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Financial Regulation Does Not Work


Financial Regulation Does Not Work

In an article entitled “Sheila Bair: Two Years After Dodd-Frank, Why Isn’t Anything Fixed? , it points out that the LIBOR scandal, the MF Global’s bankruptcy, JP Morgan Chase’s “London Whale” and his trading losses, Barclays’ rate fixing, Peregrine Financial’s fraud have all happened despite the 2,319 page Dodd Frank Act has not stopped.  A decade earlier we passed Sarbanes Oxley, which according to its sponsors was going to stop financial fraud, increase investor confidence in the market and in the accounting statements of public companies, and lower the cost to raise capital.  But SOX did not accomplish any of this.  It did not stop Lehman Brothers, AIG or any of the other financial problems uncovered in the 2008 meltdown.  Even more ironic is that no one has gone to jail from these scandals, despite the CEO and others executive officers having to swear that their financial statements were accurate.  So what is Ms. Bair, the 19th Chairman of the FDIC, solution – MORE REGULATION.  Has Ms. Bair ever heard of the definition of insanity?

Ms. Bair argues that this proves that markets are not “self correcting.”  But she fails to note that the US Government always bails out big Banks and Wall Street.  Since the crisis of 2008, we have bailed on the banks with TARP, with zero interest rate loans from the Federal Reserve, and with QE1-3.  Pat Choate has shown that we bailed on banks and Wall Street at least eight times in the thirty years before that.  The markets are not self correcting because the Government does not allow them to work.  The Federal Reserve is nothing more than a Bank bailout protection mechanism.  Wall Street got special provisions in the America Invents Act to exempt them from competition from innovative startups.  Wall Street is acting rationally, because it knows there are no consequences to for failure, but huge upsides if they succeed.  That is not how the MARKET works Ms. BAIR – but it is how government works.

Every academic study has shown that Financial Regulation fails to achieve its goals and in fact hurts investors.  For instance, see Liu, Tung, Santoni, Gary J., Stone, Courtenay C., Federal Securities Regulations and Stock Market Returns. This paper surveys several papers that all show securities regulation has been a failure.  Here are some of the effects of SOX.  In 1996 60% of worldwide IPOs went public in theUS.  In 2005 only 20% of worldwide IPOs were in theUS.  TheUS is the only major country to have fewer public companies today than a decade ago.  There has been more than a 90% decline in the number of IPOs.  This particularly hurts the technology startup market.  It costs around $3 Million a year to comply with SOX as a publicly traded company.

What financial regulation does is increases the cost of obtaining funding for startup and eliminates competition among financial companies.



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