Is Self Regulation Possible?

I make no qualms about disliking government intrusion into markets, but I also accept it as an occasionally necessary evil. Over the years the case, has been made again and again that properly motivated self-regulation is better for any and every industry than sausage club swinging government swine patrolling the halls.

We have certainly seen the evidence in comparing the CFTC and the SEC. On one end we have the Securities Exchange Commission, a fat, lazy slob adept at collective porno downloads and giant exhales of self exculpatory pleas after commission of any transgression. Prone to populism, historical revisionism and mental masturbation the SEC is government ineptitude in a blanket.

The CFTC on the on the other hand is kind of the store front lawyer at the local mall. It is poor, has never had much of a historical budget until recently and does not have the least bit of an interest in intruding into markets. When the CFTC does get involved, however, it is happy to sue the shit out of a colostomy bag with impunity for any nearby fans which may be blowing. Yesterday's position limit announcement for commodity markets is perhaps the best example since the Hunt Brothers fiasco.

I bring this issue up, because our favorite rag which was once a financial daily is facing allegations which beckon this exact debate. To self regulate or to be policed? What is better for business and society, as a whole?

I have always believed that the job of regulators is to regulate. As in, enforce laws that are on the books. I look at regulators more so as kindergarten teachers than NBA referees or MLB umpires.

When the kids go out to play, run and scream in the yard it is partially to wear them out and calm them down. It is also a classroom of sorts. One in which they learn to interact and function together, solve their own problems and create a functional market of fun, if you will. The teachers do not step in because someone didn't step on first base in a game of kickball or because someone forgot to dribble a basketball. The teachers step in when someone is hurt or when a potentially dangerous fracas erupts. Even though we don't give it much thought, this is where we learn to be civil and deal with others. Not the classroom and not the lecture hall. The playground is the real classroom.

I would argue that this is how markets should be allowed to function. As a free for all, where the teacher (regulator) steps in when a rule is broken and enforces it fully. Since the goal of the playground is fun and the goal of the markets is money, the actors in each will far more willingly police themselves if the long arm of the law is reliably distant, instead of expectantly intrusive.

I would argue that what we have today across all industries are an intrusive policemen without the balls to arrest and press the proper charges. They harass, question and defer to lawyers for more laws, while failing to enforce those which are already on the books. The notion of moral clauses give the tort lovers headaches, but just imagine the possibilities. Instead of another Dodd-Frank or yet another mnemonic regulator, inserting a self-regulatory moral clause in all market related laws would likely diminish the sort of high jinks the WSJ is accused of. Simply state that when a law is broken, the industry itself must deem an adequate punishment and execute the perpetrator to the limit of the law, if not regulators will.

This sort of open ended interpretation would force the kids on the playground to make nice for true fear of the teacher coming in and cutting recess short. Or perhaps, ending it forever.

In my view, motivated self regulation would cut debates about Raj's jail sentence, the TBTF banks and this current WSJ/Dow insider newspaper trading story, out completely.