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Exploding the bubble cycle

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Melissa Phillip / Houston Chronicle / AP / File

(Read caption) Alex Saha, 3, makes bubbles in this July 20 file photo from Houston. Bubbles – of soapy water or stock market optimism – grow and grow until they burst into a sticky mess. And then little girls and investors start again. Bursts of regulation, in the wake of stock market crashes, can ensure that the same loopholes aren't exploited twice, but can they ever keep the cycle from repeating?

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After going easy for years on the fraudster Bernard Madoff, the Securities and Exchange Commission is now engaged in an all-out war against insider trading. After financial crisis comes regulatory frenzy—so it has been for some 300 years. Both the SEC and the Dodd-Frank Act are right on cue in this long-running political show.

Boom-bust cycles come with bubble laws, to use a term from Larry Ribstein of the University of Illinois College of Law, one of the legal scholars who looked at the historic trend. What causes securities regulation? Professor Stuart Banner of UCLA Law faculty has a succinct answer: “In a nutshell, crashes.

The 1720 South Sea Bubble in Britain gave rise to the Bubble Act. The 1792 crash in New York resulted in the first significant securities regulation in America. The 1929 crash led to the1930s securities laws. After the bursting of the late 1990s technology-driven stock bubble came the Sarbanes-Oxley Act of 2002. And the collapse of the twin credit and property bubbles heralded the passage of Dodd-Frank this year.


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