[ExI] Replacing Government Oversight, Deregulating Stock Exchanges

[Lee Corbin]

Rafal wrote

Sent: Tuesday, April 01, 2008 2:48 PM
Subject: EP and Peak oil

> On Mon, Mar 31, 2008 at 6:18 PM, Lee Corbin <lcorbin at rawbw.com> wrote:
> 
> > For example, the most efficient means of capital formation in
> > western civilization appears to be the development of the limited
> > liability corporation.  Unfortunately, without supervision from
> > some sovereign state company managers take advantage of
> > stock holders to such an extent that sooner or later funds dry
> > up, thus retarding economic growth.  Institutions such as the SEC
> > are therefore necessary, so far as I have been able to determine.
> 
> ### Apostasy! 

Yes  :-)  It doesn't come easily. But I don't want to be too open
to the kind of criticism of "unrealism" that I so often dish out to
the socialists.

> There is good evidence that private stock exchanges are superior
> to government organizations at enforcing proper accounting to
> alleviate the agent-principal problem in limited liability corporations.

I would be glad to hear of it. But I note that your sentence and your
claim floats in a context-free----I mean culture-free----air of
general applicability to human beings. Is *every* society and *every*
civilization composed of historical type human beings necessarily capable
of self-regulation, self-government, and almost unrestrained capitalism?
I ask that as a general sort of question which you and other readers
may or may not wish to explore. I myself don't think so.

> Stock exchanges rely on long term persistence to attract customers,
> and that means both companies and shareholders. As long as there
> is sufficient transparency and alternative conduits for information
> (e.g. press, blogs, whistleblowers), as well as competition between
> exchanges, the owners of stock exchanges stand to gain by
> discouraging dishonest companies from listing. If the misbehavior
> of one company on their list becomes public, all other companies
> suffer, since potential shareholders will look for another exchange
> that is not tainted by scandal, and their volume of trade as well as
> income, will go down.

This sounds excellent in theory, and I firmly believe, it is *towards* 
such freedoms and such conditions that we must keep trying to
move our societies. But when liberals, socialists, and other scalawags
suggest that we should move towards more regulation and more
government, then I immediately challenge them to provide historical
examples where such, if carried out very far at all, made things
better and not worse.  (Of course, seldom or never do any of them
succeed in providing examples from the last two centuries---on the
other hand, the failures are all too familiar and obvious.) 

So I *must* challenge you on the same grounds. (To your credit
and the credit of the ideas you propose, you do mention a very
interesting case of China below. Which must be further examined,
but which is as yet not very impressive.)

For example, why was it that throughout the 19th century it just
so happened that not *one* of the relatively free market societies
on Earth managed to create the kind of exchanges you speak of?
Can the case really be made that it was only the existence of
governments that were too strong that prevented it? The U.S.
government in 1855 was among the weakest (and hence best)
that has ever existed. But we know what was happening in the stock
exchanges at the time.  For the best (and highly amusing) account, read
"The Scarlet Woman of Wall Street" by John Steel Gordon
http://www.amazon.com/Scarlet-Woman-Wall-Street-Vanderbilt/dp/1555842127
where---so that readers get the general idea, 'twas the Erie
Railroad that was the scarlet woman  :-)    

> Companies also want to have high liquidity of their stock,
> which means they prefer exchanges with lots of potential
> investors, and so there is a strong incentive to maximize
> volume of trade over long periods of time. Self-regulation
> of industries to minimize transaction costs (which entails
> combating fraud) is a natural development in any situation
> with competition, transparency and long-term persistence.
> Laugh at me if you want

Laugh? No, I appreciate the information very, very much!

> but the Chinese stock exchanges are an example of emerging
> self-regulation.

Well, let's hope so.  Now it would be nice if the U.S. today had
an 1855 type small federal government, and so could conduct
up to 50 separate experiments towards the self-regulation in stock
markets you speak of. Even now, I would promote step-by-step
reductions in the oversight of the SEC provided that the most
knowledgeable people involved would anticipate no debacle.

> The biggest problem with the government here is that it
> frequently preempts the development of such self-regulatory
> mechanisms, and imposes complex, costly, one-size-fits-all
> rules with poor feedback and frequently is subject to
> "regulatory capture" - the gaining of control over regulators
> by some of the regulated entities.

Yes, so very typical of governments.  It emerges from the
general, simplistic conception that knowledge need not be
locally based, and can be dished out by sufficiently "wise
men" from on-high. Would that everyone could absorb
"Knowledge and Decisions" by Thomas Sowell.

> A prime example is Sarbanes-Oxley, which imposed huge
> costs that disproportionately afflict smaller businesses, and
> thus serve to limit the competition against entrenched large
> companies - exactly the companies that lobby the government
> and hire former SEC employees (the "revolving door"
> phenomenon).
> 
> So whenever a government official tells you to be afraid of
> freedom and to give him more control of your life, be afraid
> of him. He is not your friend.

Right.

Lee