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“ NO MAN'S LIFE, LIBERTY, OR PROPERTY IS SAFE WHILE THE LEGISLATURE IS IN SESSION” -Judge Giddeon J. Tucker, 1866 Local Bus Company Manager turned Talk Show host Bill NoJay once discussed the two things that ruined this great country. “Air Conditioning” he mused “allowed our legislature to stay in DC full time”. Before air conditioning, our elected representatives viewed Washington as a stinking swamp, and stayed only long enough to achieve what was necessary to keep the electorate happy. When the air conditioning was installed, the opportunity to escape the family for long periods of time, and (mis)behave beyond the watchful eye of family and voters was just too great! The second culprit according to NoJay was the invention of the copy machine. Pre-copy machine, legislative efforts had to be typed and then retyped until the necessary numbers of copies to be distributed were produced. These bills were kept short and sweet and understandable. With the advent of the copy machine, and then the word processor, our representatives could produce encyclopedic type manifests and even bury other proposals inside According to congressionaleffect.com, historical research indicates that, more often than not, when Congress is in session there is a negative effect on equities markets (the “Congressional Effect”) due possibly to investor fear and uncertainty surrounding government action – or possible action-as well as unintended adverse consequences on the stock market of Congressional legislative initiatives. Some examples they give are: SMOOT -HAWLEY, 1930 NAFTA forerunner killed; great depression followsCalled "probably one of the most damaging pieces of legislation ever signed in the United States" by the Council of Economic Advisors in 1988, and enacted despite a petition signed by 1,000 economists begging Congress not to pass it. Smoot-Hawley increased tariffs to record levels (50%) on over 20,000 imported goods and triggered retaliatory tariffs by 60 other countries. The result was that world trade fell by a third by 1933 and did not recover its pre-depression levels until well after WW2. RECONSTRUCTION FINANCE ACT, 1932 Government Expands; Market Contracts The Reconstruction Finance Corporation was established in 1932 to “promote economic recovery” by disbursing billions of dollars of aid and representing the largest expansion of government’s role in the economy to date. Over 13 years, the RFC distributed more than $35 Billion – initially to financial institutions, but then to other industries like railroads, and eventually even to businesses of ill repute (massage parlors, strip clubs). When the government undertook to “promote economic recovery”, unemployment stood at 8 million. Through government seizing the allocation of resources, capital was diverted from more efficient market-allocated uses to less efficient, politically motivated uses. After 7 years of such misallocation, unemployment had actually increased more than 10% (from 8 to 9 million), and after 13 years, an estimated 1/3 of the distributions had been lost to defaulted loans and other write offs. EMERGENCY PRICE CONTROL ACT, 1942 Prices Fixed -- But Not In The Stock Market This nonsensical Act courtesy of the 77th Congress and FDR gave government the broad power to fix prices on all products except agricultural, and to ration scarce supplies of other items. The markets responded accordingly. PROPOSED HIGH YIELD DEBT TAX, 1987 1987 Crash Wiped Out 22% of Market's Value The proposed High Yield Debt Tax would have imposed serious taxes on the bond market by eliminating the deductibility of interest on debt used for corporate takeovers. The market reacted almost instantly to news of the legislation progressing through Congress and triggered the 1987 crash. Stocks that led the market downward were those most affected by the proposed legislation. While the provision concerning the stock market was stripped out before being enacted into law, it illustrates that Congress need only consider and deliberate bad legislation to destroy wealth in the market. HEALTH CARE TASK FORCE, 1993 Health Care Companies Get Sick; Lose $100B The 1993 Health Care Task Force sought to impose a comprehensive universal health care plan upon each US citizen and permanent resident alien. The proposed plan required full participation and forbade disenrollment until covered by another plan. Given the plan’s massive scope, it would have required new panels, advisory boards, commissions and tax assessments, while constraining free choice for doctors, patients and insurers. The proposed plan fixed all manner of prices including minimum coverage levels, maximum annual out-of-pocket expenses, and even fees for services. Because the plan ignored the tenets of basic economic law, it was guaranteed to lead to disaster, and the markets responded accordingly. This illustrates that the mere deliberation of new government programs and regulations can wreak economic havoc as markets factor in the consequences and likelihood of proposed regulation passing. REGULATION FAIR DISCLOSURE, 1999 Market Falls Off “Level Playing Field” Who could possibly argue with the merits of Regulation Fair Disclosure, implemented in October of 2000, mandating simply that all publicly traded companies disclose material information to all investors at the same time. The regulation seems unassailable. However, some post-Reg FD surveys (posted on the SEC website) suggest that, as unassailable as the regulation seems, it may have come with unintended consequences. Critics argue that more access does not necessarily mean better information, that issuers are now disclosing less information, and that forcing disclosure to be widely disseminated is heightening analyst herding, scripting and boilerplate language, actually leaving investors worse off. In short, opponents claim that Regulation FD inhibits the very disclosure it was intended to widen. Even a seemingly unassailable regulation can have deleterious consequences as evidenced by the stock market sell off after the Regulation went into effect. SARBANES OXLEY, 2002-03 Contributes to 20% Market DeclineIn response to Enron, Congress drafted Sarbane Oxley (“Sarbox”), often called “the most far-reaching reforms of American business practices since FDR.” Sarbox established tighter controls of all U.S. publicly traded companies, overburdened small businesses with regulation, and diminished international competitive advantage. This essentially drove the IPO market out of the U.S. (for example, in 2006, 16 of the largest 17 IPOs were done overseas). One “harmless” provision of Sarbox was to force companies to change accounting practices to use “mark-to-market” versus “fair value” methodology. In fact “mark-to-market” accounting rules dramatically compounded the effects of the subprime security meltdown in 2008 because large financial entities could no longer meet government mandated capital requirements after credit markets froze. So, when Congress goes on break, it might be time to consider buying up some stocks.

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