The similarities between the financial markets and the attention markets motivate much of this book. The history of the financial markets provides a number of useful parallels to understanding the evolution of online advertising and suggests how ostensibly limitless engines of profit can be in reality quite unstable. But the long history of thinking about financial markets and their management also gives us another important thing: a grounded sense of how regulation can help to mitigate excesses in precisely the types of markets that online advertising now resembles.
While the subprime mortgage crisis has been our primary touchstone for the last few chapters, 1929 might serve as a more apt analogy than 2008 in thinking through the question of what regulation should look like. The year 1929 was the year of the Great Crash, a catastrophic collapse in the value of stocks and other securities traded on the New York Stock Exchange. Among economists, the Great Crash is historically significant because it marks the beginning of the Great Depression, which lasted for the next twelve years and represented a colossal 15 percent decline in global GDP.16
These events prompted the U.S. Senate Committee on Banking and Currency to investigate the crash of the New York Stock Exchange. Later known as the Pecora Commission after its chief counsel, Ferdinand Pecora, the investigation revealed a broad array of fraudulent activities taking place within the financial sector in the years leading up to the crisis. The Pecora Commission’s findings provoked a raft of new regulations during the opening days of the Roosevelt administration that fundamentally changed the operation of the financial markets in the United States.
The less-than-savory activities uncovered by the Pecora Commission will sound oddly familiar to observers of the programmatic advertising markets. Pecora found that investment banks willingly sold gigantic lots of securities on behalf of businesses and governments known to be on shaky financial footing.17 He also investigated the use of so-called preferred lists, which provided gifts of steeply discounted securities to a circle of influential individuals who could lend aid to the banks.18 Moreover, Pecora highlighted the role that flimsy state-level regulations played in enabling a murky environment that made it impossible for buyers of securities to assess precisely what they were purchasing.19 It was, in short, the same set of elements present in programmatic advertising: a potent blend of market opacity, toxic assets, and conflicted players that inflated an enormous bubble in securities, which eventually burst to catastrophic effect.
The financial giants investigated by Pecora were the technology giants of their era, in terms of both their economic importance and their cultural prestige. Investment banks investigated by the commission, like J. P. Morgan & Co., were businesses with small numbers of employees that generated huge wealth. Time magazine described the banks as “the greatest and most legendary private business[es] of modern times.”20 Banks like J. P. Morgan’s—“the most famous and powerful in the whole world”—were condemned by the press as “fail[ing] under a test of [their] pride and prestige.”21 To the anger of the public, Pecora also exposed the tendency of these businesses to pay little or no tax, a controversy echoed in modern-day investigations into the global online advertising platforms.22
Importantly, the Pecora Commission shone light on the critical role that a lack of transparency played in bringing about the Great Crash. Buyers of securities simply could not get a full picture of what they were purchasing or of the conflicting interests that the sellers might have had in the transaction. Blue-sky laws, which mandated these disclosures, operated at the state level and were easily circumvented.23 Rules mandated by stock exchanges were voluntary and similarly easy to evade.24
The commission inspired the passage of the Securities Act of 1933, which tackled the transparency issue head-on. Critically, the act established a “disclosure philosophy” that is even today “generally regarded as the appropriate or inevitable method of regulating corporate finance.”25 In brief, the act set up a process by which certain significant categories of securities were to be “registered” with the Federal Trade Commission—later the Securities and Exchange Commission—prior to being sold. The registration process requires the issuer of a security to disclose to the public a wide range of information about the company. This includes facts about its controlling board, financials, and other key information. Individuals who sign registration statements on behalf of the company issuing securities are held legally liable for any inaccuracies in the registration statement. The assurance that these documents were signed under this threat, in turn, is designed to support investor confidence in the viability of the assets being traded in the marketplace. This basic registration framework still governs the issuance of stocks and other securities within the United States today.
The disclosure philosophy is modest in some respects. It is designed to ensure that accurate information is available, but it does not ensure that a given security is a good investment. As Franklin Delano Roosevelt wrote in a message accompanying the introduction of the 1933 act, “The Federal Government cannot and should not take any action which might be construed as approving or guaranteeing that newly issued securities are sound … There is, however, an obligation upon us to insist that every issue of new securities to be sold in interstate commerce shall be accompanied by full publicity and information … It puts the burden of telling the whole truth on the seller.”26
In other words, the health of a marketplace does not depend on every asset being worthwhile. The Great Crash teaches
