We Don’t Need Regulation (or Statist Education)

– December 2, 2022 Reading Time: 3 minutes

Reprinted from the Future of Freedom Foundation

Like the long line of school children who mindlessly marched into Pink Floyd’s meat grinder in The Wall, an estimated one million investors recently fell victim to Sam Bankman-Fried’s crypto grinder. The fiasco’s silver lining is that it proves that Americans need neither statist schooling nor government regulation, two insidiously intertwined institutions.

Soon after cryptocurrency exchange FTX failed about a month ago, government-schooled statists began mindlessly chanting once again for more regulation. The FTX fiasco shows, however, that regulations remain unnecessary at best and at worst harm poorly prepared investors by brushing an artificial patina of safety over shaky structures. Without that shiny patina, and with better educated investors, market forces would have been even more effective at shutting down the FTX scam.

FTX’s rapid fall shows that markets work, not perfectly but much faster and more efficiently than government regulators can, or ever do. The value of FTX’s liabilities exceeded the value of its assets so it was bankrupt and hence should have ceased operating. The run on its liabilities was not the cause of its failure but a result of its untenable financial fundamentals. As George Selgin recently explained, no government intervention was needed to achieve the right result.

But “strong” regulators, statists say, also would have identified the problems at FTX and shut it down long before its fraud grew to such monstrous proportions. Not bloody likely! Whistleblowers and experts warned regulators long before the S&L Crisis, Enron, and Bernie Madoff cost taxpayers and investors billions. In those and many other cases, regulators had insufficient incentive, not insufficient power, to stop the schemes.

In the FTX case, regulators had incentives to keep the scam afloat, at least until after the midterm elections, because FTX donated large sums to the political party in power. We’ll never know for sure how many House and Senate seats and governorships went as they did because of FTX’s political donations, but ultimately it doesn’t matter because the mere revelation that an offshore scam artist might have influenced the election has further undermined confidence in democracy.

If dollars are speech, as SCOTUS more or less contended in Citizens United, are stolen dollars stolen speech? Was it election interference for regulators not to move against FTX if they had any inkling that the company was a scam and that it was a large political donor? Expect FOIA requests aplenty and eventually inquiries and lawsuits addressing such questions.

But why did it take the market as long as it did to discover the bankruptcy of Sam Bankman-Fried’s cryptic empire? His Dickensian name, clownish demeanor, and lack of experience tipped off some observers, but most telling was his inability to explain how his business made money. Sure, he was hiding a trade secret, but the most common one of all, fraud!

Many humans are born gullible and grow more so after years of government schooling. And they become downright dumb when the Federal Reserve promotes bubbly conditions by keeping interest rates artificially low for years. To convince themselves that their risky investments are safe, investors begin to grasp at straws, even strawman regulators. There are so many regulators, they reason, and they possess such extensive legal powers. Some, like the IRS and the Fed, even have armed agents. Surely my savings are safe!

What those investors miss is that regulators often lack the detailed information necessary to protect anyone from anything. More importantly, even when spoon fed sufficient information, regulators lack the incentive to act decisively on investors’ behalf. After all, bureaucrats usually “fail up,” garnering more power and bigger budgets the more they screw up.

With better investor education, less noise created by the Fed’s printing press, and no shiny regulatory safety patina to blind their reason, investors will play it safer, hiring savvy advisors with skin in the game, like Marc Cohodes, who pointed to the FTX scam in early October. They will also relearn basic precautions, like insisting on hiring their own independent auditors, as Wilma Soss and other twentieth-century investors did.

Presumably no major media outlet picked up the cogent critique of Cohodes, or connected the many obvious dots themselves, because FTX amply greased those potentially squeaky wheels. As far as we know, media companies were also being pressured by regulators to keep quiet, just as the CDC pressured them to squelch the Great Barrington Declaration during the pandemic.

In short, it is high time that Americans wake up to the fact that they do not need government regulators or schools. At best, costly regulatory and educational bureaucracies fail to protect investors. At worst, they encourage dismisinfoganda and even outright fraud to support radical progressive and collectivist agendas.

Robert E. Wright is the (co)author or (co)editor of over two dozen major books, book series, and edited collections, including AIER’s The Best of Thomas Paine (2021) and Financial Exclusion (2019). He has also (co)authored numerous articles for important journals, including the American Economic Review, Business History Review, Independent Review, Journal of Private Enterprise, Review of Finance, and Southern Economic Review. Robert has taught business, economics, and policy courses at Augustana University, NYU’s Stern School of Business, Temple University, the University of Virginia, and elsewhere since taking his Ph.D. in History from SUNY Buffalo in 1997. Robert E. Wright was formerly a Senior Research Faculty at the American Institute for Economic Research.