The Real Question is “Why Does the Government Pretend It can Protect Us from Insider Trading”

I would have probably ignored this piece in the Wall Street Journal, except that others seem to think it was an important editorial. Also, I don’t pay money for news access to the WSJ or anyone else, so I wouldn’t have any access to the argument without Newser. All I have access to are the headline, sub-headline and first few sentences:

Busting Insider Trading: As Pointless as Prohibition.”

Just as Americans found ways to keep drinking, Wall Street will always look for an edge.

The much-hyped modern insider-trading prosecutions and their results are reminiscent of nothing so much as Prohibition-era government attacks on bootleggers. There is about as much chance of stopping trading on undisclosed financial information as there ever was of stopping the consumption of booze. There is simply too much money sloshing around the world’s stock exchanges waiting for an “edge.” Information is more mercurial than mercury and will seep into some crevice in the system no matter how many channels are…

OK, while this is true, there are ways to get closer to real enforcement. If insider trading was a capital crime, trials were swift, and executions were public, there would probably be fewer instances of insider trading.

But I’m not sure I want such penalties.

But the real question is not, “Should we stop insider trading?” or “Can we stop insider trading?”

The real question is, “Since we can’t really stop insider trading why does the government pretend we can do so?” Because, the fact is, even though they can’t really stop it, they pretend they can. It is an obvious ruse. After Bernie Madoff got away with his pyramid scheme, while the SEC left him alone but made a big deal about putting Martha Stewart in jail, it should be plain to all of us that they are basically pretending they can control such crimes.

Why?

I think the most obvious answer is that Wall Street makes more money when Main Street people entrust their money to them. This doesn’t mean that they don’t also make money for Main Street. Lots of people have made money on their 401k or their IRA account. But the bottom line is that, when money is lost, it will be from the little people, not the “too big to fail” Wall Street operations.

So to get us feeling confident enough to swim with the sharks, the government creates the illusion that they are the referee to make sure no one has an unfair advantage.

In other words, the pretense that the government can stop insider trading is advertised to the public so that they will entrust their money to Wall Street. Such enforcement is a marketing campaign on the part of Wall Street to reach Main Street.