Auditing Wall Street

Throughout this decade, valuable lessons were learned in the financial sector that unethical and greedy behavior combined with poor oversight can bring the economy into a free fall altogether. The modern American (and world) economy goes as Wall Street goes. In good times, this can multiply gains far greater than they would ever be able to obtain on their own. However, the door swings both ways and the overall economy can fall victim to the malfeasance of a single sector. Never before has oversight and regulation of a single industry been as important to the national economy as a whole.

The SEC (Securities Exchange Commission) was formed to be this oversight. At times, it has performed this role well. On other occasions, it has proven to be asleep at the wheel. However, at all times it has been subject to the power - or lack of - that has been given. Its job is to enforce laws that are on the books, not to enact its own regulations. But, as it may come to the surprise of many, the US government has been somewhat lax over the years in passing reforms over the stock market. Most of the rules enacted belong to Wall Street itself, with penalties for violations often being near non-existent. [Martha Stewart disagrees with that last statement.]

Historically, it has been up to Wall Street to regulate itself. This opens up a wide variety of potential conflicts for interest. That may seem to be the equivalent of putting Mark McGwire and Barry Bonds in charge of Major League Baseball's drug policy. Even most federal laws have been framed by the powers that be on Wall Street. That's not to say that the laws have been enacted to benefit the cheaters. Most regulations in place are very beneficial to the investing community as a whole and work to enforce ethical behavior. After all, if the general public does not have a general belief that the stock market is on the up and up, then they will stop investing and there will not be enough money in the system to make the wheels turn. The problem has been the loopholes and gaps left in place combined with short term thinking.

As we saw with the housing bubble that crashed in 2008, Wall Street is often willing to look the other way when the money is flowing in. In this case, mortgages were packed together into derivatives that were sold off under the belief that the good homeowners would cover for the risky owners and that the total value of the derivatives would continue to rise since housing prices would always go up (on the whole). Of course, that logic has been proven ridiculous. But a lot of smart people fell victim to it at the time.

While steps have been taken to prevent this particular situation from occurring in the exact same manner, the underlying issue is still in play. Regulation is always a few steps behind the trading action. Until some amount of foresight is shown, bubbles will pop and market crashes will continue occur. Every time it does, the economy will take a few years just trying to get back to the status quo.

Source: http://ezinearticles.com/6323616

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