This book provides a broad overview of financial markets and policy initiatives to address the problems inherent to financial markets by way of regulation. To state this right at the beginning: this is not a historian's account, nor is it one by a financial economist. Seth Oranburg is a legal scholar by trade and this is clearly apparent throughout his text. In a total of thirteen chapters, the author develops his view of how financial markets have developed and how investors and regulators have shaped this sphere. The overarching chronicle here is the division of these developments into three stages: “the wild west” (from 1790 to the Great Depression), “electric light” (from the New Deal to the financing of Silicon Valley start-ups), and “social media investing” (from the dot-com bubble to crowdfunding). Not everybody will agree with this sort of classification. Its main purpose is the presentation of Oranburg's fundamental perspective, which is that time and again, technical developments furthering financial opportunities have been channeled by major players (rich investors) and regulators to benefit the few over the many. Developments like the run toward investments in cryptocurrency are thus presented as the consequence of desperate small investors searching for higher returns. This notion does not do justice to the factual range of available investments to the wider public, nor does it elaborate on investors’ recurrent excessive risk taking in financial markets.
In an early example of this perspective, the book covers the lax regulation of so-called bucket shops, where small investors driven by the innovation of ticker news gambled in stocks. For sure bucket shops were institutions marred by often fraudulent owners. But they also put pressure on brokers’ fees and participation restrictions, thereby contributing to a vast increase in stock ownership in the 1920s. Yet it was this widening in the participation in stock speculation that helped feed the financial excesses of the 1920s. With the crash and the harsh economic downturn that followed in the 1930s, regulation turned toward limiting the sources of excesses and instability. However, in Oranburg's perspective, the regulations of the New Deal area are presented as initiatives to disenfranchise investors and particularly small investors. This then presumably set the stage for decades. In this account, the last decades are presented as dominated by privileged investors (angels and start-up financiers) that, again, hinder average investors in taking advantage of outstanding investment opportunities. Many would disagree here; possibilities for participating in financial markets have multiplied, as have the possibilities for taking risky positions. The key problem—particularly when considering the bounded rationality of investors—is not the limited participation for people with limited wealth but rather the systemic instabilities induced by adverse selection and excessive risk taking. It is this topic that has dominated the discussions of the appropriate regulation of financial markets in recent years. Not surprisingly, the book does not treat banking regulation and issues like the too-big-to-fail dilemma.
On theory: Just one point can serve to illustrate where the text deviates from common economic reasoning. In Oranburg's view, corporate fraud is one important reason for regulation and oversight. It is here that the book proposes that the key problem of fraud should be seen in merely transferring wealth from one person to the other. The time and effort spent by the fraudster in this account appears as the main social loss, since it does not augment the total of goods available. One wonders whether this is a view widely shared among legal experts in the field. This is clearly not where economists see the key problem of fraudulent behavior. Rather, the detrimental effects of such actions (e.g., insider trading) on market participation are important. The higher the perceived risk of losses through illegal activities the fewer the funds supplied through the financial system and the lower the aggregate output. Similar problems emerge when the text tries to make the point that strengthening crowdfunding could be the solution for the fundamental problems of finance. Clearly, the notion that holders of bank accounts, mutual funds, and stocks benefit from (thus free ride on) the monitoring activities of banks and major investors is absent from Oranburg's picture.
A further problematic point concerns the book's treatment of timing. It is commonly understood among financial economists that activism in regard to the management of wealth comes at a price: buying and holding stocks is generally a better strategy than frequent buying and selling. Again, Oranburg presents a conflicting notion. In his perspective, improving liquidity in the market for crowdfunding helps solve the troubles with other forms of finance.
The book makes for fluent reading. Its most instructive sections come in chapters 7 and 8, where relevant legal material is presented in a very accessible way. An easy flow of information appears to be the author's top priority throughout the book. However, this means there is almost no mention of academic debates describing conflicting hypotheses and positions. Readers looking for a more detailed and balanced account of historical developments in financial markets and regulation will be better served by the edited volumes Financial Systems and Economic Growth: Credit, Crises, and Regulation from the 19th Century to the Present (ed. Peter L. Rousseau and Paul Wachtel; 2017), focusing on the economic side, and The Oxford Handbook of Financial Regulation (ed. Niamh Moloney, Eilís Ferran, and Jennifer Payne; 2015), dealing with legal developments.
