By DAVID MOON, Moon Capital
December 15, 2002
New York State Attorney General, Elliot Spitzer, took on the titans of Wall
Street, extracting hundreds of millions of dollars in penalties from the largest
investment firms for their intentionally misleading research and discriminatory
business practices. In many ways, he is a model market participant,
holding the feet of the investment industry to the fire of public scrutiny.
What a shame this lawyer now sees himself as the sine qua non of the
financial services industry.
Spitzer deserves plenty of applause for his success in shedding light on many
of Wall Street's dirty little secrets - things like the relationship between
investment banking, supposed "independent research" and the use of IPO shares as
bribery fodder. But after a string of high profile successes, Spitzer now
wants to offer opinion about the proper role of government regulation in the
financial industry. And as a government employee, he thinks we need more,
not less. Surprise, surprise.
In a December 4 speech to financial services executives in New York, the
Attorney General talked about the structural flaws of a free economic market and
the need for more government regulation.
Blaming the scandals of Wall Street on a "free market" is a simplistic
attempt to explain a series of events that defy a simple explanation. Some
people are greedy. They break laws. That doesn't mean we need more
laws. I can effectively argue, in fact, that a government failure to
enforce existing laws contributed to the scandals on Wall Street. If the
police never arrest anyone for robbing banks, the small percent of the
population that is inclined to rob banks will likely feel permission to increase
their illegal activities. Why should we give more power to an entity that
failed to consistently and properly exercise its responsibilities for years?
Spitzer goes as far as blaming a lack of government regulation for problems
such as the high cost of certain prescription medicines. I suppose the
government could lower the price of a blood pressure or diabetes drug simply by
decreeing the maximum price a manufacturer could charge. That would create
shortages; price controls always do. To combat the product shortages, the
government would have to force companies to manufacture drugs they did not want
to sell at the government imposed price - or the government would have to
appropriate the drug formula and produce the medicine itself. It’s scary,
but the most powerful state attorney general in the nation argues “the
government has to come up with a pricing scheme” for pharmaceuticals.
I wonder how many new drugs would be developed if the reward for success was
the nationalization of the patent?
A free market system has limitations. So does a free society in
general. If society’s primary goal was to prevent all crime, we could
station a policeman on every corner and inside every home. If a husband
begins to abuse his wife, the police officer would immediately take the guy to
prison. We wouldn't even need a trial, since an officer of the court was
there to witness the abuse. Every Pilot gas station would have an Army
Special Forces unit stationed within the store, fully armed with grenade
launchers and neutron bombs to protect against potential robbers. In this
type of society, the crime rate might decline. But the economic and
psychological cost for that possible decline would be enormous.
A law can effectively exist only when a majority of society wants that
particular restriction. (If most people do not want to limit their speed
to 55 mph, that speed limit is a useless law.) Government's primary role
in the business world is to enforce the broadly accepted and desired conduct
restrictions wanted by the vast majority of the market participants – not decide
the price of privately produced goods or services.
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).