Scoundrels! All scoundrels! The government needs to do something about the scoundrels! But what can be done?
The cries from America’s investors for government action to “fix” the stock market are reverberating throughout the land. “When in doubt, regulate,” seems to be the hue and cry.
Will that fix the problem? Can you legislate morality? Can you regulate people into doing the right thing? Its been tried before and I don’t see any evidence of success.
Would the proposed new rules and regulations have prevented the scandals if they had been in place before the book cooking took place? Not likely. Writing in The New York Times recently, Dr. Lester C. Thurow of MIT said, “Anyone who thinks the current round of corporate scandal could have been prevented with new rules and regulations simply does not understand American capitalism. The Enrons, WorldComs and Tycos are not abnormalities in a basically sound system. Scandals are endemic to capitalism.”
Though largely unpreventible, the recent spate of financial deceptions is somewhat explainable. The end of a boom cannot be predicted with much accuracy. The pressure on executives to fulfill Wall Street’s expectations is enormous. Believing that the current situation is a temporary blip on the screen, it’s easy to make a few accounting adjustments and push the problem into the future where it can be absorbed in future profits when the blip is gone.
The problem is the boom was really over and the executives got caught with their balance sheets exposed. The anticipated return of profitability did not happen and there was no rug to sweep the deception under. They got caught.
So now the investment groupies of the 1990s want the government to make things right. Ain’t gonna happen. Security investing is risky business. Wherever there is the prospect of gain, there is also the potential for loss. Changing the accounting rules won’t prevent fraud and deception either.
According to Dr. Thurow, “Politicians calling for new sets of rules to prevent financial scandals from recurring are like generals fighting the last war: by the time they demand change, it’s already too late. New laws and regulations adopted in the aftermath of scandal are almost always useless in preventing future wrongdoing, especially in financial matters.”
So what should the government do? The government needs to prosecute the wrongdoers and leave financial rulemaking to the accountants. Some of the large accounting firms have been criticized, rightfully so, for their part in allowing the recent scandals. However, the errant accountants comprise only a very miniscule part of the accounting profession. On the whole, public accountants take their public responsibility very seriously and can be trusted to protect the public interest.
Even under the best of circumstances, financial information is not evenly available to investment pros and amateurs. Pros rub shoulders with corporate executives daily and are therefore privy to confidential information that never reaches Main Street, or at least doesn’t get there until it is too late to take action.
Realizing that trying to outdo the pros is destined to fail, individual investors are well advised to consult a professional. Mutual fund managers who concentrate investments on a broad, cross-section of the economy can help individual investors avoid some of the potholes. Though everyone is hit when the whole market drops, at least diversification minimizes the damage.
Should individual investors pull out of the market? No. This is a time to buy. Over time, the American economy is the best place to bet our financial future. Pulling out now will insure that we miss the boat when the market begins to ascend again. And ascend it will.
Be patient. Have faith.
Thought for the Moment — When we lose the right to be different, we lose the privilege to be free.
— Charles Evans Hughes (1862-1948), U.S. Supreme Court Justice
Joe D. Jones, CPA, is publisher of the Mississippi Business Journal. Contact him at firstname.lastname@example.org.