Advocates of regulation attribute almost magical powers to regulators, but clever cheats can get around any system. They always have. It's their chosen profession, and the regulators can't look everywhere. Regulation advocates also assume that bureaucrats are disinterested and incorruptible, but we know this is not always true. People who work in government are like anyone else. There will always be a percentage of individuals who can be tempted by corrupt opportunities. The logic of regulation would require that super bureaucrats be appointed to watch over the regulatory agencies.
But who will watch over them?
This is why regulation is counterproductive and a poor substitute for investor vigilance. The more rigorous the regulatory effort appears, the more risky it is.
Regulation by market discipline is better, but in our state-dominated culture few people realize this. Arthur Levitt says, "The complexity of today's products, markets and investment strategies calls for a laser-like focus [by the SEC] on risk assessment."
But the opposite is true. Savvy investors would do their own risk assessment if they didn't believe the government was doing it for them. And wouldn't they do a better job, considering it was their own money at risk? Regulators risk nothing.
Of course many of us investors are unqualified to assess risk for ourselves. But we could pay specialists for the service, generating a competitive market for risk assessment -- in contrast to the monopolistic SEC and other agencies.
That form of investor protection would be superior in every way to a system that gives a bureaucracy arbitrary power. After all, private risk assessors would have to justify their fees, which clients would pay voluntarily.
Current government regulation interferes with honest voluntary exchanges by imposing arbitrary terms and requiring tons of paperwork disclosing information no one wants anyway.
Fraud will always exist. Enforcement of anti-fraud laws is a useful deterrent, but in the end there's no substitute for investor vigilance. Government regulations provide a false sense of security -- and that's worth less than no sense of security at all.
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