The Problem with Stocks
How to fix our broken stock market
The problem here, at the very core, is that we do not have a free market economy. (Wanna know more? There’s an episode and a podcast episode for that.) We obviously can’t fix the entire thing in one fell swoop, but there are actually a number of steps we can take to make the stock market way more fair and transparent.
The solution? It all comes down to the SEC
Let’s start with the Securities and Exchange Commission, aka the SEC, the government body that regulates and monitors the stock market and the investors and firms that participate in it. In theory, the SEC is there to create regulations that protect investors and make sure they’re not getting screwed over (*ahem* payment for order flow), as we saw in Jon’s interview with current SEC chairman Gary Gensler in this episode, they’re in a very tough spot.
As Jon said, they’re the sheriff and they’re outgunned. They don’t have enough resources — their entire budget is roughly two billion dollars a year while Wall Street spends tens of billions of dollars annually on technology alone — and they definitely can’t keep pace with the technological advancements that are happening constantly in the financial industry. When the SEC does go after firms for breaking the rules, they’re only able to levy fines. (The more serious crimes are referred to the Department of Justice, but that’s a rare occurrence.) Most companies just write these off as the cost of doing business.
So, how do we make it less challenging to keep this greedy band of Wall St. bros in check? Here are some ideas:
Crowdsourcing corruption busting
Organized rebellion, like the GameStop stock surge, has shown that retail investors are far from “dumb money” — they’re actually smart enough to bring the entire system to its knees. But let’s be real — while their success is inspiring, it shouldn’t be entirely on the apes of Reddit to reform our market one meme stock at a time. Still, there is a role for retail investors to play: grassroots power can be used to hold firms accountable. We can demand that firms aren’t able to exploit the market and we can press Congress and other government bodies to properly regulate it.
Reform! Reform! Reform!
As Dave Lauer outlined on our panel, the structure of the market is ultra complex, and that’s by design. The more obscured things are by complexity, the harder they are to regulate. And to make matters worse, at the moment many of the rules that are in place are “self-regulatory,” meaning these institutions are meant to keep themselves in check. Really flawless plan. It’s working like an absolute charm, clearly.
Lauer is leading a grassroots campaign called We The Investor to mobilize investors and push Congress and the SEC to fix our extremely rickety market structure and bad practices like Payment for Order Flow. There are also nonprofit organizations like Better Markets that push for financial reforms that will make the market fairer for everyone.
Waaaaay less money on lobbying
There’s a big, honking reason why Congress is very resistant to making the SEC a more powerful agency, and — no surprise!— it’s that Big Finance spends an incredible amount of money lobbying them to keep regulations to a minimum. In 2020, Wall Street spent almost $3 billion on campaigns and lobbying efforts. It’s often called the Acela Economy, because it runs between Wall Street and D.C. Basically lawyers move in and out of working at the SEC and representing financial firms, both defending them and lobbying them.
Disclosure of the amount of money that is spent influencing members of Congress is possible to find buried in records, but you basically need the digging skills of a journalist to do it. This means your average investor likely has no idea how much money a given company has contributed to PACs or spent lobbying this committee chairman or that one. And would be relatively easy to make into law, since this information could be easily published in a firm’s annual report.
We can all win if some of us stop cheating
As J Brown emphasized repeatedly during our panel, this isn’t a case of one side losing so the other can win. Rob Jackson explained on the podcast that the current mindset in D.C. and in the financial industry is that you can’t have investor protection AND grow capital. But we can have both!
But that won’t happen as long as those who are making fucktons of money by keeping the market unfair are in charge of the rules and policing themselves. What we need is for everyone in the market to work together to make the entire system better for everyone.