Ever since the dawn of the New Deal in the 1930s, statists have told us that government regulators are needed to “stabilize free enterprise” and protect depositors and investors. Thus, for the last 80 years or so, we’ve lived under a regime in which there is an army of government bureaucrats for the banking industry and the financial industry. If anyone thinks that banking regulators are nonexistent or lack power, all he has to do is watch the face of any bank president in the United States when a subordinate announces, “The regulators are here.” It turns white with fear. The same holds true with respect to CEOs of financial institutions with respect to SEC regulators.
Yet, what has the regulated or controlled economy accomplished? Is there stability in the financial markets? Is the banking industry solid? If so, how come federal officials are so nervous? How come they are predicting another Great Depression, which by the way was caused by another group of federal bureaucrats known as the Federal Reserve, a point that even current Fed Chairman Ben Bernanke has admitted?
The truth is that embracing the paradigm of regulation and control for the eight decades has accomplished nothing but a loss of economic liberty. Rules, regulations, and government enforcers cannot protect people from the vicissitudes of life, their follies, or their mistakes. But the siren’s song of security seduces them into making them think that their government is taking care of them, making them less cautious and less responsible. It also seduces them into giving up their economic liberty, just as it has done with respect to their civil liberties.
One of the beauties of an unhampered market economy is that it provides its own regulators. These are speculators who are motivated by profit. They are the people known as “short-sellers,” and they are oftentimes hated and reviled by big, established firms. Why? Because short-seller speculators are the ones who inform people that there are problems within particular businesses. They are the free market’s regulators.
Suppose a particular business is having financial difficulty but refuses to disclose it to the public. Investors continue to innocently invest their hard-earned in the company. The speculator learns about the problems because it’s his business to learn about such problems before anyone else. That’s the way he makes his money. He goes into the marketplace and borrows shares of the company’s stock, which he then proceeds to sell. The price of the stock tends to drop due to the speculator’s sales. That alerts investors that something might be wrong with the company. They start selling their shares. The speculator later buys the shares back at a lower price than he paid for them and delivers them to the company from which he borrowed them.
Thus, short-sellers provide a critically important service for investors. They do it not out of altruism or charity but out of self-interest. By seeking a profit for themselves, they provide a valuable service for everyone else. When you think about it, doesn’t that principle apply to most people in the marketplace?
For another insight into the importance of short-sellers, take a look at the New York Times article “Cliff Asness Is Mad as Hell.” For some humor amidst all the dreary financial news, be sure to read Aness’ disclosure statement that is appended to his article. Another good article on the important role that speculators play in an unhampered market economy is one we published back in 1993: “The Speculator as Hero” by Victor Niederhoffer, which originally appeared in the Wall Street Journal.
Also, be sure to watch the video of Jim Roger’s telephone interview with Bloomberg, which is also linked in today’s FFF Email Update. He makes the same point that we’ve been making here at FFF — that the bailout is nothing more than a welfare plan for the rich and powerful Wall Street friends of Washington politicians and bureaucrats. As Rogers points out, the longer the cleanup of all these malinvestments is delayed, the bigger the pain is going to be when the whole thing finally comes crashing down.
Also, be sure to check out the great review of Separating School & State by Sheldon Richman, a book that continues to provide the only viable solution to the education mess — a free-market solution.
Happy weekend from FFF!