Financial markets in North America are struggling to deal with the after-effects of the deregulation process of the 1980s and ‘90s. Once hailed by neo-liberal economists and politicians as the key to future prosperity, deregulation has instead undermined investor confidence and prevented capital markets from working effectively.

As the economy starts to show signs of recovering from last year’s recession, stock markets remain in the doldrums. The Dow Jones average, which reached an all-time high of over 11,000 just a couple of years ago, now languishes at about 9,600. The Toronto Stock Exchange’s TSX Index and the Nasdaq Stock Market are equally stagnant.

Some analysts are surprised at this weakness in the markets, given the reasonably strong performance of the US economy in recent months. Consumer confidence and industrial output are relatively solid, while inflation remains low. In fact, investors are hesitating to jump into the stock market for the simplest and most obvious of reasons – they don’t think they can make any money by doing so.

The problem is that corporate profits are still too low to justify the price of investment. More importantly, perhaps, investors just don’t know if they can believe the profit figures corporations are reporting. A whole series of financial scandals has called into question the honesty and reliability of accounting firms, investment advisors, and bankers – the people investors are supposed to be able to rely on.

Enron, of course, is the case most familiar to the public. Incompetent and dishonest management turned one of the fastest growing corporations in the world into a pile of worthless paper. In the process, they cost employees, pensioners and investors billions of dollars. What has investors frightened, however, is that the auditors, the giant accounting firm of Arthur Andersen, failed to blow the whistle on Enron’s illicit business practices. Auditors are supposed to be watchdogs over management, protecting the interests of shareholders. Instead, Andersen’s accountants helped Enron to cover up its activities by shredding crucial documents.

What has happened is that over the last two decades, the half dozen giant accounting firms that dominate the world market have discovered that there is more money to be made in corporate consulting than in accounting. Very frequently, these accountants now also act as consultants to companies whose books they are supposed to audit.

This puts these firms into a clear conflict of interest. As an auditor, their job is to make sure the information the company provides to investors and the public is accurate, including any relevant bad news about the company’s operations. As a business consultant, they work with management to raise the value of the company’s stock. Since consulting fees tend to be much richer than accounting fees, the watchdog role gets sacrificed all too often.

A similar blurring of roles has happened in the field of securities and investment. Merrill Lynch, the giant US brokerage company, just got caught in a clear conflict of interest. According to the New York State Attorney General’s office, the company was advising investors to buy shares in a company that its own internal stock analysts knew was a "dog."

These are not isolated incidents; there have been many similar scandals in the US, Canada, and Europe. The results have frightened even the largest investors, because this widespread corruption poses a threat to the whole investment market. The Globe and Mail Report on Business quotes John Bogle, of the giant Vanguard Group of mutual funds,: "Our capitalistic system is in peril."

It’s a scary picture for investors. The auditors, who are supposed to guarantee that the financial information the company releases is accurate, may be "consulting" for the management they are supposed to oversee.

The stockbrokers, who are supposed give you impartial advice on investments, may be more interested in the fees they can earn by promoting certain stocks. The bank that holds your RRSPs and offers a brokerage service may be more interested in protecting its own interests than in looking after your money.

Nine banks, including the Canadian Imperial Bank of Commerce, have been named in a class-action lawsuit by Enron investors. The suit alleges that these financial institutions helped Enron raise billions of dollars in investment markets while their own staff knew, or should have known, that the company was on the skids.

Nor can we expect government regulatory agencies to step in and clean up the mess. After all, the governments of Ronald Reagan, Margaret Thatcher, George Bush Senior, and Brian Mulroney devoted their political careers to "getting government off the back of business."

Regulatory agencies now don’t have the legal power or the resources to properly police financial markets.

That, after all, was the purpose of deregulation: to "unleash" the markets. These days, many investors wish that somebody, anybody, would put the leash back on.