Why Proper Regulation of the Financial Sector is Important

Why Would Anyone Invest in China with Any Confidence?

The great genius of the 1930’s regulatory legislation that created the SEC and set the rules for investing is that it provided the U. S. integrity in financial markets.  Absolutely nothing was done to tell investors whether or not a particular security was good or bad, but everything was done to provide investors with accurate information that they could use to evaluate the quality of the investment.  For the most part, the risk that an investor was acting on false, misleading or inaccurate information was removed.

Since well functioning capital markets are critical to a highly functioning economy, this regulation provided the U.S. with a highly functioning economy, until of course “de-regulation” became the word of the day.  The results of de-regulation of financial markets were predictable and certain.  The markets would lack integrity, and the failure of financial markets would ultimately plunge the U. S. into a severe recession.  (See 2008 – present).

A closed society like China does not understand this.  And so we have this story

China Props Up Bank Shares

 

And this information.

China stepped in Monday to buy shares of the country's battered banks, which have been caught in a selloff that analysts say reflects a broader loss of trust in the integrity of corporate earnings and government statistics.

China wants to be a part of the global financial system.  It would like its currency to become a reserve currency.  It would like to attract foreign investment (without ceding control to foreign investors).  This type of reporting is not what they want

The market rout began among a group of small U.S.-listed companies accused by investors of misrepresentation and has quickly spread to other Chinese assets available to overseas investors. Stock investors are fleeing China's state banking giants partly on fears that they aren't coming clean about their bad-debt problems after several years of blow-out lending.

Investors also are selling highflying Internet companies such as Baidu Inc. amid questions about obscure ownership risks. And they are fleeing property stocks on fear that Beijing's inflation-fighting efforts have left developers and buyers in hock to illegitimate financiers.

So China, go back and take a look at U. S. Financial history.  And when you do you will see that strong regulation far from inhibiting an economy is actually essential to growing it.  And after you learn that lesson, how about teaching it to the U. S., we seem to have forgotten it.