In a provocative WSJ op-ed, Henry Manne compares the prohibition of insider trading to the prohibition of alcohol:
Just as Americans found ways to keep drinking, Wall Street will always look for an edge.
The much-hyped modern insider-trading prosecutions and their results are reminiscent of nothing so much as Prohibition-era government attacks on bootleggers. There is about as much chance of stopping trading on undisclosed financial information as there ever was of stopping the consumption of booze. There is simply too much money sloshing around the world's stock exchanges waiting for an "edge." Information is more mercurial than mercury and will seep into some crevice in the system no matter how many channels are closed. ...
The imagination of wealth seekers in using valuable information in the stock market will always outpace the ability of regulators to cope. The payoffs are too big and too accessible and the number of willing players too great for the practice to be significantly inhibited by scores of convictions. But political reputations can still be made by convincing investors that these prosecutions are in their interest and will significantly alter the market's behavior.
The case for outlawing insider trading is even weaker than it was with alcohol. The latter did in many cases inflict real damage—to careers, family relationships, livers. Insider trading not only does no harm, it can have significant social and economic benefits including a more accurate pricing of stocks.
But that is not the story for today, and it has been told many times (and never seriously refuted). The story for today is that we are repeating the errors of Prohibition. We see federal prosecutors making names for themselves by convicting mostly low-level functionaries. We see the so-called corruption of otherwise good folks, including medical researchers and high-tech specialists, with valuable information. Yet with so much wealth at stake, this "corruption" surely goes far beyond what prosecutors have been able to demonstrate.
It is high time to stop this ridiculous posturing. We really don't need another government failure like Prohibition.
Go read the wohole thing?
