Why Politicians Shouldn’t Be Trading Stocks

Recently, disputes have arisen in the US Congress over the massive profits made by some members in individual stock trades. Research by Capitol Trades showed that within the Congress about 370 million USD worth of company stock was bought and sold between 2019 and 2020- an absolutely mind-blowing amount.  Multiple senators are advocating for a complete ban of individual stock trading during one’s tenure in the Congress, with a few differences from proposal to proposal. This article will provide a brief analysis of the primary reason behind the decision to ban stock trading, the existing provisions, and what we can expect going ahead.

As members of the US Congress, senators are privy to information the public isn’t- for example, senators were informed of the dangers of the COVID pandemic and the expected consequences before any public action was taken. This enables them to make judgements with respect to the stock market based on insider information, giving them an unfair advantage over the average investor. Senate Intelligence Chair Richard Burr sold $1.7 million of stock in 2020 after getting a daily briefing on the COVID-19 pandemic, despite reassuring the public, according to ProPublica.

Moreover, the policymakers of a nation should have minimal incentive to take decisions based on their personal gain. Allowing trading to continue when the policymakers of a nation are incentivized to put potentially harmful provisions in place is dangerous. 

Nancy Pelosi, Speaker for the House, initially said that America being a free market economy implies that anyone at all should be able to freely trade stocks. She later rescinded her statement and said she’d be willing to support a bill to ban trading if her fellow Democrats were for it too. Of course, the same problem of insider information arises. Let’s take an analogy- A and B are going to bet on whether a coin will land tails up, or heads up. B secretly knows that both sides of the coin are heads. This gives him an unfair advantage, and guarantees a win or at worst, a tie. B will rip A off for a few games and then run away to ensure that A doesn’t catch on.

The stock market is the rigged game right now, and Congress members involved in stock trading are the Bs of the game. Everyone else fits into the ‘A’ archetype. In the status quo, A stands no chance against a smarter, craftier, and more resourceful B.

Now let’s evolve the analogy a bit- C enters the arena, and is meant to act as a guard against B cheating. He asks B for the coin, and replaces it with a normal one, thus allowing the game to continue in a fair manner. 

Except he doesn’t. C is a negligent guard who is easily fooled. B simply hands him a decoy coin, or ignores him. C couldn’t care less and lazily oversees the game in all his irresponsible glory. If B gives him a coin after a fair bit of protesting, C simply slaps a minor 200 dollar fine on him and then lets the game continue as is, even if B were to sneakily use yet another double-sided coin to cheat.

C is the STOCK Act, 2012 in this situation. STOCK stands for Stop Trading On Congressional Knowledge, and is meant to serve as a check on the use of insider information by Congress members. The act states that all stock trades that cross a certain threshold must be reported within 30-45 days of the trade. A first offense warrants a 200 dollar fine. Repeated offenses warrant increasing fines, but the crucial problem lies in the inefficiencies of the act- absolutely no authority follows up on lack of payment or disclosure, enabling multiple instances of ‘B ignoring C’ and doing as he pleases.

Clearly, the provisions in place don’t work. This statement is further backed by an Insider report showcasing the extent of law-bending. There is a drastic need for regulation over the personal financial activities of Congress members. Their duty is to serve their nation, and them agreeing to be in the Congress means giving up certain privileges afforded to a layman.

Multiple senators have come forth with their plans for regulation- many of them are similar, and broadly advocate for a ban on stock trades, as mentioned in the introduction. A few have specifics- for example, a bill by Senator Mark Kelly and Jon Ossoff details the Ban Congressional Stock Trading Act, which states that all Congress members, as well as their spouses and dependent children, will face a ban on stock trading and must place their stock portfolios in a blind trust. Another bill by Senator Josh Hawley is largely the same, except it excludes dependents from the ban. 

Steps to prevent insider information trading have been taken by the Federal Reserve too, with them restricting trading of stock and securities by policymakers. There is an urgent need for a consistent law across all organs of the government, to prevent disastrous economic consequences of the coin game between A and B.

3 Comments

  1. Ashish says:

    Relevant issue, very well explained for easier understanding . Looking forward for Next .

    Liked by 1 person

  2. ruchika thakur says:

    With the budget coming up this would also be equally applicable to Indian politicians!

    Looking forward to to more insights from you

    Liked by 1 person

  3. vimalneena says:

    Completely agree.

    There should be a bill to limit lawmakers ability to trade stock because they have tremendous influence over the economy. They have access to information that general public does not. These actions (of trading stocks) result into people losing trust in them.

    Very well explained.

    Like

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