I keep thinking about what John Kenneth Galbraith (1908-2006) would have had to say about the financial markets meltdown.
In his later years, Galbraith used the term “innocent fraud” to describe the way the economy had fallen under the sway of corporate managers looking for short-term personal windfalls, rather than shareholders interested in sound long-term business strategies, or governments worried about broader societal interests.
Regulators should have reined in the greedy insiders—we can all see that now. But who was really doing the regulating? With hindsight, we should have been listening to Galbraith when he observed back in 1999:
“[All] but the most doctrinaire accept the need for regulation and legal restraint by the state. But few economists take note of the cooptation by private enterprise of what are commonly deemed to be functions of the state.”
And how exactly did private enterprise co-opt what were properly government regulatory functions? Object lesson: in 2004 the big investment banks succeeded in convincing U.S. authorities to allow them to be subjected to what amounted to voluntary regulation.
Last week, Christopher Cox, the U.S. Securities and Exchange Commission’s beleaguered chairman, admited the self-supervision scheme was “fundamentally flawed from the beginning,” and scrapped the whole innocently fraudulent experiment.
Galbraith saw it coming.