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Monday, June 18, 2007

Market Failure in Everything: The Wall Street Edition

All markets fail to some extent, the only question is the degree of the failure and whether action is required to alleviate the problems the market failure brings about. Kash Mansori at The StreetLight notes that even "Wall Street - the emotional center of the laissez-faire economic world-view" can be helped by government intervention designed to remedy market imperfections:

Rectifying Market Failures, by Kash Mansori: This is interesting. It seems to be a case where government regulation has actually caused the market (in this case, the market in investment advice) to operate more efficiently.

Wall Street Analysts Proving More Bearish Than Ever

June 18 (Bloomberg) -- Never in the history of Wall Street have analysts been so bearish. The good news is they're also getting it right more often, helping make investors richer by betting against corporate America.

Thank the regulatory hammer of former New York Attorney General Eliot Spitzer. In 2003 he forced 10 big firms to separate investment banking from research to avoid the conflicts of interest that tempted analysts to keep their reports upbeat.

"The industry has changed: you're not anathematized if you come out with a negative opinion," said Robert Stovall, ... Wall Street ... strategist... "It used to be that sell recommendations were frowned upon. I even worked at firms where the CEO said, 'I never want to see a bearish word on my stationery.'"

That transformation has helped investors following analysts' advice to beat the market. Nine of those 10 firms have been accurate the past two years, according to Investars, which tracks analysts' performance.

It's old news that government intervention can help remedy market failures. But the fact that this principle seems to hold true even on Wall Street - the emotional center of the laissez-faire economic world-view - is fascinating, and carries important implications for markets where market-failures are much more obvious.

Oh, and in case you were wondering: Yes, I'm thinking about health care.

    Posted by on Monday, June 18, 2007 at 03:42 PM in Economics, Market Failure | Permalink  TrackBack (0)  Comments (41)


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