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Why the Regulators Always Lose
The SEC makes a practice of being wrong.


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Rich Lowry

Part of the problem is that the SEC has to try to outfox people paid very well, and with every incentive, to outfox it. As David Smick writes in The World Is Curved:

A well-intentioned government bureaucrat is no match for the kind of creative and clever market wizards, and their lawyers, who begin searching for legal means around any regulatory constraint the instant the regulations are put in place. Today a senior Securities and Exchange Commission (SEC) officer earns between $143,000 and $216,000 per year. Even junior executive decision-makers at Goldman Sachs garner annual compensation packages in the millions of dollars.

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Then there’s the more fundamental problem that it’s almost impossible for the SEC to know what the market — the collective wisdom of countless millions of people, acting on an array of information too vast to quantify — doesn’t know. Markets aren’t perfect. They are given to speculative manias, but they are easier to identify in retrospect than at the time. Yes, there are always Cassandras famous for their prescience after a bubble bursts, but forgotten are all the times the bears warned against robust and healthy economic growth.

If the market is wrong, it is also brutally self-correcting. Enron and Lehman Brothers were gone before SEC officials could think much about what new regulations they were going to advise Congress to pass, doomed to be found lacking in due course.

When it comes to Madoff, as one wag observed, he ran afoul of one of the oldest regulations on the books, “Thou Shalt Not Steal.” What the market needs now is not regulatory overkill, but reforms to make sure that incentives are properly aligned — e.g., bond rating agencies shouldn’t be paid by the firms issuing the bonds — and that the system is as transparent as possible.

Even the shrewdest rules won’t avoid the next bubble and bust, after which the SEC or some other regulatory agency will again inevitably be found wanting.



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