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.”69For 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.
32In 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.70Advocates 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 .71Judging 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.”72Tighter regulation may have an adverse
33effect 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.”73The bottom line is that financial crises are endemic. Overzealous attempts to regulate them may do more harm than good.