[TopQuark]

You make a careful argument, and your point on detriments of regulation is well taken. However: "let me respond to your challenge that fraud doesn't necessarily destroy wealth...Every time someone is a victim of fraud he is marginally less likely to participate in the market in the future."

This well may be, but (i) one has to differentiate the existing wealth and wealth creation, and (ii) the model is incomplete: one has to model explicitly choices other than abstention from the fraudulent market (the victim typically goes to some other market when suffering a setback in a given one --- witness the real estate bubble after the burst of the DotCom bubble --- in which case even creation of new wealth is unchanged).

I agree with you when you say that this point fascinates many. My personal take is that it is because of the "common sense" perpetrated by media and uneducated folks: fraud is equated with robbery, hence loss. People do not understand, of course, that the loss is NOT macroeconomic: there is a countervailing gain to the robber. But, if a robbed one feels a loss, the folks reason, there must be a loss.

[DManA]

The problem is that markets are essentially an amoral tool and we are trying to overlay morality on top of this. Markets are a collective tool, morality is a quality that individuals bring with them when they participate.