Its Not the Greed, Stupid

So here is George Will, sitting at his word processor, attired like Fred Astaire in tuxedo with top hat and tails, white bow tie, white carnation, meting out the daily truth. Today the natty bumpo of conservatism offers a lesson in the foolishness of regulation as illustrated by the ticket scalping business.

George relies on the works of David Harrington, a Kenyon College economist (for the uninitiated, Kenyon College is in Ohio, and known for its Liberal Arts), who recently authored a paper urging the development of an open market in body parts. (How about a road side stand in ElPaso where brokers offer healthy young immigrants to buyers from the nation’s leading hospitals. You could also buy corn and tomatoes and velvet Elvis paintings.) Harrington’s thesis is that a free market automatically punishes greed. In the case of scalpers, for example, people who hold out too long for unreasonably high prices ultimately have to cave in and take less. Duh. And, George says… this is the clincher … Democrats, who are morally opposed to greed… should ease off this regulation stuff and let economics tame the greedy.

Now here I am at my word processor wearing 5-year old blue jeans, nicely faded, and what is commonly called a golf shirt, sans any logos, so it only cost $12. I do not give a rat’s ass about scalping. If you want to pay $1000 to see Notre Dame lose a ball game it’s your business. And if greedy scalpers are disciplined by the market, more power to it.

In fact there is no dispute that the market is self regulating. The greedy get theirs’ in the end. Problem is when the greedy reign and the bubble bursts, the little guys get hurt most. The entire economy suffers, and the bastards who perpetrated the mess walk away with fortunes. In the last 100 years, we learned that there are two elements in the economy that need to be regulated. The first is the tendency of successful businesses to dominate the market and take unfair advantage of their market position. We developed antitrust laws to limit the effect of this phenomena. The Sherman Act, 1890, and the Clayton Act, 1914, effectively curbed the economic power of monopoly until the 1980s, when the Raygunner put people in the antitrust division at Justice who did not believe in the rules.

In 1933 we finally came to our senses and recognized that the stock market required regulating. There needed to be some certainty that the stock you were buying was a real stock, the people selling it were not taking advantage of inside information in selling it, that the market was not being manipulated by major players to the disadvantage of the uninformed buyer. The Securities Act of 1933, and Securities and Exchange Act of 1934 laid the groundwork. The Glass-Steagall Act mandated a separation between commercial and investment banking and removed the hazard of commercial banks taking on too much market risk. By 1999 we had effectively eroded away most of the protections afforded by these laws. Gramm Leach Bliley eliminated Glass Steagall, and concern over market transparency was frittered away in favor of new thinking. The SEC became underfunded and overstaffed with people who had for years been its critics. The high tech bubble was fueled primarily by vastly over stated expectations for dot com companies that had nothing to offer but rosy predictions for success written by market analysts who often knew they were writing fiction. We more or less fixed that with Sarbanes Oxley, but never really gave the SEC the staff… or the leadership… necessary to make sure it was enforced.

The market needs to be regulated. There are new players in the market that need to be reigned in (insurance companies) and new instruments in the market that should be better understood (credit default swaps). We need to get real about the need for very long term financing for Freddie and Fannie (or whatever other entity replaces them). Most of all we need to staff up the regulators and do it with people who actually believe in regulation.

I am with George on the ticket scalping thing, but for the rest of it, I want some old fashioned regulation to control what happens in the market.

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