Why Markets Need Referees

Picture New York, late 1920s. Stocks are flying. Shoeshine boys are giving tips. Brokers lend you nine dollars for every one you put down, so you can buy more shares. Some companies issuing those shares are basically empty shells. Nobody is checking.

Then October 1929 happens. The market loses about a quarter of its value in two days. Over the next three years, US stocks fall around 89 percent from peak to trough. Banks fail. Savings vanish. The Great Depression begins.

Congress goes looking for the cause and finds the same answer over and over. Public investors had no real information about what they were buying. There were no rules against insiders dumping on retail. There was no referee.

So Congress wrote two laws. The Securities Act of 1933 forced companies to tell the truth when they sold shares. The Securities Exchange Act of 1934 created an agency to police the markets afterwards. That agency is the SEC, and President Roosevelt picked Joseph P. Kennedy to run it. Markets without rules don't stay markets for long.