HiRiHellRaiser, welcome to the forum! I can appreciate your comments about my ignorance. Nevertheless, your comments are off the mark.

Regulation is a rule or order proscribed by an authority. Who is the authority? What if the authority makes a rule that when followed injures people or damages their property? Does adherence to the rule without regard for the rule follower’s intent make us safer? If I end up with some ones property after following the rules is it considered theft?

The only rule we need to follow is “Do No Harm”. The licenses you refer to are simply bilateral contracts that you enter into with the government. You agree to follow their rules and they agree to provide you limited liability. What you can and can’t do along with the penalty for noncompliance is defined through SEC regulation. You are now empowered to rape, pillage, and steal under the protection of the U.S. government as long as you do it without breaking the rules in the rule book. As a result of the penalty being spelled out in the regulation you can break the rule with full knowledge of the consequences if caught thus creating a moral hazard dilemma.

The Boesky, Milken, and Keating examples you refer to are great examples of the moral hazard to society relating to regulation. It is not the study of Macroeconomics that illuminates the issue. Behavioral economics is the discipline you should focus on when discussing these individuals. Regulation stands to quantify the level of exposure related to a certain act thus making this more about game theory in which a cost benefit analysis is performed to determine if the benefit is worth the proscribed penalty.

In a common law society people are prosecuted for action in which harm or damage has occurred or is imminent to another person or their property. A judge and jury are then allowed to determine the intentions of that person’s action and proscribe the penalty without the constraints of regulatory limitations. In a common law jurisdiction it is more difficult to perform a cost benefit analysis because the penalty is a variable determine by a judge and jury after taking into consideration the circumstances. You will no longer hear someone say “I can’t drink and drive because this will be my third strike and I will go to jail”. Instead they will say “I better not drink and drive because I might go to jail even though this will be my first offense.”

Now let’s get back to the Boesky and Milken example. First of all, deregulation is defined as the removal of government’s regulatory controls from an industry. Starting in 1980 the Savings and Loan industry went through a period of “regulatory modulation” not “deregulation” as evidenced by the following regulatory actions:

“The DIDMCA passed by Congress in1980 allowed thrifts to make consumer loans up to 20 percent of their assets, issue credit cards, accept negotiable order of withdrawal (NOW) accounts from individuals and nonprofit organizations, and invest up to 20 percent of their assets in commercial real estate loans. Additionally, In 1982, the Garn-St Germain Depository Institutions Act was passed and increased the proportion of assets that thrifts could hold in consumer and commercial real estate loans and allowed thrifts to invest 5 percent of their assets in commercial loans until January 1, 1984, when this percentage increased to 10 percent [1]. It gave savings and loan associations the authority to make commercial loans. Savings and loan associations were authorized to make commercial, corporate, business, or agricultural loans up to 10% of assets after January 1, 1984.”

It was the malicious abuse of regulatory allowances by unscrupulous individuals such as Milken and Boesky that contributed to the S&L calamity. These individuals were empowered by the fact that series 7 licensing put them under the regulatory authority of the SEC and spelled out what actions were acceptable and the penalty for actions that were unacceptable. It was an easy analysis for them because 98 percent of the activities they engaged in were allowed under existing regulation that did not take into consideration their intent. The other 2 percent of their activities had to do with reporting and minor security infractions that carried insignificant penalties. This is evidenced by the fact that Milken pleaded guilty, under a plea bargain, to only six securities and reporting violations which carried a maximum sentence of 10 years in prison but only resulted in 2 years imprisonment for Milken. Milken’s cost benefit analysis was fairly simple: Spend 2 years in jail for $2.1 billion. Best case is $1.05 billion per year and worst case is $210 million per year spent in jail.

Do you think that not being able to quantify the punishment under a common law fraud charge would be a deterrent to such activity? Do you think that if his licensing didn’t provide him with limited liability that a common law jury would have found him guilty of fraud as the facts were presented? People like him and maybe you hide behind regulation and say I did not break the rule so I am protected from being charged with a crime by the government even though my actions harmed others.

Regulations are a constraint on productivity because it enables or disallows activity without regard for intent. A man can start a fire to heat his family or burn down the forest. Whether or not the forest burns down is not the question. The question is “what was his intent for starting the fire?.