Looking at the Effects of Securities Deregulation

Posted by John Coates, Harvard Law School, on Tuesday December 27, 2011 at 10:01 am
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Editor’s Note: John Coates is the John F. Cogan, Jr. Professor of Law and Economics at Harvard Law School. This post discusses Professor Coates’ testimony before the Subcommittee on Securities, Insurance, and Investment of the United States Senate Committee on Banking, Housing, and Urban Affairs, available in full here.

Amid an economic downturn caused in part by financial deregulation, it is odd to most people outside the Beltway that Congress should be actively considering (and indeed have passed in the House) a raft of proposals for more financial deregulation. Yet the politics of both parties require efforts to generate job growth, without spending or taxing, and some deregulatory proposals may plausibly do that. My testimony takes up three themes related to pending proposals to revise securities laws to (among other things) deregulate widely held but unlisted companies and banks, to permit unregistered “crowdfinancing,” and to loosen constraints on small public offerings:

  • (1) the proposals under review all raise the same general trade-off, which is best understood not as economic growth vs. investor protection, but as increasing economic growth by reducing the costs of capital-raising vs. reducing economic growth by raising the costs of capital;
  • (2) no one can predict with any degree of certainty whether any proposal on its own, much less in combination, will increase job growth or reduce it, because the evidence that would allow one to make that prediction with confidence is not available; and
  • (3) the proposals are thus all best viewed as proposals for risky but potentially valuable experiments, and should be treated as such – with an open mind, but also with caution and care.

My testimony makes a suggestion: any proposal should contain a sunset, with the SEC directed to study the effects of the proposal during a “test” phase, and authorized to re-adopt the proposals if their benefits exceed their costs. Specific comments on each bill are contained in the final part of the testimony.

The full testimony is available here.

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