Elliot Spitzer, as the New York State Attorney General gained a lot of enemies by taking on a number of Wall Street Titans, and dragging them to earth. (Some say these enemies are the ones who first leaked his scandal) For this he was vilified by many libertarians and other pro-business/free market types. While I consider myself to be a strong libertarian, I also recognize that Free Markets require harsh consequences to function properly, and Spitzer was a needed Stick.
The thing is I never saw Spitzer as out to destroy Wall Street, or as an enemy of the free market; and in his most recent column for The New Republic discussing market regulation he illustrates why I have this view:
To understand the shape of our response to the crisis, we must understand the crisis itself. We have experienced a failure of capitalism–not the failure of capitalism. We know markets are still the best way to allocate resources and to set prices and wages. But the first and essential corollary to any theory of markets should hold that they are fragile and must be protected. No matter how frequently large swaths of the world loudly shout, “We love the market!,” virtually nobody does. In the absence of rigorous enforcement of rules, market players seek monopoly power and unfair advantages… their actions demonstrate that self-interest, unbridled by enforcement of rules, will destroy the very market so many people so ostentatiously claim to adore.
But there was supposed to be another group designed and empowered to root out malfeasance and protect the commonweal: a large cadre of government regulators. There’s a widespread assumption that these regulators were improperly armed to adequately protect the public, without sufficient statutory firepower or resources.
The truth is that multiple existing agencies already have, as part of their core responsibility and legal authority, the obligation to protect consumers and oversee financial markets. Take the Fed’s failure in addressing the issue of excessive leverage, which posed a “systemic risk”; or the Securities and Exchange Commission’s inaction while blatant abuses stared it in the face. The regulatory failures of the past decade were in large part failures of will and ideology, not power.
Our market has been–and will continue to be–undermined by regulators who are intellectually or ideologically unwilling to confront powerful market players. Too many of our regulators have been tarnished by the culture of Washington, where the constant movement between government and the private sector has created a fear of disrupting the status quo. It is an environment where stringent enforcement–the very type we needed–jeopardizes future confirmations, alienates potential clients, and engenders social ire. This cozy world isn’t exactly corrupt. Rather, it perpetuates an insidious process of socializing the regulators and the regulated alike. Everyone emerges accepting a way of doing business that ultimately fails the public and the economy. Groupthink has prevailed, leading to an ideological conformity that forecloses challenges and alternative theories….
But, once again, we’re missing the opportunity. Instead of adding bureaucracy, we should be using the government to help invigorate shareholders to police companies. They should be empowered to control executive compensation, eliminating all the conflicts that now encumber those decisions.
Shareholders, like all stakeholders, will make a better determination about the use of their capital than bureaucrats who don’t ever suffer the downside of a bad investment. We need to facilitate opportunities for shareholders to actually participate in key decisions, and to deny those whose interests are not aligned from hijacking them. Strangely, we’ve heard a lot about executives and bureaucrats in this moment of reform. But shareholders, a force integral to the integrity and vitality of markets, have largely been left out of the discussion. We need them now more than ever.
The phrase ‘regulatory capture’ has not been uttered nearly enough, but that is exactly what happened, and is exactly why a natural downturn was allowed to grow out of all proportion. His point that stronger regulation can have chilling affect on Capital is an important one to recognize least we over-reach, al la Sarbanes-Oxley. Yet, rather than blather on about the evils of greedy humanity, because that’s not going to change, he actually makes the most pro-market suggestion I have yet to encounter anywhere.
It’s not more power, its enforcement of existing rules, and a diversification of enforcers that we need. There is a saying in Linux community that ‘many eyes revel all flaws’. Strong centralized power is quite corruptible and easy prey to vast moneyed interest. But an army of millions of stake-holders with real-but-diffuse power can be both potent and viscously efficient. This is applying basic free-market theory, and turning it back in on itself, it’s exactly the type of ‘libertarian policy’ that I think we need to see more of and I applaud Spitzer for his work and words in this regard.
And I’m not the only libertarian to like this column either.
