Wednesday, October 10, 2012

Gresham's Law

Gresham's Law is a a law of economics.  According to Wiki it is expressed as follows:

Gresham's law is an economic principle that states: "When a government compulsorily overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation."[1] It is commonly stated as: "Bad money drives out good", but is more accurately stated: "Bad money drives out good if their exchange rate is set by law."

Another expression of Gresham's Law is as folows:

"Two decades before the S.&L. crisis and the article on looting, Akerlof wrote about “Gresham’s dynamic” in a 1970 piece on “lemons”: “Dishonest dealings tend to drive honest dealings out of the market. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence.” NYT - William K. Black

One way to think about it is prohibition.  Prior to the prohibition of alcohol sales it was regulated and taxed.  After prohibition we saw the rise of a massive black market for alcohol.  This lead to over 10 years of intensive gang violence.  Our entire political system was being gamed by bootleggers.  Entire cities like Chicago were owned essentially by gangsters like Al Capone.

Any of you watching Boardwalk Empire, while this is a dramatization, will be familiar with politicians, government officials, judges, and police being bought off in order to keep the flow of liquor going which was supposed to be illegal.

Another example is the drug war.  The War on Drugs has done nothing to create the black market for drugs.  Selling drugs is more profitable than ever.  In the absence of any rules, laws, regulations, and oversight the bottom line becomes making as much profit as possible.  Honest business people will not touch illegal drug sales which leaves the markets to more unscrupulous forces that care about nothing but making money.

We saw this in Las Vegas in the 1940's to the 1970's.  A lack of regulations brought in the mafia which essentially ran Vegas for decades.  Skimming, rigged games, and other shady business practices were common.  Movies have been made about this legendary corruption such as Casino.

It's my view that we are seeing Gresham's Dynamic play out with Indian Casinos.  The NIGC is supposed to be regulating the casinos but it is not clear (at least not to me) how effective their regulating has been.

Tribal Sovereignty makes it even harder for the Federal Government to assert legal jurisdiction over tribal casinos.  At least at this point the Federal Government through the NIGC or other agencies have had for the most part a hands off approach to tribal gaming.

We all want to believe that the governing bodies of tribes are being honest with their tribal members about their business.  But we know based on news reporting that scandals have taken place at Tribal Casinos up and down the State of California.

There's a political nexus as well with politicians taking contributions from tribes in exchange for support for putting land into trust, supporting a casino development plan, or to keep the State from putting regulations on tribal casinos.  Or to keep the State from legalizing gaming in general.

There are several dynamics at work and not all work for the tribe.  In some cases Cities seek to take advantage of tribes demanding more money from them for infrastructure improvements than was previously negotiated.  In some cases tribes fight tribes to prevent each other from opening casinos.

All this has lead to some level of corruption in tribal gaming.  It may not be totally wide spread.  I am sure many tribes try to operate as fairly and honestly as they can given the environment.  But the lack of oversight and regulation has created an environment where the bottom line is to make as much money as possible by any means.

My opinion is that eventually this will lead to the Federal Government having to take a more active role in regulating tribal casinos.  It won't happen overnight but as more and more scandals get unearthed, as more people go to jail, and as more public attention is drawn to the issue the Federal Government will be forced to act unless tribal casinos clean up their act on their own.  Gresham's Dynamic suggests they won't.