Criminalizing capitalism

That's the title of Nicole Gelinas's excellent article in the City Journal. Here’s the conclusion:

As the economy heads into a possible downturn, calls will grow for someone to pay for the pain of another burst bubble—and for yet more onerous rules, regulations, and prosecutions of businesses to prevent future crises. But no government mandate or punishment, however harsh, will stop companies and markets from being imperfect collections of fallible human beings. At the end of a decade of financial surprises, that may be the most enduring lesson of all.

Along the way, Gelinas notes that criminal liability paints the grey in black and white and imposes terrific costs on firms, as prosecutors wield big advantages in front of biased juries (quoting me among others on that point). She notes:

The Enron trials are object lessons in how prosecutors can use their advantages to devastating effect. Business leaders may think that what happened to the Enron defendants will never happen to them, since they don’t do what Enron did. But there’s no guarantee that they won’t someday confront the same strategies and tactics that the government used during the Enron cases.

And this isn't so good for investors either:

The worst thing about criminalizing what should often be civil regulatory matters is that it creates a false sense of security for investors, who may think that aggressive prosecutions protect them from losses.

Gelinas notes some modest regulation that could protect the most vulnerable investors:

The feds should thus revive a failed Enron-era proposal banning companies from allowing employees to invest more than 10 percent of in-house retirement savings in their companies’ stock. Congress should also prohibit the owner of any independent 401(k) or IRA from investing more than 15 percent of retirement assets in one company or 20 percent in one industry. (Investors could still do so elsewhere, of course.) And Congress should continue to prevent people from using their 401(k) accounts to invest in their homes, despite suggestions that lifting the ban would prop up the housing market. Housing assets, just as vulnerable to market bubbles as stocks are, already make up too large a percentage of Americans’ savings.

Read the whole thing. See also Bainbridge, and Kirkendall, who correctly notes that he's been saying all this for years.

Comments

[michael webster]

Do you believe that agency costs are never criminal?

[Larry Ribstein]

I'm not sure if this is a serious question, I know it doesn't relate to the post about Gelinas's article, but I'll ignore those problems and just note the obvious answer: no.

[M. Hodak]

I also thought Gelinas's article was excellent, but it did strike me as a rehash of what Kirkendall has been saying all along (and you, too). In fact, I assumed she relied on Kirkendall to some extent to put this story together.

Needless to say, I entirely agree with the premise that criminalizing business practices is a much more costly way to protect the little guy than other, more sensible remedies for protecting investors from fraud--or from their own neglect or ignorance.