Thursday, June 12, 2003

Legalize "Insider Trading"


Libertarian talk show host Larry Elder has the first part of an interview with Professor Henry Manne today. Manne (who taught my father) has, for years, been spitting into the wind arguing for the repeal of the insider trading laws. The insider trading rules are a perfect example of the law of unintended consequences. Some good points:
Elder: A "little guy" hearing this is going to say, "Well, I'm not an insider -- how could it not harm me that I'm not privy to information that other people are privy to?"

Manne: That was one of the very first myths in this field since my book in 1966. The serious scholars don't make that argument at all any more, because it's very clear that that person is in the stock market, an anonymous market, to sell the shares and doesn't care who buys them. If there's information out there, it may be an insider has it. It doesn't make any difference. Once you make a decision to sell, you don't lose anything when there's an additional buyer in the market, because that person happens to have information. That's absurd.

and

Elder: Let's talk about the recent state of corporate accounting scandals: Enron, Global Crossing, etc. What impact would insider trading have had on these kinds of scandals?

Manne: I don't think the scandals would ever have erupted if we had allowed insider trading . . . because there would be plenty of people in those companies who would know exactly what was going on, and who couldn't resist the temptation to get rich by trading on the information, and the stock market would have reflected those problems months and months earlier than they did under this cockamamie regulatory system we have.


Unfortunately, regulation often ends up making problems worse -- the Enron and Global Crossing scandals, exacerbated by the regulation of the market, as Manne notes, are now being used as examples of "market failure" requiring more regulation, instead of repealing the regulation which led to the disaster.

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