Should the SEC Be Rewarded for Incompetence?

In a column for the Washington Times, my Cato colleague Richard Rahn uses the Securities and Exchange Commission as an example of a government agency that fails to perform its core mission and then uses that failure to seek a bigger budget.

The budget for the Securities and Exchange Commission (SEC) grew tenfold (to more than $1 billion) in the past 25 years, but there is no evidence it has made us any safer from financial fraud. In fact, the opposite seems to be the case. The Madoff Ponzi scheme was the biggest financial fraud ever. Yet when knowledgeable people presented evidence of the Madoff scheme to the SEC, they were just blown off. Now the SEC wants a bigger budget as a reward for its failure, and the agency and members of Congress are demanding more power for the SEC. The United States has many laws against financial fraud, so that is not the problem. The problem may be - in addition to SEC incompetence - that the public assumes the SEC is looking out for it and consequently fails to do proper due diligence. In other words, the existence of the SEC may be increasing rather than diminishing risk.

The more profound issue, which Richard also addresses, is whether the very existence of bureaucracies such as the SEC results in more fraud and financial turmoil. Or, let's flip the question: Is there any evidence that the SEC (or other bureaucracies) have made a positive difference? The answer isn't necessarily no, but it sure would be nice to see any peer-reviewed evidence that the answer is yes.