary to a prohibition on risky over-investment by non-Accredited investors, or to a prohibition on Accredited investors being able to discover new investment opportunities which are advertised via general solicitation.
It is absurd that Federal securities regulation has been positioned, politically, as intended to protect retirees from fraudsters while the taxpayers have never been offered any hope of receiving an economic benefit if such protections are successful: a smaller welfare burden.
Every wealthy retiree whom the government protects from fraud through securities regulations receives just as much welfare benefit in old age as every poor retiree whom the government did not protect from fraud, and that is just plain wrong.
To the extent that retirees, and would-be retirees, require government protection in the form of securities regulations, the people whose rights are infringed to create those protections must see a potential benefit. Perhaps it would be a good idea for retirees to lose the ability to collect social security and other welfare benefits at all if they have invested in a Rule 506 Offering within the last five years.
This would force these at-risk investors to try very hard to think clearly about the risk of investing.
Some commentators have suggested that the current definition of "Accredited" investor contains ridiculously low net worth and income thresholds, and this makes sense from a systemic risk perspective. Most people believe that it is impossible to retire at all during one's life unless one manages to accumulate far more than a million dollars of liquid assets. And if one does have a million dollars, excluding the value of a primary residence, it generally is not in the form of liquid assets.
Borrowing against illiquid assets to be able to invest in securities offerings may not make an Accredited investor into a non-Accredited one, under current SEC Rules, but like with fractional reserve banking it poses serious systemic risks that the Commission should not ignore.
Every purchase of a security becomes another asset, and it is the arbitrary accounting valuation of those assets that will be used to determine whether an active private offering investor is still Accredited the next time they wish to invest. The Commission knows this but, like its incompetent banking regulator colleagues, the Commission has never done anything about the systemic risk from the fraud that is "accounting" in a fractional-reserve banking system.
When an Accredited investor invests by borrowing against illiquid assets, perhaps the Commission should include a Rule that prohibits the investor from recognizing accrual-based accounting valuation gains for any security acquired in a Rule 506 Offering. If the investors are required to liquidate their Rule 506 securities to realize gains, in order to redeploy those gains into further Rule 506 securities, the Commission will create a valuable safeguard against the kind of systemic risk that the too-big-to-fail banks abused that required taxpayer bailouts to recapitalize them during the present crisis.
In the midst of economic crisis, frequently (in capitalism) the only remedy to the crisis is new capital. The new capital must generally arrive before it is too late for the capital to accomplish its intended purpose, which gives rise to a serious conflict of interest when big financial institutions and entrenched political interests have absolute control over who gets capital, and who doesn't get capital, in the economy they alone control through politics (such as SEC rules) or private "ratings agencies" or credit scoring schemes for bank lending within such a centrally-controlled economy.
The manner in which new capital is formed during a crisis must not be driven, as it has been since 2008 in the United States, by legal frameworks that criminalize raising capital while poor, or that compel taxpayers to bailout failed dysfunctional financial institutions whose intrinsic value depends on depriving regular people of the opportunity to form new capital themselves in the free market.
Below is a selected transcript of a speech given by economist Richard Wolff in Palo Alto, California, on September 6, 2012.
I do not agree with many of the illogical conclusions drawn by this economist from his extensive academic investigations.
However, I do agree with his summary of the current systemic problem in the United States, and I agree with the words he uses to communicate about it. His proposal for a systemic remedy is interesting, albeit impractical unless somebody first cures humanity of its addiction to recurring crisis. Even with such a cure, it seems impossible to cure humanity of its intergenerational political struggles or put a stop to our cyclical changes of popular opinion. Richard Wolff offers a summary of the origin of our present systemic problems that transcends politics or opinion. Consider the following excerpts --
Richard Wolff, "Democracy at Work: The Cure for Capitalism"
September 6, 2012, Palo Alto
"Capitalism, like every other economic system we've had, was born, evolved, and eventually dies like everything else."
"Two major collapses in 75 years, the vast waste of people and resources that every one of these crises produces, ought to be more than enough to at least allow us to discuss, to debate, to explore alternatives that might allow us to live a lot better lives than we do now."
"First, where are we, here in the United States and in the world economy?"
"This is the worst economic crisis in my lifetime, and therefore, in yours."
"It began in 2007, which means it is now coming to the end of its fifth year, and that there is no end in sight."
"It keeps going, because they haven't found the solution."
"Most of the effort to explain it involves games of blame."
"Republicans blame the Democrats, and vice-versa, in an endless chorus that begins to sound the same."
"People on the left like to blame bankers, people on the right like to blame poor people who take out loans, so forth and so on."
"I want to break from all of that. I want us to acknowledge that in this economic system that we have, which has a name, it is called capitalism, there are a set of rules, and that most people, because they really can't avoid it, play by those rules."
"When a society has people who are all playing by the rules, and can show you that that's what they're doing, and the end result is the kind of disaster we have, then it isn't any more appropriate to blame this or that actor."
"It's time to recognize that the system of rules is the problem."
"In my profession of economics we have a great philosopher with which all economics courses begin. His name is Adam Smith, and he's famous for the following line: 'If everybody pursues his or her own self-interest it will work out for the best for everybody.'"
"It's a wonderful rationale ... but where that leads is exactly where we
are: in a very, very bad crisis."
"Let's begin by analyzing this crisis as the crisis of a system."
"It's not just that we're in a crisis now, of horrific proportions for five years, it's that this is the second major breakdown of this capitalist system in the last seventy-five years."
"The last one was the 1930s, begins in 1929 and isn't really over until 1940-41."
"Crisis is part of how this system works, and it always has as far back as the last 200 years of capitalism it has a crisis every few years."
"Every President said, at one point, here are the policies I am proposing, and they have two great qualities: number one, they will get us out of this crisis, and number two, they will make sure we never have a crisis like this again."
"Every President promised it. No President has delivered on the promise yet."
"That tells you something: the system is crisis-prone, and that is a very serious defect, to say the least."
"Capitalism has a tendency, everywhere, to polarize income and wealth."
"Sometimes, when the system really breaks down, masses of people get so angry that they begin to push back."
"In America, that happened in the 1930s."
"We had the biggest labor movement organization that the country ever had. Something called the Congress of Industrial Organizations organized millions of workers in the 1930s, in the depths of the depression, workers who had never been in a union before."
"Alongside the unions, the CIO, that did the organizing, were two other institutions that were important then and that may surprise you."
"Socialist parties, here in the United States, and the Communist Party of the United States, were powerful. They had a lot of people, and they worked together with the CIO."
"Together, they went to the government at that time and they said two
things: we represent the mass of working people and we don't want to suffer the way we're suffering in this breakdown of capitalism, you've gotta do something."
"The socialists and communists said 'you gotta do something for the people,' but they added a little barb, 'because we think that there is a better system, an alternative system, to capitalism, and if you keep performing as badly as you are doing in the depths of the depression, we are going to try to establish that alterntive,' and they pointed across the ocean to the Soviet Union.
"CIO, socialists and communists, had enormous support in the United States, they were very powerful and they could mount a serious problem for this country."
"Roosevelt was a good politician. With half of the businesses in his pocket, he knew he could count on the CIO, the socialists and the communists, to kind of work something out and here was the deal: I'm gonna get the money from the corporations and the rich, I'm gonna help you on a scale you have never seen before, and in return you are gonna stop talking about getting rid of capitalism, you are gonna mute that part of your message."
"So what did Roosevelt do?"
"He created the Social Security system."
"Every American over 65 years of age who has had a lifetme of work is now gonna get money from the government for the rest of his or her life, thank you very much."
"He announced another new program: unemployment compensation."
"Everybody who is out of work is now gonna get a government check, every week for a year or two, to make this easier."
"But now comes the third program. President Roosevelt says, 'If the private enterprise system of the United States cannot provide work to tens of millions of American citizens who want to work well then I will do it.' and between 1934 and 1941, Roosevelt created and filled 12.5 million jobs where you're hired by the Federal government.
"And who paid for all of that? The corporations and the rich."
"In 1945 for every dollar that the Federal government got in income taxes on individuals, it got from corporations a dollar fifty."
"What's the relationship today? For every dollar that is taken from individuals, corporations today contribute twenty-five cents."
"Therein lies the lesson: that it was the upsurge of a militant, organized working class that overcame, for a while, the tendency of capitalism to polarize. But the lesson there was better learned by the business and the rich than by the working people. Because the business and the rich went to work, no sooner was the war over, they went to work to undo what had been done in the 1930s. The economic history of the United States in the last thirty, forty, fifty years has been the undoing of The New Deal."
"The answer is you've got to control the politics, because if you don't it will come back and undo what you've achieved in your economic life.
They learned that in the Great Depression by watching what the CIO and the socialists and the communists did."
"So in the last fifty years, the business community went to work. They destroyed the labor movement, they destroyed the socialist parties and they destroyed the communist parties."
"Today ... 93% of private sector workers in the United States have no union."
"The notion of unions as a powerful social force requires a lack of understanding of what is going on in our society that boggles the mind."
"So what have we got?"
"We've got all the mechanisms in place that allow the business community and the wealthy to control the politics."
"It's the fault of a system that has to keep making money, whether the technology is advanced or not, and drives people because that's how it makes money."
"Not only does it produce crises, and the terrible waste and damage, not only does it polarize unless people react, and not only does it deny us the fruits of technical change, the fruits of all kinds of breakthroughs, but even more, what it does to us as individuals needs to be understood."
"Most production in the United States is done by large corporations."
"We are a society that celebrates small businesses."
"Small businesses, we are told, are the backbone of America. No, they're not. Big business is what runs this economy."
"Small business, we are told, creates three out of four jobs. Quite true. Small businesses also go out of business on a scale that is fantastic, and loses three out of four jobs."
Perhaps small business would go out of business less frequently, instead being operated as going concerns indefinitely the way that big businesses are, if small businesses were legally allowed to raise capital from the public in the United States.
Perhaps the labor union of the modern era will be an electronic social network that meets a business need of its members, the need of every person to have material support from a community of investors and mentors who know how to create and sustain a meaningful scale of creation within the capitalist economic system.
Co-Founder and CEO
Public Startup Company, Inc.