On August 4 the SEC accused General Electric of accounting fraud (Litigation Release No. 21166), but it chose not to disclose who committed the frauds and it did not punish the criminals.  Instead, the SEC fined the victims—the shareholders—$50 million.  Worse, the SEC protracted the so-called investigation so long that even if the felons were indicted, the case likely would get tossed out of court because of the statute of limitations.  This is just one example of many injustices by the SEC during the last decade that reveals how this agency has supported the efforts of some managers and directors to defraud the investing public.

I infer that Congress and recent presidents have approved these activities, for Congress, Bush, and Obama have done nothing to improve matters.  They have given the appearance of caring, but thwarted any real, effective measures.
Congress enacted Sarbanes-Oxley and President Bush signed the legislation.  But Sarbanes-Oxley did little to dampen the activities of criminally-minded managers and directors.  This was because it did so little to improve enforcement activities.  Sarbanes-Oxley merely required a variety of studies and increased penalties and required auditors to report on the firm’s internal controls.  But these actions have not lessened securities fraud or accounting shenanigans.

More recently President Obama claims to fight the problems that caused the financial crisis by advocating a new agency.  “The Consumer Financial Protection Agency will have the power to ensure that consumers get information that is clear and concise, and to prevent the worst kinds of abuses.”  Many business writers have critiqued this proposal for a variety of reasons.  I agree with them, but I think there is a deeper problem and that is the myth of regulation.

What Obama is really trying to do is give American voters the impression that he is in charge, that he cares about them, and that he is improving matters so that the chances of another financial meltdown is infinitesimal.  It is political legerdemain.

As long as managers have perverse incentives to cheat investors and as long as the SEC goes after only the little guys and ignores managers at Enron, WorldCom, Madoff Investments Securities, and GE, nothing is going to change.  If the Congress and if the President want to improve matters—and I have no idea if they really do—then they must change the set of incentives and disincentives.  To effect real change, the system must punish managers and directors who lie and steal and cover it up with scandalous financial reporting.

More regulation might make society feel better, but that just is an indication that most Americans have little understanding of economics.  They will continue to lose in the stock markets until they insist elected officials do something substantive.

My fear is that Democrats will rally around Obama while Republicans vilify him, similar to the previous administration when Republicans rallied around Bush and Democrats denigrated him.  There is too much partisanship in this country and not enough rational analysis.  Americans need to understand that both presidents have failed us by supporting new legislation and by crippling better enforcement.  (For whatever it is worth, this is one of the reasons I am an Independent.)