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More on the FDA

Suppose we regulated financial investments the same way that we regulate medications.

We’d have a centralized, bureaucratized agency in Washington manned by expert financial analysts with PhDs in finance from Stanford and MBAs from Harvard. This agency might be called the Finance and Investment Administration – the FIA. No financial institution could offer for sale (or gift) any financial instrument unless it first is proven, to the satisfaction of the FIA’s staff, to be both “safe” and “effective.”

If the FIA deems any financial instrument – a bank account, a bond, an IPO, a piece of real-estate, whatever – to be unsafe, no one will be permitted to invest in that instrument. Likewise, if the FIA deems any financial instrument to be ineffective, no one will be permitted to invest in it.

Every financial instrument, every investment opportunity, legally available will have the government’s official imprimatur – Uncle Sam’s assurance of both safety and effectiveness.

If the FIA does its job effectively, what financial instruments will be approved for sale?  Perhaps every instrument that is not marketed or sold fraudulently, regardless of its riskiness?  Or perhaps only grade A corporate bonds and debt issued by Uncle Sam?  Or perhaps no investment instruments – because every investment instrument features some level of risk.

What is Americans’ appropriate level of maximum riskiness of an investment? Note that the FIA will make this determination for every American. Warren Buffett and Peter Lynch might assess some instruments differently; no matter: if the FIA prevents these instruments from being sold, Warren Buffett, Peter Lynch, and every other American would be prohibited from buying them.

Bill Gates and Joe Sixpack might have tolerances for financial risk that exceed the maximum risk-tolerance assumed by the FIA when it decides if an instrument is sufficiently safe. No matter. Gates, Sixpack, and every other American would be prohibited from making these riskier investments.

We don’t – thankfully – regulate personal investment decisions in this way. So why do we regulate personal medication decisions in this centralized, bureaucratized, one-size-fits-all-300-million-Americans manner?

One possible answer to this question is that health care is a matter of life and death, while finances are not. True (at the extreme). But it’s not clear which way this observation cuts. If Ms. Smith faces a 90% chance of dying an excruciating death within the next 12 months, isn’t it especially important — precisely because it’s a matter of life and death — to let Ms. Smith herself choose to pursue whatever life-saving potentials are within her grasp?  If an FIA kept her from buying a junk bond, that would be annoying; if the FDA prevents her from possibly saving her life or avoiding agonizing pain, that is atrocious.