Let's take an example which can serve as a template argument against any and every government regulatory agency, let's look at the Securities and Exchange Commission (SEC).
Like the Transportation Security Administration the SEC was formed after a government policy failure. The government policy-enabled market crash of 1929, among some politicians, called for some government theatre to "restore confidence in the markets." So in 1934 Roosevelt created the SEC, to mime market oversight.
From the SEC site:
The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.
and
- Companies publicly offering securities for investment dollars must tell the public the truth about their businesses, the securities they are selling, and the risks involved in investing.
- People who sell and trade securities – brokers, dealers, and exchanges – must treat investors fairly and honestly, putting investors' interests first.
Of course it does no such thing. The mission is a synopsis of the government theatre performance, and it is absurd to expect truth from a company, even if they new it (who knows all risks?) And the game is already rigged, like a casino, to assure brokers dealers and exchanges never lose, but clients generally do.
Of course, Madoff was identified as a criminal to the SEC 10 years before he outed himself, Enron went on without a regulatory problem in spite of widespread evidence of wrongdoing, and the FBI in 2004 testified to an open congressional hearing about widespread fraud in mortgages. Nary a congressman or prosecutor or SEC inspector lifted a finger. If and when companies are in trouble, like banks, the SEC will step in to protect them, not investors. SEC Chairman Christopher Cox outlawed shorting bank stocks (and eventually more) when the bankers were about to face the consequences of their criminal acts. There is no correlation between SEC "enforcement" and investor protection by the SEC.
So what, do we just let bad guys run riot on Wall Street? Well, that is what we do right now, and instead of punishing them, we bail them out. Moral hazard. Also, when government regulates, the regulators are captured by the regulated. I do not recommend an absence of sanction, what we have now, but sanctions that work. How so if not with regulators.
Every criminal named above was caught by shortsellers. Their study companies to see which ones are lying or cheating, and since that inevitably leads to disaster, shortsellers bet on disaster. They borrow the stock of a target company, sell it, keep the money until the stock goes down, and then buys the same amount of stock at a lower price, and then return the borrowed stock. And keep the price difference between the old high price, and the new low price, for themselves. There has never been a more effective policeman in the markets than the shortseller. And here is the best part, if the shortseller is wrong, the shortseller pays dearly:
"He who sells what isn't his'n / Must buy it back or go to pris'n."
If a shortseller was wrong, it hurt. Long before the SEC, indeed we had more years with no SEC in USA than with an SEC, before the SEC we had effective policing, by private means. It was only the introduction of government regulation that concentrated power and enabled, through legislation, the leverages necessary to achieve the stock market crash. At the same time people stopped looking to short sellers to police the markets. Why pretend the SEC can police the markets, but shortsellers cannot?
And as a side, although we no longer rely on the shortsellers, they still do provide a value, and make money doing it. Such is the free market.
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