right-thinking Americans agreed on the need for more regulation as rapidly as possible,
we got Section 404 of the Sarbanes-Oxley Act. Accounting firms were given a vague and
onerous mandate and, the next thing anyone knew, New York was losing its financial
strength to London.”
69
For as long as the might and competitiveness of the United States’
financial markets takes precedence there will always be those advocating against what
they see as socialistic policies such as tighter regulation.
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In order to ensure that the United States’ financial markets remain the largest and
most competitive, they must be efficient and harness innovation. Hedge funds have long
been accredited with fostering innovation and promoting efficiency especially in the
pricing of securities. Advocates against regulation argue that financial technology has
taken off the same way as information technology did in the early 90’s. Financial
technology cannot be put back in a box any more than information technology can: This
is the culmination of 30 years of innovation starting with the Black-Scholes option
pricing model in 1973 which was used to quantify the viability of investment options, but
the notion that we can return to 1972, with credit held on bank balance sheets and
investment banks just flogging securities on commission, is false.
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Advocates against regulation argue that if Congress tried to hinder financial
innovation with excessive regulation, then the global investment banking industry, which
is currently dominated by the United States, would be driven offshore to London or
Zurich, or some other jurisdiction where it could operate in peace .
71
Judging by the fact
that in the last few decades the United States has had to relinquish its superiority in other
industries e.g. manufacturing, the financial industry is one that is far too important to lose
to other countries. Therefore, in order to preserve the superiority of the financial markets,
policymakers should consider the consequences of being over zealous with the regulation
stick.
According to Chairman Christopher Cox, US Securities and Exchange
Commission, “hedge funds contribute substantially to capital formation, market
efficiency, price discovery, and liquidity.”
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Tighter regulation may have an adverse
33
effect of promoting inefficiencies within the market in terms of overvalued securities and
so on.
There is of course the more conventional argument against regulation. Financial
markets have experienced booms and busts through out their entire history. In particular a
“sophisticated and innovative financial system is susceptible to destructive booms; but a
simple, tightly regulated one will condemn an economy to grow slowly.”
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The bottom
line is that financial crises are endemic. Overzealous attempts to regulate them may do
more harm than good.
