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Professor James Q. Wilson vs. the Robber Barons

Cramer's not letting the small-cap debate off his radar screen.

When I was in college, there was this terrific professor, James Q. Wilson, who talked about why we needed regulation of business in this country. We don't start with the need to protect the public, he said. Competition will do that. But when the public gets the short end of the stick, for whatever reason, the government will step in to protect that public interest. The goal of good business people, he used to say, is to figure out a way to offer services that are fair without the government becoming involved, because once the government is involved, things tend to go wrong, not right.

I loved Wilson. He made sense. His notion of ensuring that government intervention on behalf of the public remains unnecessary is dead right. We have to figure out ways to regulate ourselves before the heavies in Washington, D.C. do it for us.

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That's why this

debate about talking about small-cap stocks hits home with me. I have to tell you that this stuff is not happening in a vacuum. If the Bonnie H's of the world, those who bought small-cap stocks after a quick run because of a portfolio manager's touting, all wrote

Arthur Levitt

or their Congresspeople, believe me, we'd have just the kind of government regulation we don't need.

What is needed, of course, is simple common sense. Let's sort out the interests here. We all want managers to speak their minds. That's valuable to us. We don't want managers who put their money where their mouth is to be censored. Or, to put it in a way we all understand, we don't want "No comment" or "That's a fine stock long term" to be the answer every time a professional gets asked a question about a stock. The government, as represented by the

Securities and Exchange Commission

, doesn't want that to happen either.

But we have to respect the fact that the government has the public's interests to protect in its regulation of the stock market. And the right of a portfolio manager to speak his or her mind is not as important as protecting the Bonnie H's of the world from being ripped off. Believe me, if we managers don't start showing some common sense about this stuff, the government will overrule our right to speak our minds and uphold the public's right not to be ripped off.

Some of you out there, who claim to be libertarian about this stuff, think, "So what, Bonnie deserved what she got, she should have known better." Sorry, that is not how the government works. It doesn't question Bonnie's motives and means, it questions the motives and means of Hymowitz. Trust me on this; I've been around this bend.

Nor does the government give one whit about protecting the rights of daytraders to pick off the Bonnies of the world, which is exactly what happens in these situations. The daytraders get the first


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offerings and then blow them out to the Bonnies, who use market orders. The right to make a buck in that fashion is not on the SEC's agenda. The government's interest wouldn't be piqued in the first place if a big-cap stock were involved. Big-cap stocks don't jump like this. Big-cap stocks can handle the glare and the tout. Little ones can't. (Anybody who remembers when Marty Zweig was hot will recall that, when he was smoking, he had to warn on his stock recommendation hot line to use limit orders or wait until a recommended stock came down. He knew the power of his words and he didn't want the public to be ripped off by his system of recommendations. Neither should



But common sense dictates that small-cap stocks cannot handle the power of television in general and of "Squawk Box" in particular. Everybody on that set knew what would happen if Hymowitz touted Epicor. Everyone. But a caveat emptor approach isn't going to keep the government out of the business of talking about stocks. It has a legitimate interest to protect and it will if managers are not careful.

Which brings me back to my Professor Wilson. He used to teach that if the Robber Barons showed some common sense and didn't collude and conspire to rip off the public, then we wouldn't have to set up bright line rules that ultimately hold down profit and stultify competition.

The same thing will happen with the stock market, believe me. If managers don't realize the power of their words to affect small-cap stocks, the government will create broad bright line rules that will ultimately shut all discourse down. But if we back away from mentioning small-cap, the government's desire to protect the public won't be stimulated.

It's pretty simple. We clean up our act as managers or the government cleans it up for us. I think we would all understand that the former is a lot better than the latter.

Take the pledge. Don't talk small-cap.

Random musings:

I revisited this topic because I've never had as much

email cheering me on about anything in the four years we've been doing

. So I'm not letting this stuff get off the radar screen.

James J. Cramer is manager of a hedge fund and co-founder of At time of publication, his fund had no positions in any stocks mentioned. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at