There are markets, and there is the Market. Markets are networks of people who come together to exchange one thing for another. The Market is the cornerstone of a belief system whose biggest proponent has been the University of Chicago. Chicago: Hog Butcher for the World, according to Carl Sandburg in 1912, whose economy was revitalized in the 1970s by the City’s commodity exchanges and their esoteric flacks in Hyde Park.
Market value theory is to economics what “universal grammar” is to Chomskian linguistics: a hypothesis that the human brain wants to trade in organized markets, where the syntax of our behavior generates a fair valuation of the resources and goods that we are trading, which we call “price.”
This view has considerable romantic appeal, but it does not explain an inalienable dimension of market behavior: cheating. The stunning barrage of evidence that the Market is being willfully and systematically dismantled–the rigging of mutual fund pricing, credit ratings and now LIBOR–is positive if it causes us to reflect critically on our false belief in the power of the Market to protect us from ourselves.
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In addition to cheating, another possibly unexplained and inalienable dimension of market behavior might be the “law of unintended consequences,” as illustrated depressingly in a completely different context in Philip Caputo’s novel “Acts of Faith.” In that book, various people and groups who try to “make a difference” in the hell of Sudan find that the steps they take to try to address problems only seem to create new ones. But it could be said that these attempts ultimately fail because they are rooted more in the personal aspirations of the do-gooders than in the most basic reality of the people they’re trying to help.
I wonder if there might be a parallel of this kind in recent market events? Possibly even in the role of regulators?
In 1968 I read a book, I’ll say it for you, last one? Back to business, by C. Walton Hamilton (CWH), “The Politics of Industry”, 1957. I mention it at my blog post of 27 July 2007. When I read it, I thought CWH was crazy. After I had been a CPA for about three years, I realized CWH was right and the way 99.99% of the people think the world works just ain’t so. What led me to this conclusion? Exposure to the Department of Justice and SEC. It’s almost enough to make you a “Crit”.
I saw large scale “cheating” by CPAs. Really! How to reduce it? Increase CPA liability for bad audits. Simple enough. What do we get instead? More paperwork, SOX, PCAOB, etc. Nonsense.
Reform the rating agencies (RA). Good luck Sylvan. I’m in Josh Rosner’s corner, there are few things that will be as effective in cleaning up the RA as ending their First Amendment protection.
I’ve posted on 31 years of failure in CPA regulation and see the RA as being in the same business, third-party certification, with the same problem, “the classical agency problem”.