Stiglitz’s The Roaring Nineties partially blames the big accounting scandals on market fundamentalism. But I’m inclined to agree with Henry Manne that one of the best cures for fishy accounting is to legalize insider trading. Here’s an excerpt from an interview with Larry Elder:

Elder: Let’s talk about the recent state of corporate accounting scandals: Enron, Global Crossing, etc. What impact would insider trading have had on these kinds of scandals?

Manne: I don’t think the scandals would ever have erupted if we had allowed insider trading . . . because there would be plenty of people in those companies who would know exactly what was going on, and who couldn’t resist the temptation to get rich by trading on the information, and the stock market would have reflected those problems months and months earlier than they did under this cockamamie regulatory system we have.

Take one of the simpler complaints about U.S. accounting: failure to count the cost of stock options. If insider trading were legal, then insiders – like accountants at Arthur Andersen – could sell the stock of firms the knew to have poorly disclosed but seriously expensive stock options. The information pours into the market, the exaggerated earnings statements fail to impress, and Mr. Small Helpless Investor doesn’t get any rude surprises from his broker when news finally trickles down to the New York Times.

I guess Stiglitz would deride my proposal as “market fundamentalism,” but I call it common sense.