A Bull Market: In Regulations.(Brief Article)

It's accepted wisdom in Washington that giving regulatory agencies like the SEC enormous new enforcement authority will placate fidgety investors and help reverse this year's stock-market slide. But the accepted wisdom is highly suspect, if not downright counterfactual. Indeed, a strong argument can made that the rush to re-regulate corporate America is precisely what is holding back a bullish market rebound.

Consider the research of top-flight financial-market analyst James Bianco of Arbor Research and Trading Company in Barrington, Ill. For many years, Bianco has been tracing the relationship between federal regulations and the performance of the stock market with data going back all the way to the 1930s. Bianco has discovered that "the most profound effect the government has on financial markets is through industry regulation." He has found, to be specific, that every time there's a spurt of new rules and edicts from Washington, interest rates and inflation tend to rise, and the stock market to sag.

In the 1970s, the regulatory state flourished, and stagnation and a miserable stock market were the result. In that decade, the real annual rate of return on the market was -6 percent. Conversely, in the 1980s, America deregulated in key industries such as financial services, transportation, and energy. Pages in the Federal Register fell by some 50 percent. The stock market tripled in value. And in the 1990s, the regulatory state remained relatively tame, and the market soared to even greater heights. The lesson? Rules and rallies generally don't go together.

But here's the bad news: Congress and federal agencies are on pace to make 2002 one of the biggest years for new regulation in perhaps a decade. Wall Street has taken grim notice. In fact, Bianco's research shows that it was precisely the stampede on Capitol Hill and in the White House for new securities laws after the WorldCom fiasco that caused the Dow to drop in mid July to its lowest level since 1997. "The 1,000-point ...