The WSJ’s Holman Jenkin’s reviewed the SEC’s tough problem with Elon Musk and Tesla in last night’s edition.  The problem is that Elon has a pretty ugly relationship with the stock market, since while he has cultivated quite a passionate following for his own activities and dreams (leading to high stock prices), there are many in the capital markets that think these aspirational views will never get to the bottom line, and they are aggressively shorting the stock.  For full disclosure, I’ve been one of those in the last few years, and suffice it to say, I’ve been burned.  As John Maynard Keynes said, the stock market can be irrational longer than you can stay solvent.  So while I agree with the shorts, I’m no longer in the shorting game–at least in the moment.  I’ve never understood how you can get to a successful car company simply on the basis of government subsidies (direct and indirect) that Tesla gets.  So while Tesla continues to hemorrhage cash, its stock price has nevertheless continued to rise.  And that just incites the short sellers further.

Now Mr. Musk is never short (no pun intended) on public bravado, and he is certainly not happy with the excessive shorting of his stock, a clear market signal that many think he is on the wrong track.  So when he publicly stated that he had financing secured to take Tesla private (at a significantly higher stock price), that elicited buying, driving the stock price higher, and even further higher by the need for those shorting the stock to cover their sales–the classic short squeeze.  The problem is that manipulating the market price for your own gain is a crime.  So did Elon have the financing?  Was he trying to manipulate the price and seek revenge against his hated enemies, the short sellers?  As Jenkins states

The SEC could throw the book at Mr. Musk as it did Bernie Ebbers of WorldCom or Ken Lay of Enron. Even less ambiguously than these men, who were able to shift some of their blame to expert accountants and financial officers, the agency could conclude Mr. Musk intended to mislead the market by putting out inaccurate information that he knew would have a positive effect on the stock price.  It was information, after all, that explicitly told the world an offer for Tesla shares, then selling for $350, would soon materialize with their hero’s own imprimatur for $420 a share.

The problem is that Mr. Musk is very popular, a hero to those wanting to transform the auto business away from fossil fuels.  But manipulating the price higher, when the underlying business may be worthless is risky.  Even now BMW and many other luxury car makers are coming out with their own electric models, in large part to address regulatory requirements, like this awesome model:

So its by no means clear that even if the market ultimately goes electric, that Tesla will be the beneficiary.  And if the SEC doesn’t do anything about market manipulation that is promoting a fraud, what will this do for the SEC’s reputation when Tesla does finally implode?  As Jenkins notes,

The SEC seldom is keen to cause trouble by noticing wrongdoing before the market has made up its own mind about a company’s dereliction; it much prefers to show up after the fact and shoot the wounded.

So the SEC has to pick its poison:  do what it would do to anybody else that did this, and send Mr. Musk to jail (and likely Tesla to bankruptcy) with the political hit that will come with it, or do nothing and hope that you’ve found a new job by the time Tesla goes belly up.  Or say a prayer that Mr. Musk might actually not go bankrupt.

Jenkins does a great job at highlighting this conundrum, but we need to take it further.  Many of the most ardent proponents of bigger government suggest regulation of big business malfeasance is an essential responsibility of government.  But this case highlights the problem:  Even if we agree that regulation is needed, since in theory regulation might prevent some malfeasance, the reality is we don’t live in a world called in theory.  We live in a real world where regulatory decisions are necessarily made by regulators who are well aware of how their decisions may effect their own careers and livelihood.  That is, regulation can never be separated from the world of political economy.  How many times when catastrophe strikes, in industries that are heavily regulated, do we see statements after the fact that the regulators were “asleep at the switch?”  Of course the regulators were never sleeping, but just like every other individual, they compared different regulatory responses to the issues they faced, weighing their own costs and benefits (which no doubt includes some aspect of broader social concerns) and making decisions that afterword appeared to be “asleep at the switch.”  But in reality they were optimal given the incentives the bureaucrats faced.  Ask yourself this question:  which one of you would like to be the one going in front of the cameras and telling the press you were indicting Elon, and watch Tesla go up in smoke because of your action?

Further, we need to not be quite so accepting of partiality in justice.  Jenkins gives up a bit too quickly:

So what if you’re the SEC and you give Mr. Musk a pass (as the SEC, we’re predicting, will largely do) and then find egg on your face down the road?  First answer: Today’s SEC commissioners and chairman will pray that it happens after they are gone.  Second answer: In a fact of life that irritates many readers when I mention it, if you’re an ordinary scofflaw, you can pretty much expect the law to be administered as written. If you are Hillary Clinton or Elon Musk or anybody from whom large political ripples flow, the law is always going to treat you differently. Get used to it.