Author Archive Send to a Friend <% dim printurl Version

February 21, 2002, 8:00 a.m. The Cure for Enron-itis The future of Wall Street is the average investor. Treat him fairly.

uestions have arisen as to whether or why free-market conservatives should concern themselves with "fixing" problems in the capital markets brought to light in the wake of the Enron debacle and — more broadly — the earlier bursting of the Internet bubble. Conservative commentary has ranged from legitimate worry by small government proponents of a massive regulatory overreaction that impedes markets and hampers economic growth, to more libertarian assertions that recent corporate and dot-com implosions in themselves prove that the free market works and is inherently self-fixing.

Still others, most notably George Will in The Washington Post and Lawrence Kudlow on these pages (fully cognizant and sympathetic, one presumes, of the views expressed above) have nonetheless argued for strong oversight and enforcement of ethical conduct in the capital markets. They add that it is primarily free-market conservatives — and Republicans more precisely — who have a special responsibility to safeguard public confidence in the fairness and credibility of the capital market system.

We have already seen market opponents and anti-capitalists of all stripes revel in using the Enron collapse as validation for the "risky scheme" label they long ago placed on Social Security reforms that give people greater control in investing a small percentage of their payroll taxes. Republicans may decry the tactic as cynical demagoguery, saying that the risky schemers seek to protect the interests of big-government spenders at the expense of strengthening a successful pay-as-you-go entitlement system that can't long outlive the retirement of the Baby Boomer generation. But even more is at stake than winning the political battle for these important reforms.

Even with the explosion in market participation over the last two decades, with some 50% of American households now investing in one manner or another, the goal should be nothing short of 100% participation in the market, expanding the ranks of the financially empowered to meet family goals throughout their careers, and to see that every American — and not just a select half — has the opportunity for real wealth creation before and after retirement. Reaching this goal, and encouraging more Americans to participate in the market, will prove illusory unless we respond firmly to both corporate wrongdoers and the conflicts of interest that give them opportunity to selfishly circumvent the system and make the case for its detractors.

This is not to diminish the responsibility of investors themselves. As always, investors need to do their homework and understand the risks involved. But it's one thing if individual investors know the facts and lose. It's another thing entirely, as the Enron case demonstrates, if they are unaware that the "facts" they've been given about a company's financial condition have been compromised by conflicts of interest that beset every "authoritative" source of information at their disposal: including the corporation bent on beating the street by whatever reporting means necessary, the auditor piping the tune of the corporation that paid him, the market analyst whose research must be cleared by the corporation's investment bankers, and the credit-rating agency that may or may not be subject to pressure from the corporation's creditors.

It constitutes neither an attack on Wall Street nor an inconsistency in free-market conservative principles to acknowledge these problems and expect that they will be cleared up. On the contrary, it's something closer to a moral imperative. The free-market system is built on unobstructed transparency, full disclosure, and the free flow of straightforward, accurate, and unbiased information. Anything less should not even be an option.

Consequently, "even conservatives" can seek strong rules governing information integrity — the essential bedrock for economic activity. And conservatives don't do this to guarantee favorable financial outcomes — a concept antithetical to free enterprise — but to guarantee fair financial opportunities, which is why we have free enterprise in the first place. "Enron-itis," or fears of shady corporate reporting and accounting, have subdued market performance for weeks now. America simply cannot long afford a loss of confidence in the level of credibility and truthfulness at the heart of a capital market system so vital for economic recovery in the short term, and sustained prosperity down the road.

The future of Wall Street is the average investor. In years to come his money will increasingly move into the markets, and as he grows, he will be a source of capital investment to fuel business expansion, job creation, technological advancement, and economic growth. It's the investor who creates still greater financial opportunities for us all.
One would think that the custodians of Wall Street might wish to treat him fairly, if for no other reason than that it is entirely in their best interest to do so.

— Rep. Baker is chairman of the House Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprises