Paul – you have laid out some BIG issues here. First let me take a shot at shareholder monitoring.
You slip in one enormous point, Paul – that of shareholders actually monitoring the companies they invest in to make sure someone is actually watching what companies are doing. You raise this in the context of it being a problem for ETFs. The truth is, that problem went WAY over the line long ago. Frequently, generally, NO ONE is at the switch in terms of shareholder monitoring. Large institutional investors and mutual funds are the primary culprits, with ETFs as yet still accounting for only a very thin slice of the absentee shareholders. It is a BIG problem for capital markets and one I rarely see addressed. I would really like to see institutional investors get MUCH better organized on this issue, but the sad truth is that no one wants to pay for it. But we do all pay for it eventually, with every Enron or failed financial institution.
Your “first law of regulation” is as easy to say as “you can’t trust lawyers” and “politicians are liars.” It’s got a nice libertarian ring to it, but it doesn’t solve any problems or address reality. Is the solution NO regulation? I doubt that, though there are those who might disagree. Raw capitalism can lead to extreme concentration of power, monopolies writing “self-regulation” to maintain monopoly leading, to LACK of completion, etc., together with protecting financial markets from the possibility of complete implosion (see our current predicament) – THAT is why the government is in the business of regulation at all, even though they frequently get it wildly wrong. But discarding government regulation altogether is not the answer.
Something else that unfortunately is not the answer is to let the big financial institutions fold. And THAT has a nice POPULIST ring to it that again rolls easily off the tongue. But if there is ONE point that economists are in universal agreement on at this point in the crisis, it’s that the Fed’s big mistake was (not to save AIG or Bear or Merrill Lynch or any of the others) to let Lehman Brothers collapse. I absolutely agree that it’s a sad state we’ve gotten ourselves into where greed can’t be allowed to simply consume itself when it overreaches. And it makes us angry and indignant. But do we want to fight on principle or do we want to prevent 30% unemployment rates across the west and 10 years of an arctic climate for credit markets and the global economy?
These are big question, tough questions, Paul, but the answers are not pat and the solutions are not sound bites.