A Challenge to Classical Liberalists

Classical liberalism is NOT what we think of in America as liberal- rather it's the economic idea that freedom and the free market is self correcting, and government intervention is not needed.

The problem I find, reading the works of Mises and his fellows who commit mathematical dishonesty in support of free markets, is this: Freedom is a knife that cuts both ways, the freedom to do good, and the freedom to do evil. Quite often, under a "free market", due to a lack of information, doing evil pays quite well- especially when committing fraud.

So well, in fact, that in September 2008, we discovered that fraud in the banking, stock market, and insurance industries (basically, the financial sector) had attracted huge amounts of well-paid talent. Thanks to some well timed deregulation over the past 30 years or so, that talent found fraud to be a much easier way to get richer than everybody else than actually producing anything worthwhile.

So here's the challenge- I will put forth a pair of linked theories, and you prove to me that they are wrong:

1. Ethical Behavior is inversely proportional to Executive Compensation in any given institution.
2. That without draconian governmental interference in the market to make sure everybody has equal information and fraud doesn't pay (as in, life sentences and executions), any half-hearted attempt to prevent fraud will merely be met with more pay from investors who don't understand that they are being defrauded, to cover the increased risk.