Lawbreaking by some doesn't mean more laws needed

By DAVID MOON, Moon Capital Management
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).

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