Thursday, December 11, 2008

Are Bailouts Regulation?

"When the Securities and Exchange Commission was created in 1934, its purpose was to serve as an independent regulator of the unbridled profit-seeking activity of self-interested individuals and firms in the securities markets. It was not intended to supplant the market or directly participate in it. Instead, it marked a deliberate effort to clearly define and separate the role of the national government, on the one hand, and the capital markets, on the other."

Henceforth, fraud and unfair dealing in the stock and bond markets would be subjected to external discipline by the federal government. Minimum standards would be enforced, such as requiring that investors be told the essential details about securities in which they were investing. Registration of securities and licensing of broker-dealers would be required. It was, in short, arms-length regulation of an unabashedly private market.

Over the years, the agency has acquired three explicit goals: protecting investors; maintaining fair and orderly markets; and promoting capital formation. These three complementary missions are logically consistent with the original premise of the securities laws, which was that government is an auxiliary to the market, not a substitute for it or a participant in it. Virtually every aspect of the 1933 and 1934 Acts, and the regulations implementing them, follows from the notion that markets should be efficient, competitive, transparent and free of fraud.
I think this puts in perspective an issue that ought to be raised: Is it constitutional for our national government to make efforts to "bail out" industries and businesses? And, is it constitutional for our national government to become a participant in financial markets by becoming a shareholder and therefore an owner in financial businesses? It seems to me the answer should be no.

The Constitution grants Congress the enumerated power to regulate interstate commerce. It seems to me this means Congress has the power to write a set of rules by which financial businesses will operate. Mr. Cox describes these sorts of rules in the quotation above.

But "regulation" does not mean offering loans to businesses to keep them from bankruptcy. And, I can't find in Artcile 1 Section 8 of the Constitution that Congress has the enumerated power to essentially be in the business of loaning money, whether for mortgages or for saving businesses and industries.

It seems to me "regulation" does not include use of a government official as a car czar, as I understand the auto industry "bail-out" bill does, who will approve or disapprove specific aspects of efforts by auto industry businesses to restructure in an effort to be more competitive in the future.

And, surely, the power to regulate interstate commerce does not include the power to own the very businesses Congress has the power to regulate.

Unfortunately, as Hayek wrote, "the basic principles on which this civilization was built have been falling into increasing disregard and oblivion."


Tim Canon said...

I would like to see some of these bailouts challenged in court, not because I think the SC will wise up and actually read the Constitution in deciding them, but because it has become a sort of toxic tonic for me to read exactly how these 9 individuals justify the most blatantly unconstitutional acts our government perpetrates upon us. Reading it hurts; it does not go down smooth; but perhaps the result is that I derive insight from reading these horrible creations of corrupt men.

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