The Senate this week scheduled to take up the House-passed “JOBS” bill, a politically clever double entrendre meant as an acronym for “Jumpstart Our Business Startups Act.” The premise behind the legislation is that fewer companies are issuing public stock than in the past because of the onerous regulatory burden placed on public companies and the process of going public.
The alleged proof of this tight causal relationship, it turns out, comes from surveys of the executives of growing companies. Imagine that — executives not liking regulation! Have you ever met an executive who said he liked regulation? Or one who wouldn’t swear on a stack of Bibles that he could never, ever take advantage of customers or shareholders because he would be punished in the competitive marketplace?
What we also know from painful experience — from the mortgage and credit bubble, from Enron, Worldcom and the tech and telecom bubble, from the savings-and-loan crisis and the junk bond scandal and generations of penny-stock scandals — is that financial markets are incapable of self-regulation. In fact, they are prone to just about every type of market failure listed in the economics textbooks.
Financial markets are hotbeds of asymmetric information, when one party in a transaction knows much more about the thing being traded than the other.
They are, as Greg Smith reminded us, rife with agent-principal problems, in which the self-interest of bankers and brokers and ratings agencies are not well-aligned with those of their clients.
Financial markets are magnets for moral hazard, where people can take risks knowing that they won’t have to suffer the full consequences of those decisions because of government bailouts or insurance.
And financial markets are highly conducive to herd behavior because bankers and money managers know that, no matter how disastrous their decisions turn out to be, they won’t lose their jobs or their standing in the industry if they were making the same bad decisions as everyone else.
Yet despite this well-accepted theory, and in spite of recent experience, Wall Street and its political spear-carriers are always quick to blame “excessive regulation” for whatever ails the markets or the economy.
Their latest idea is to exempt any firm with less than $1 billion in sales from many of the reforms enacted after Enron or the latest financial scandals. That’s a pretty loose definition of a “small” company, and one that would have exempted from these regulations about 80 percent of companies that have recently gone public.