In browsing another economics blog, Ajay Shah’s blog, I came across this post on market regulation. I like some of his comments regarding hedge funds, and it happens to be somewhat on topic with what we discussed last week in UES:
It is useful to have a system of checks and balances whereby the regulated market is forced to compete, to some extent, with an unregulated market. Atleast some customers should make the choice of whether they want to be in the unregulated market. This will put pressure on regulators to not be over-zealous.
This idea has merit, insofar as it is better than complete regulation. In other words, our mail system in the United States is substantially better off for our private carriers existing — and who would trust the US Postal Service over DHL, UPS, or FedEx? No reasonable person. But the US Postal Service is not one of those examples of a necessary evil for which the political cost is too high to sustain for political actors. Former Japanese Prime Minister Koizumi began the process of privatizing Japan’s postal service, long a sacred cow, and he is still revered over there. Granted, it would take someone charismatic, who has the ability to sell something, whereas in the US our current President couldn’t sell his Mother at this point. Not that he’d have to. Bidding on Barbara Bush would no doubt be vigorous.
As usual, I digress. Here’s more from Ajay Shah, emphasis added:
The great success story of this approach, of course, is the hedge fund: an unregulated fund management vehicle accessible only to rich people. Rich people have a choice between going to a regulated mutual fund vs. an unregulated hedge fund. If the government is adding value through regulation of mutual funds, rich people will use mutual funds; else hedge funds will gain favour. The remarkable success of hedge funds worldwide suggests, to me, that regulation of mutual funds has gone too far in terms of imposing restrictions. …
I personally believe in the virtues of the `package deal’ of listing on public exchanges and large-scale direct shareholding by households, backed by rules about disclosure and corporate governance, which gives remarkable liquidity and market efficiency. I’ve spent half my life trying to help build that ecosystem.But we should not assume that this `package deal’ is good. A viable framework for trading shares of unlisted firms, without any of the legal and regulatory overheads that come from going IPO, would improve competition against this package deal, and induce greater checks and balances in the economy.
Shah loses me around the package deal stuff. What do you think?
Excellent concept. No doubt, though, that regulation will expand until it covers all participants in the market. Such is politics. Just look at the calls for regulating hedge funds what with their recent meltdowns that cover the WSJ and CNBC.
By package deal, I think he is referring to the strings attached when listing a company/mutual fund publicly. That is, mutual funds are subject to a variety of regulations, chief among them being disclosure of assets. Hedge funds, being not public, do not have to abide by these rules.
I must agree that introducing unregulated alternatives into regulated markets is surely to increase competition and in the end make all consumers better off. However, the idea of introducing free market alternatives usually runs contrary to the interest groups who in most instances are behind the call for regulation. In many cases, it simply comes down to a vocal minority who by organizing and demanding government intervention are able to extract just enough surplus from the majority to avoid their attention.
The ideal solution would be to address the issue at its core, that is, the lobbying system and its limits (or lack thereof). Then again, wouldn’t that mean regulating the lobbying system?