The First Law Of Regulation

There’s undoubtedly a case to be made, Jim, for protecting some investors from themselves.I know that a lot of John Bogle’s criticisms of ETFs come down to the basic premise that allowing such easy trading of stock indices in real-time causes excessive speculation.  His argument is that such activity becomes the enemy of returns.

And, of course, the stock market is supposed to act as a mechanism for allocating capital, not as a casino.  Incidentally, if ETFs have a weak point, I think it’s that it is unclear how the voting power associated with the large holdings of companies’ share capital will be exercised.  Perhaps some readers would care to share their views on this point.

But, in general, I believe that consenting adults should be allowed to do as they please with their money, including, if they wish, making twenty trades a day in leveraged ETFs.  All the odds tell me that your chances of remaining solvent for a year (or a month) doing this are not great, but that won’t stop people trying.

I also subscribe to the first law of regulation – that is, that there’s no problem in the financial markets which can’t be made worse by the regulator’s rulebook.  The evidence to back this up is overwhelming: take the institutionalisation of the credit rating agencies under the NRSRO label (Nationally Recognised Statistical Rating Organisations), something that was initially supposed to help investors, but which led directly to the credit bubble and the corruption of the ratings system; take the short-selling ban, which has led to a deterioration in equity market trading conditions; and take the current proposals to stop the creation of “naked” CDS positions – something that in my view will make corporate bond liquidity even worse, and intensify the credit crunch.

Maybe one day there will be a radical reversal in the trend towards excessive bureaucracy.  Perhaps we will also see the abolition of the “too big to fail doctrine” in the financial markets, something that has in my view also led directly to the current crisis.

If this seems highly unlikely at the moment – politicians’ knee-jerk reaction is, after all, to try and save insolvent banks while bringing in more rules – I see it as a hopeful sign that the ultimate bailer-out of the bailers-out, the IMF, is apparently running out of money.

But here we are talking about very long-term changes, trends in society that may take years or decades to play out.

For the time being, and despite the increasing complexity of some exchange-traded products, I think it’s great that investors now have a terrific choice available to them, whether they want to speculate, diversify, protect themselves from inflation or economic downturns, or set up long-term savings plans.

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