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Time to legalize insider trading?

Dylan Matthews, at the Washington Post’s Wonkblog, has a pretty well-reasoned piece suggesting that we should just get rid of the laws against insider trading.

That sounds crazy at first, but it’s hard to argue with most of his reasons–in fact, I’m on record saying some of the same things, including:

  • Insider trading laws are designed to make us civilians trust the financial system. Matthews says, reasonably, that we shouldn’t trust the financial system–we should understand that it’s a place where insiders, simply by being insiders, get to fleece everyone else, and we shouldn’t even bring them our money.
  • Even if insider trading laws were ruthlessly enforced, it would be impossible to prevent “insider nontrading”–simply not taking bets that you otherwise would have taken.

Matthews does make a few points I find less compelling, like the idea that we want people to put their money in index funds. I think that would worsen other problems on Wall Street (when a million people own a stock, nobody has much power over the company; when a million people combine their stock into a fund, the manager of that fund has quite a bit of power and can demand that the company declare a special dividend or buy back stock or do any of the million things that Wall Street—and only Wall Street—thinks are good ideas).

But on the other hand, there’s another reason to legalize insider trading that Matthews doesn’t mention: It would pretty much end the mystique of financiers.

Imagine if everyone understood that Wall Streeters made more than the rest of us, not because they made smarter trades with the same information, but because they just plain knew what was going to happen in a way that the rest of us never could?

Who would argue that they deserve their ridiculous pay, when they were clearly doing what any bozo could do in the same position? Who would say that we need to keep taxes on them low?

So yes, maybe it is time to legalize insider trading–we could stop pretending that Wall Streeters are smarter than the rest of us, or that they’re doing us any favors by making money for themselves.

2 comments to Time to legalize insider trading?

  • Hanna

    This seems a bit idealistic. Everyone knows that Wall Street is crooked, and the financial system is criminal, but shrugs their shoulders and says “but what can we do about it?”. I doubt that legalizing insider trading will be the thing that causes people to realize that the economic system is corrupt. In fact, it can easily be spun into a positive thing for everyone by the right wing media, like all the other terrible things were. We need a massive, grassroots movement which is agitating for change. A strong trade union movement would be the way to achieve this. Giving even more free rein to Wall Street in the hope that maybe, some people will be fed up, is naive. The people are already fed up, but don’t know what to do. Workers should be self-organizing and uniting against big business and Wall Street, not hoping that an even more openly corrupt system will wake everyone up.

    • > I doubt that legalizing insider trading will be the thing that causes people to realize that the economic system is corrupt.

      Probably not. But I’m against unenforceable laws in any case.

      >A strong trade union movement would be the way to achieve this.

      I don’t have much faith in unions as they’re currently conceived. Cooperatives are a different matter–there’s no need for Wall Street to be in the equation *at all.*

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