The Confidence Game: Manipulation of the Markets by Governmental Authorities

Abstract

The global financial crisis renders visible and urgent a perennial (although often ignored) tension in financial regulation with respect to the extent to which governments should intervene to fix the financial markets. Because the maintenance of confidence is at the heart of much financial regulation, a massive lack of confidence seems to be a significant market or regulatory failure justifying governmental intervention. However, some governmental responses to the financial market crisis seem to treat the preservation of confidence in the markets (rather than the preservation of market integrity) as the fundamental concern of regulation. The paper argues that adopting emergency measures to manipulate the markets in the interests of improving confidence risks undermining the ability of regulators to control the behavior of financial institutions for the future in any meaningful way.