Eliot Spitzer vs. the Chicago Boys


Who's to blame for expensive prescription drugs, pollution, and the biased research coming out of Wall Street? Try pinning the rap on the University of Chicago.

At least that was New York State Attorney General Eliot Spitzer's attempted in a Dec. 4 speech to financial-services executives at the annual Banker of The Year dinner. At the banquet, which was held in New York's Helmsley Palace, Spitzer blasted the University of Chicago for encouraging recent market excesses with a philosophical curriculum that teaches less regulation is always good for capitalism. The audience listened respectfully, but many, especially the University of Chicago alums, privately voiced their disagreement with Spitzer's thesis later in the evening.

"The government has to come up with a pricing scheme."

As a voice of laissez-faire economics, the University of Chicago has shaped much of the dialogue over market regulation in recent years, starting with Ronald Reagan's Administration in 1980. Free markets, the theory goes, will correct most excesses by making it impossible for those guilty of bad behavior to survive. "They've said that intervention by...government is wrong," Spitzer said. "But they haven't taken into account that markets can have structural flaws." Contacted by BusinessWeek Online for a reaction, University of Chicago professor of business and economics Kevin Murphy said Spitzer's interpretation of the schools position was simplistic. Says Murphy: "I think we have better things to do than beat up a straw man."

RETURN OF THE REGULATORS? Spitzer's speech was another shot across Wall Street's bows as investors and the financial system continue to dig out from the collapse of the telecom and energy markets. Both were high-flying dynamos -- thanks to dramatic deregulation in the 1990s -- that have crashed amid scandals involving allegations of accounting irregularities and market manipulation. Congress recently passed legislation that will impose higher standards of corporate governance. Now, some politicians and academics are calling for the robust reregulation of some industries to protect investors and consumers.

That's where Spitzer seems to be coming from. There is now clear evidence that the "deregulation spasm" of the '90s was based on an argument that had "structural flaws," he told the bankers. For example, environmental polluters are not being punished by the market, he charged, and that means all of society pays the price for pollution. Relying on the market to fairly price prescription drugs has also failed, he insisted, since some severely ill people rely so much on one particular drug that they will pay anything to get it. "The government," said Spitzer, "has to come up with a pricing scheme."

FAUX FREEDOM. And, of course, there's the financial-services industry. Spitzer has spent the better part of 2002 investigating investment banks for issuing biased research that cost retail investors dearly. Along with the Securities & Exchange Commission, Spitzer's office is expected to announce fines of ranging from $75 million to $500 million. While competitive financial-services markets depend on the "free flow of information," Spitzer said, that wasn't available to retail investors. Instead, banks issued glowing research about corporate clients to land lucrative investment-banking business. So the "free market" wasn't really free at all, according to the attorney general.

The scandals Spitzer has been probing have tarnished the industry, scuttled stock prices of major players, and spooked individual investors. Spitzer said he's eager to get all the threads of his investigation tied up. And then investment banks will emerge stronger than before, he believes. He declared that "the way to get the boom going again is to be aggressive" in finding the best way to restore confidence in the stock market.

Today, it's reforming Wall Street. Tomorrow, the University of Chicago? By Heather Timmons in New York


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