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>From: [EMAIL PROTECTED]
>To: "e-gold Discussion" <[EMAIL PROTECTED]>
>Subject: [e-gold-list] Re: Warren Buffett covered overseas.
>Date: Mon, May 6, 2002, 10:31 AM
>It's so simple: because the financial industry is so tremendously
>regulated -- the SEC and so on -- its full of crime and horror and
>inefficiency.
>
>Another government cock-up.
One thing that didn't help is the government's regulations on insider
trading and how that inhibits price discovery. Take a look at the following
op-ed:
Where Were The Inside Traders When We Really Needed Them?
Smith Op-Ed in Liberty Unbound Magazine
Op-Eds & Articles
by Fred L. Smith, Jr.
May 1, 2002
Contrary to what you hear from just about every politician and every
pundit,
the Enron collapse suggests that less regulation might make future
disasters
of this type less likely.
Enron, like most companies, sought to minimize liabilities on its
balance
sheet by transferring debts and risks to external parties. As most readers
of business pages know by now, the entities to which Enron transferred many
of its liabilities were creatures of Enron itself. Shifting risks to such
entities is merely internal bookkeeping and has no net benefit. Shell games
like this come close (or perhaps exceed) the threshold for fraud and the
courts will be deciding whether stupidity or criminality is the more
plausible explanation. But fraud isn't new and laws against that problem
have long existed. No new regulations are needed here.
But other regulations may have deadened the market's ability to detect
Enron's problems earlier, when they were less severe and when corrections
would have been less costly. After all, some people knew much of the Enron
story much earlier, indeed, at a time when Enron's share price was rising
sharply. But markets are efficient and knowledge that a company is in
trouble inevitably results in people selling the stock, driving down its
price. What made it possible for Enron stock to soar to the $90 range while
it was getting into worse shape?
Certainly the laws against insider trading are part of the reason this
happened. After all, the rationale for such laws is that no one should be
allowed to profit from information garnered because of one's special
position within the firm. It wouldn't be fair! Outsiders can gain from
acquiring knowledge but insiders, whom we would expect to know more, can't.
Had Enron insiders been able to sell based on their realization that the
firm was in trouble, Enron's share prices would never have soared so high
and fewer investors would have rushed to purchase the stock. And, of
course,
the investors would have experienced lower paper losses when the share
prices did drop. Instead, the share price increased rapidly throughout
2000-creating the bubble. The Enron employees who thought they were rich
soon found they weren't, and lots of other people lost money.
As Hayek and the Austrian economists spent their lives explaining,
markets
are best viewed as institutions that communicate information about the
value
of goods and services. If there is no ability to exchange goods, then that
knowledge cannot exist. Under current law, outside investors can invest (or
disinvest) in a firm based on their knowledge about it. But those in the
best position to learn critical information about a firm face major
barriers
to using and profiting from such information. Not surprisingly, many
insiders-managers, employees, auditors, and investment analysts-find it
less
worthwhile to dig deep to find the real status of the firm. The executives'
positions depend upon the firm's success. If they are unable to profit from
bad news, they will tend to hide it, hoping they can turn the situation
around.
The result of insider trading laws is that less energy is put into
assessing
the viability of firms. And, thus, stock values are always somewhat
distorted. In most cases, those distortions are minor. In the Enron case,
they were massive-and that fact turned a problem into a disaster.
John Kyle
---
http://cambist.net
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