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Whatever the long-run economic consequences of the waves of corporate, securities, and accounting scandals that have rocked Wall Street and Main Street, one thing is clear: the scandals have created a fertile climate for new regulatory initiatives and for regulatory entrepreneurship by ambitious politician-bureaucrats. We have observed both in abundance. Regulation has come in the form of the Sarbanes-Oxley Ace and the new corporate governance rules recently adopted by both the New York Stock Exchange and Nasdaq. Regulatory entrepreneurship has come in the form of state attorneys general's efforts, especially New York's Eliot Spitzer, to achieve fame and political support by aggressively entering the regulatory vacuum created by the Securities and Exchange Commission's failure vigorously to pursue the corporations implicated in the various scandals. The SEC's passivity was likely caused by the agency's capture by the same special interests it was ostensibly regulating. This article looks at the current regulatory disequilibrium in the U.S. capital markets from the allied perspectives of political theory and federalism in order to make two points about the current regulatory environment.

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