Insider Trading Is Fine - But Not in Congress

Last Sunday night, 60 Minutes came out with a great report that highlights specific acts resembling "insider trading" by members of U.S. Congress.

The report comes on the heels of an effort by Peter Schweizer of the Hoover Institution to uncover "soft corruption" in Washington and deduce why Congress members have proven uncanny at earning large profits from stock trading.  Despite the denial by Representatives such as former Speaker Nancy Pelosi (whose look of horror when questioned directly on the issue alone makes the report worth watching), the evidence of congressional insider trading is obvious.

As Nobel Prize-winning economist Fredriech Hayek taught, power centers always attract the worst of individuals.  That members of Congress would use their authority over the financial sector to make a quick buck on the side is anything but surprising.  As former Obama chief of staff and U.S. representative Rahm Emanuel put it, one shouldn't let a good crisis go to waste.  That's probably why he dumped loads of Freddie Mac stock before it was revealed that the lender was under investigation for inflated earnings back in 2003.

Insider trading, which is essentially the quick disbursement of relevant market information by individuals closest to select industries, shouldn't be illegal by itself.  This argument has been made numerous times by economists Murray Rothbard and John Tamny.  This particular passage by Rothbard outlines the sheer absurdity of insider trading laws:

There is another critical aspect to the current Reign of Terror over Wall Street. Freedom of speech, and the right of privacy, particularly cherished possessions of man, have disappeared. Wall Streeters are literally afraid to talk to one another, because muttering over a martini that "Hey, Jim, it looks like XYZ will merge," or even, "Arbus is coming out soon with a hot new product," might well mean indictment, heavy fines, and jail terms. And where are the intrepid guardians of the First Amendment in all this?

But of course, it is literally impossible to stamp out insider trading, or Wall Streeters talking to another, just as even the Soviet Union, with all its awesome powers of enforcement, has been unable to stamp out dissent or "black (free) market" currency trading.

Much to the dismay of those who regard government as the great equalizer in society, humanity is inherently unequal.  Certain people have better access to information than do others.  In the realm of a market economy, the faster industry information is shared, the sooner productive factors are designated to more efficient use.  Our world of scarce resources necessitates the allotment of information as soon as possible.

The irrationality of insider trading prohibition can be thought about in another way.  Suppose a stock trader overhears a conversation at a bar between two executives of, say, Apple.  The executives are expecting a supply chain disruption of raw materials to a key manufacturing plant.  This information is not public yet.  Because of this "insider information," our stock trader decides against buying more shares of Apple.  The next day, Apple stock tanks, and the stock trader isn't at a loss because he refrained from buying a stock he was initially going to purchase.  Should he then be prosecuted?  How does one prosecute non-action?

But though a case can be made for private-sector insider trading, the dynamics of congressional insider trading are drastically different.  Congress members have unique access to information by the very fact that they dictate much of how the economy behaves and reacts to regulations and legislation.  And, if you can imagine, congressional members have exempted themselves from prosecution for insider trading activity.  How convenient.

This authority in itself makes congressional insider trading unfair.  The problem is how to rectify such a blatant act of enrichment through coercion.  Congress members already can't discipline themselves not to spend more tax dollars than they take in; what hope is there for them to abide by their self-imposed restrictions?

The key is to make the public aware of such shameful behavior and to limit the amount of control the government wields over the economy.  It's no easy task, but it must start somewhere.  Otherwise, Leviathan will just continue to overextend its grasp on society, and the rule-makers will keep designating themselves king-makers.

Last Sunday night, 60 Minutes came out with a great report that highlights specific acts resembling "insider trading" by members of U.S. Congress.

The report comes on the heels of an effort by Peter Schweizer of the Hoover Institution to uncover "soft corruption" in Washington and deduce why Congress members have proven uncanny at earning large profits from stock trading.  Despite the denial by Representatives such as former Speaker Nancy Pelosi (whose look of horror when questioned directly on the issue alone makes the report worth watching), the evidence of congressional insider trading is obvious.

As Nobel Prize-winning economist Fredriech Hayek taught, power centers always attract the worst of individuals.  That members of Congress would use their authority over the financial sector to make a quick buck on the side is anything but surprising.  As former Obama chief of staff and U.S. representative Rahm Emanuel put it, one shouldn't let a good crisis go to waste.  That's probably why he dumped loads of Freddie Mac stock before it was revealed that the lender was under investigation for inflated earnings back in 2003.

Insider trading, which is essentially the quick disbursement of relevant market information by individuals closest to select industries, shouldn't be illegal by itself.  This argument has been made numerous times by economists Murray Rothbard and John Tamny.  This particular passage by Rothbard outlines the sheer absurdity of insider trading laws:

There is another critical aspect to the current Reign of Terror over Wall Street. Freedom of speech, and the right of privacy, particularly cherished possessions of man, have disappeared. Wall Streeters are literally afraid to talk to one another, because muttering over a martini that "Hey, Jim, it looks like XYZ will merge," or even, "Arbus is coming out soon with a hot new product," might well mean indictment, heavy fines, and jail terms. And where are the intrepid guardians of the First Amendment in all this?

But of course, it is literally impossible to stamp out insider trading, or Wall Streeters talking to another, just as even the Soviet Union, with all its awesome powers of enforcement, has been unable to stamp out dissent or "black (free) market" currency trading.

Much to the dismay of those who regard government as the great equalizer in society, humanity is inherently unequal.  Certain people have better access to information than do others.  In the realm of a market economy, the faster industry information is shared, the sooner productive factors are designated to more efficient use.  Our world of scarce resources necessitates the allotment of information as soon as possible.

The irrationality of insider trading prohibition can be thought about in another way.  Suppose a stock trader overhears a conversation at a bar between two executives of, say, Apple.  The executives are expecting a supply chain disruption of raw materials to a key manufacturing plant.  This information is not public yet.  Because of this "insider information," our stock trader decides against buying more shares of Apple.  The next day, Apple stock tanks, and the stock trader isn't at a loss because he refrained from buying a stock he was initially going to purchase.  Should he then be prosecuted?  How does one prosecute non-action?

But though a case can be made for private-sector insider trading, the dynamics of congressional insider trading are drastically different.  Congress members have unique access to information by the very fact that they dictate much of how the economy behaves and reacts to regulations and legislation.  And, if you can imagine, congressional members have exempted themselves from prosecution for insider trading activity.  How convenient.

This authority in itself makes congressional insider trading unfair.  The problem is how to rectify such a blatant act of enrichment through coercion.  Congress members already can't discipline themselves not to spend more tax dollars than they take in; what hope is there for them to abide by their self-imposed restrictions?

The key is to make the public aware of such shameful behavior and to limit the amount of control the government wields over the economy.  It's no easy task, but it must start somewhere.  Otherwise, Leviathan will just continue to overextend its grasp on society, and the rule-makers will keep designating themselves king-makers.

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