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Spencer Bachus Archive

Tuesday

15

November 2011

2

COMMENTS

Should Congressional Insider Trading Be Illegal?

Written by , Posted in Big Government, Economics & the Economy, Waste & Government Reform

A storm has erupted following 60 Minutes coverage of Peter Scheizer’s new book, Throw Them All Out, which highlights, among many other things, instances of “insider trading” by members of Congress. Following the report, many have called on Spencer Bachus (R-AL), Chairman of the House Financial Services Committee, along with other politicians implicated by the book, like former Speaker Nancy Pelosi and current Speaker John Boehner, to resign.

In the past, I have argued that insider trading ought not be a crime, as it brings to the market information that might otherwise remain hidden. Imagine if we were able to learn of Enron’s dishonest bookkeeping much sooner, for instance, if some insider had been legally allowed to capitalize on the fact that they knew the company was lying. Economically, it really makes no sense to criminalize the practice. But politics adds a new dimension.

The addition of political power potentially changes the equation. As an example, if a politician can call a hearing on an issue, stirring up market angst, he can not only capitalize on it with his foreknowledge, but he can then call additional hearings just to create more angst on which he can capitalize. In other words, it potentially impacts the political process itself. The concern here is not misguided economic fairness, but rather the sanctity of the democratic process.

That politicians benefit financially from their political knowledge is not a new idea – we already knew that they consistently out perform average investors. And indeed, there may be some informational benefit and market efficiency reasons for allowing them to continue to do so. But it’s incredibly ironic that while there is a much stronger argument for curtailing the practice amongst politicians than among average market participants, politicians remain the only class immune from insider trading laws. It would make much more sense to constrain politicians, whether it be Congressional rule or legislation, and free the private individuals than our current approach of the other way around.

Ultimately, however, politicians have to answer  to their constituents. Regardless of the legality of their actions, the voters will ultimately decide. The more important issue from where I sit, and one which I think is being largely ignored in coverage of this story, is the degree to which politicians are involved in all manner of economic minutia in the first place. If they constrained their activities to those with Constitutional authority, there would be far less opportunity for financial mischief in the first place.