Dear Reader,

When most people think about the consequences of printing money, the usual culprit – inflation – comes to mind. And of course, it should; however, the problems created by monetary stimulus actually go much deeper than inflation alone. Another key problem is malinvestment. During the boom, all sorts of activities seemed to make sense… such as flipping homes. A few years later, after the bubble, those same things almost guarantee failure.

Whether it’s dot-coms in the ‘90s or real estate now, investments went into the wrong sectors of the economy. Naturally, the bust came and was followed by a clearing process. Former dot-com businessmen liquidated and found work elsewhere; recently, construction work and real estate jobs began shifting to other parts of the economy.

When a sector contracts, the results aren’t necessarily a bad thing. People find new profitable projects and other, more useful skills elsewhere. Furthermore, the remaining businesses may actually grow stronger. Think Amazon and eBay after the dot-com bubble. The quicker the market clears out unsuccessful competitors, the better the remaining companies can shine. Similarly, not every real estate or construction company will close down – just the most inefficient ones.

When the Fed promises us a quick recovery with monetary stimulus, it perverts this entire process of clearing out businesses. With the possibility of a quick, artificial boom, entrepreneurs are encouraged to continue seeking unwise ventures. In a way, folks dig themselves deeper into a hole – the complete opposite of what needs to happen.

This perverse incentive is very evident in real estate. After housing prices crashed, I heard many stories of investors buying cheap properties. Their idea was, “Well, the markets will just pop back up again.” The entire business plan was based on hopes of another bubble forming. Without the Fed pushing billions into the system, real-estate investors might take a more realistic view and realize that the inventory remains enormous and the demand weak. It’s going to take years for this to work itself out. Our expectations of the future form our perceptions of value today. If the Fed is promising a quick recovery – a false expectation – many investors will probably continue to misallocate their capital.

This is equivalently true of the financials. Here’s an industry that has been beaten into the ground and still holds a pile of questionable mortgages. On top of that, more regulations are constantly rolling out of Washington. I don’t understand why anyone would see the financials as a viable industry in the near term. There is of course one reason it could be: If the Fed can thrust the economy out of its rut, then a leveraged bank play might just pay off. Many big-time investors have lost their shirts placing big bets on a bank for no other reason than expecting a boom just around the corner. Rather than find companies creating value now, these investors throw money into the fire right alongside the Fed.

Next, Doug Hornig will give us an article on E-verify legislation, currently in the House of Representatives. The job hunt is already hard enough, but the government is ready to make it more bureaucratic with HR 2885.

The E-Verify Debate

By Doug Hornig

Government surveillance and control of citizens in this country is something I have written about many times in this space, and something with which we should all be very concerned. It is not a trivial matter. Every infringement on our personal freedom means that we are that much less free.

Totalitarian states tend not to assume all power and hand it to a central authority all at once. More often, liberty is steadily chipped away, always with some “good” reason for prohibiting this or requiring that. And citizens go along because “it’s a small thing,” or because “I don’t mind cooperating with that if it makes us all safer,” or because they’re frozen by either fear or apathy… until one day they wake up and find themselves living in a cage – a totalitarian state.

The process has been on the move here in the US for decades now. Slowly, the police and politicians – backed by a shamefully spineless judiciary – have eviscerated a Bill of Rights that was once our crowning glory, a watershed document in human history that marked a turning away from the absolute rule of an elite and toward individual freedom.

Now, sadly, we’re turning back.

There’s far too little space here to go into all the assaults that have been launched against our rights, both those specifically enshrined in the Constitution and other derivative rights that have become firmly entrenched over time. Let’s just examine the latest chapter in this sorry story: the debate over the E-Verify system.

Americans are a people apt to change their lives at any moment. We are free to work wherever and for whomever we choose. We can move to a different state, take a new job, or start a business and hire our own employees. The right to make what one wishes of one’s life is assumed, never really questioned.

Increasingly, this right is banging up against the desire of the state for more centralized control over the working population. And the state now has the perfect excuse to trigger that tightening: illegal immigration.

This issue is has become a hot political flashpoint, with passions running high over how to deal with the situation. One suggestion comes in the form of HR 2885, the Legal Workforce Act.

HR 2885, introduced in the House by the House Judiciary Committee Chairman Lamar Smith (R-TX) in June, sets the stupefying goal of verifying the identity of every job-seeker in the US. Let’s put that another way. If you apply for a job in the US, you will not be hired until you get a government stamp of approval.

Here’s how Smith would like it to work: The new law would require all employers to submit potential employees’ names, Social Security numbers, and such other data as the government may find pertinent to the Department of Homeland Security (DHS) for authorization before an employee can start work. The data would then be vetted by E-Verify, a government-run database and employment identification verification system.

It’s impossible to overstate how deeply misguided this proposal is, nor in how many ways; that’s true no matter whether you think we should embrace undocumented aliens with open arms or believe they should all be shot. To have introduced it into an economy struggling to stay afloat is a near-criminal act.

To take the most obvious point first, job creation is a top priority in the country today. All politicians at least pay lip service to the need. Whether lawmakers can actually do anything to create jobs is debatable, but one thing is certain: It can destroy them. And that’s exactly what HR 2885 is – job killing legislation.

It manages to stifle job growth on two fronts. On one hand is the business owner, already staggering under a mountain of regulations. The additional cost of compliance this new law would impose will be the straw that breaks many an entrepreneurial back. Small companies will go bust.

On the other hand, there is the potential employee, perhaps desperate for work. Now he or she will have to wait for the bureaucratic wheels to grind (as will the employer eager to hire). What if there’s a tiny glitch in the process? Worse, what if the database has incorrect information on the applicant? Then the real nightmare begins.

Of course, there is one place where new jobs will be created: Washington, D.C. The bill will necessitate a whole new – and rather large – division of DHS to handle the workload. But anyone who reads the Daily Dispatch already knows how we feel about expanding the federal payroll.

Then, beyond the immediate practical considerations, there are any number of larger questions. For example, under what authority does the federal government think it can bestow upon itself the role of ultimate arbiter as to who does and doesn’t get hired by private businesses?

Additionally, many liberty lovers see this move as merely a back-door way of establishing what many in power really want – a universal surveillance database – to be followed soon by a national ID card (though the bill has a disclaimer on this). That database will likely not stop with name and SSN, but can be expected to expand to include fingerprints, retinal scans, and probably DNA descriptors.

It’s also a certainty that there will be mission creep. There always is. Private-sector employers will evolve into extensions of the government… a vast, national police force, if you will. It’s not much of a leap to see them eventually tasked with verifying whether employees are delinquent in the payment of federal, state or local taxes, in compliance with child support or alimony decrees, on a terrorist watch list, or convicted or even accused of a crime.

Originally, HR 2885 had a prohibition against using the E-Verify database for anything other than employment verification, but that was replaced by a new section allowing it to be used to “protect critical infrastructure.” That could affect everything from your right to fly to your ability to access public buildings... not to mention that the information is sure to be shared throughout the law enforcement and intelligence communities.

Luckily, some substantial pushback has developed against HR 2885. Opposition is coming from within the GOP, among border-state governors and legislators, and from citizens across the political spectrum, from liberal immigration-rights groups and the ACLU to Tea Partiers.

However, whether the opposition is strong enough to counter politicians’ desire to curry votes with the stridently anti-immigrant crowd remains to be seen. The only certainty is that if this bill becomes law, it will radically change the way business is done in the US…. for the worse.

[All political acts have some kind of economic impact, and the team at The Casey Report is expert at spotting shifting trends and examining investment implications. You can benefit from their wisdom: a three-month trial subscription is risk-free.}

Additional Links and Reads

The Flaming Ferraris (The Guardian)

In Friday’s edition, I noted that I’d never heard of a profitable rogue trader. I’ll have to swallow my words, as I’ve found a story that proves me wrong. In 1999, Credit Suisse fired three profitable traders nicknamed the “Flaming Ferraris” after their favorite after-work drink. Nonetheless, my comments still stand. The number of losing rogue traders far outnumbers the winners.

25 Million Pounds (YouTube)

While on the subject of rogue traders, I’ve tracked down the 1996 documentary 25 Million Pounds, about Nick Leeson, arguably the most infamous rogue trader and the person who brought down the over 200-year old Barings Bank. Leeson’s story is particularly interesting, as many factors contributed to his success. He could have been caught a dozen times along the way, but due to incompetence at Barings his activities remained hidden until the whole bank was on the verge of collapse. The documentary is packed with interviews of Nick Leeson. It’s an interesting look at the personality behind a rogue trader.

Others Go, But Buffett Stays on Side of President (DealBook)

The New York Times notes that Obama’s and Warren Buffett’s recent New York City fundraiser only filled 116 of 130 seats –and that 116 includes Democratic staffers at the event. If Wall Street’s moneyed interests are turning their backs on Obama, that spells big trouble for him. It’s one thing to be lagging in the polls by a few points; it’s a completely different matter to be shunned by this powerful group. When the banking world wants something done in Washington, they’ll fight tooth and nail to do it. If they’ve decided that it’s time for Obama to go, he should be worried.

That’s it for today. Thank you for reading and subscribing to Casey Daily Dispatch.

Vedran Vuk
Casey Daily Dispatch Editor