Economics

The Empty Case for More Regulation

The Madoff scandal shows why bigger government isn't the answer.

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If there is anything we have learned from the crisis in the financial sector, it's the urgent need for more regulation. Had federal regulators been more vigilant or wielded greater powers, all this suffering and heartache might have been averted. That's the story we've been told, and it must bring a rare smile to the face of Bernard Madoff.

Madoff was the manager of a Wall Street investment fund that he allegedly confessed to his sons was "one big lie" and "a giant Ponzi scheme." But "giant" fails to capture the scale of his fraud, which may have lost $50 billion, more than the entire gross domestic product of most of the countries on Earth.

Also striking is that his alleged victims were not rubes and simpletons but individuals of exceptional wealth and financial acumen—including various tycoons, as well as managers for banks, pension funds, and hedge funds. Even Madoff's own son, who worked for his father's firm, invested millions of dollars of his own money in the supposedly phony fund.

A Ponzi scheme, as it happens, is not a scam of dizzying complexity. It's the oldest scam in the book. You take money from new investors to pay off previous investors, and you keep doing it until the new infusions can't keep up with the withdrawals. It's about as simple as financial trickery gets.

So if regulators had been paying attention, they would have detected what was going on, right? After all, as one expert noted, Madoff was conspicuously unable to attract a lot of big institutions. "There's no Harvard management, there's no Yale, there's no Penn … no State of Texas or Virginia retirement system," James Hedges IV of LJH Global Investments told Fortune magazine.

Why not? "Because when you get to page two of your 30-page due diligence questionnaire," said Hedges, "you've already tripped eight alarms and said, 'I'm out of here.'"

So you would think all this would have caught the eye of any regulators who were half-awake. But regulators, it turns out, were not oblivious to what was going on. Nor were they lacking in means to rein Madoff in.

In fact, as The Wall Street Journal reported the other day, the Securities and Exchange Commission had been suspicious of his methods for a long time. It had even heard in 2005 from a competing investment executive who drafted a 21-page report arguing that Madoff was running a Ponzi scheme.

The government had actually investigated him—not once or twice, but "at least eight times in 16 years," according to the Journal. Yet it "never came close to uncovering" the operation, which may have begun as early as the 1970s.

So what makes anyone think that future bureaucrats, no matter how vast their authority, will be able to do better? Advocates of stricter regulation often talk as though the choice for protecting investors is between imperfect market mechanisms and foolproof government regulations. In fact, governments, like every other institution, are staffed by fallible individuals who can be fooled as easily as anyone else.

The call for more federal control overlooks inconvenient facts. The first is that con artists will often outfox regulators, if only because they have far more to gain from carrying off a fraud than civil servants have to gain from stopping it. If the SEC couldn't catch the brazen Madoff in eight tries, what suggests we should place greater faith in the ability of other agencies trying to monitor a vast network of financial companies?

Banks have been decimated by their purchase of mortgage-backed debt that has gone bad. But banks operate in one of the most heavily regulated sectors of the economy. The call for more intervention assumes that if one aspirin won't cure a case of pneumonia, two will.

And if America's weird aversion to regulation is the problem, how come banks in government-addicted Europe are in the same hole? "By some measures, in fact, European banks exposed themselves to even higher levels of risky debt than American banks did," the International Herald Tribune reported in October.

Federally imposed rules are no match for a mass outbreak of reckless abandon, and they're no substitute for individual prudence. A new burst of regulation would eventually confirm those truths, but the mess we're in should be lesson enough.

COPYRIGHT 2009 CREATORS SYNDICATE, INC.

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  1. I would think that question #1 that the SEC should consider asking in future investigations is “So where is the money that you say you have?”

  2. C’mon, obviously there wasn’t enough regulation. Afterall the Bush Administration was in power. A reckless laissez faire affair that allowed greed to prevail. Nothing other that is imaginable for the Bush Administration.

  3. In the ’90s I invested a small fortune in the booming Pog market and got my ass kicked when the bottom fell out of the market. Where were the feds then, dammit?

  4. “Remember Alf? He’s back; in Pog form!”

    Anyway… it’s early, I guess it will be awhile longer for the usual gang of leftist idiots to cruise by and point out the long-standing support fraud has always enjoyed in libertarian circles. And Madoff ripped off a lot of Jewish people, so we’ll have to hear about how all us Muslim-loving atheists helped him out. I’m sure at least one woman in Florida’s had an abortion, so we’ll get an earful of that as well. And Florida has a lot of BrownHispanicThreat: uh-oh.

    We have become a blank screen for people with severe personality disorders to project their obsessions upon. It’s getting really, really boring.

  5. So the theory here is that if you ignore the difference between criminal fraud and overly-risky investment practices by companies that comply with the law, you can use the existence of the former to pretend that it’s impossible to establish ground rules for the latter.

    Deep.

  6. So the theory here is that if you ignore the difference between criminal fraud and overly-risky investment practices by companies that comply with the law, you can use the existence of the former to pretend that it’s impossible to establish ground rules for the latter.

    Actually, I think the theory is that a regulatory system that is demonstrably incapable of policing brazen fraud is unlikely to be capable, ever, of policing overly-risky investment practices.

    And, of course, when you remove the downside of overly-risky investment practices by creating moral hazard via bailouts, you will increase the prevalence of such practices beyond the ability of any agency to control.

  7. Much as I hate to say it and encourage a stereotype, the Jewish community is totally over-represented in investment banking relative to their population (Goldman Sachs makes it, Lehman bros. doesn’t. Hank Greenberg is forced out at AIG. But Henry Paulson bails them out with TARP funds while keeping the chair warm for Geitner, while Rubin commends him. Holy crap there’s a lot of Jews in finance!).

    Being a connected Jewish guy in high finance makes you damn near untouchable. That connectedness has a quality all its own when others evaluate whether to give that person money. Being in that crew is perceived as a stamp of approval that’s better than due diligence, and that’s a cultural perception, not one that is legally enshrined.

    And if you do find yourself in legal trouble, or even a mild case of jeopardy, when it comes to accessing legal reps and such there isn’t a better person to be than a notable in that crew. No one appears to want to legislate that reality away, do they?

    I am shocked not that Madoff was ripping people off, but that he was ripping off his fellow Jewish benefactors and enablers. They were obviously surprised by his behavior as well. Truly unusual in Jewish community to see Jews eating their own like that, usually they are much more tight-knit bunch who stick together. You can tell how rare such behavior is by the complete slack-jawed response of everyone involved.

    Obviously Madoff derived a great deal of his reputation and capacity to procure capital via these personal relationships. You can’t legislate that away, and you can’t even theoretically regulate it away until the chief regulators (Treasury, SEC, Fed) are not going to the same Bar Mitzvahs as the con-man they are trying to regulate and catch.

    I’m not donning a tin-foil hat with my Zionist Banker conspiracy theory crap either, but I’ve got my eyes open and think that his access to the Jewish finance culture and their reciprocating trust in him trumped everything else that screamed “SCAM MAN.” Its why he got away with what he did for as long as he did. There’s no mystery here as to how this happened.

  8. Honestly, I get Chapman’s point, but his argumentation is bad: “Regulation could have caught Madoff 8 times, but didn’t, therefore that’s a case against regulation.”

    The logical equivalent is “The US Government could have caught bin Laden 8 times, but didn’t, therefore we should stop trying to catch bin Laden.” I dislike regulation, so don’t jump to conclusions – I’m just pointing out what a failure his point is.

    Basic fraud regulations are common sense, but that doesn’t mean that SOX is common sense. Basic property and environmental regulations are common sense (to prevent impacting neighbors’ property values negatively and to prevent ChemCorp from dumping chemical waste into the public rivers), but that doesn’t mean that excessive zoning and municipal codes are common sense. That’s all that needs to be said – there’s just a line where things go too far.

    Madoff deserves to rot in prison, as did the Enron executives. But the problem with invasive regulations like SOX is that they assume that everyone needs to be treated like criminals in order to catch the few that are criminals, including responsible businesses and small businesses that can’t afford to compete in the more difficult legal and regulatory environment.

    It would be like the cops pulling every car over at every intersection to check for illegal drugs and guns – you’ll catch some people breaking the law, while making life very difficult for those who do obey the laws. That’s basically the environment SOX created for business. That’s why I think that regulation plays a much bigger part in the current recession that is being mentioned.

    But Chapman makes an incoherent argument when it’s rather straightforward – that the Madoff’s of the world should not significantly hurt all of those large percentage of businesses trying to be responsible and follow the rules.

  9. RC Dean,

    Actually, I think the theory is that a regulatory system that is demonstrably incapable of policing brazen fraud is unlikely to be capable, ever, of policing overly-risky investment practices.

    But that’s an absurd argument. The drawing of lane markings on the road works. It effectively establishes the rules of the road for the 99% of drivers of who intend to drive like responsible, law-abiding people. By doing so, it makes the roads much safer and more efficient.

    This remains true even though drawing lane markers doesn’t do much to influence psychotic road ragers, drunk drivers, and others who deliberately set out to break the law.

    There are two different issues here.

  10. Nick Said:
    “It would be like the cops pulling every car over at every intersection to check for illegal drugs and guns – you’ll catch some people breaking the law, while making life very difficult for those who do obey the laws. That’s basically the environment SOX created for business. That’s why I think that regulation plays a much bigger part in the current recession that is being mentioned.”

    Good point here. In a sense, the byzantine nature of financial reporting with the guild’s lexicon obfuscating everything for good measure helped Madoff.

    Has anyone seen the financial statements he released to his clients? They are nigh incoherent, but full of the inscrutable legalese and obtuse numbers that to the layman look like the Standard Model of physics. It looks so authoritative and informed, it must be true. I was thinking about that last night as I parsed through my girlfriend’s 401k statement from her investment broker. She couldn’t understand it, so couched in numbers and finance-guild-talk it was. Buried in all the mess of course was the sad fact she had lost 49% for the year, and she couldn’t figure that out from reading the statement. She wouldn’t have known if she was looking at her statement, or one of Madoff’s statements for Mort Zuckerman.

  11. Joe must have very long arms.

  12. There are two different issues here.

    I don’t think so. We’re trying to figure out what the capabilities of regulatory apparatus are, to determine whether it makes any sense to expand their portfolio to include much more complex and ambiguous activities.

    If they can’t handle the basics, what on earth makes you think they can handle something much tougher.

    Analogizing regulation of what kinds of innovative investment vehicles are “too risky” to painting stripes on a road just doesn’t work.

    If you’re looking for strained analogies, this is more like giving a contract to build submarines to a boat company that has trouble building fishing boats that don’t sink.

  13. If they can’t handle the basics, what on earth makes you think they can handle something much tougher.

    The difference between preventing “force and fraud” – actual crimes with victims and establishing “rules of the road” is not one of degree, but of kind.

    There is a qualitative difference between laws against driving to endanger or vehicular homicide and speed limits, stop sign installation, and line-painting.

    Your question is like asking “how can Major League Baseball be expected to define the strike zone, when pitchers still throw at people’s heads?” Very, very easily, actually. The two issues have nothing to do with each other.

  14. If you’re looking for strained analogies, this is more like giving a contract to build submarines to a boat company that has trouble building fishing boats that don’t sink.

    No, it’s like giving a contract to build submarines to a company that builds submarines, even after some of them have been sunk by enemy action.

  15. Rather than more regulation, it might be that quick arrest (Not house arrest, but a lousey jail), rapid trial and a long prison sentence (not a nice prison),in some God-forsaken place in Texas, Alabama, or Mississippi, would make others think twice.

    At least move him out of his apartment and let those who lost money through him take turns staying there.

  16. I, too, hate stereo-typing of our Hebraic friends. That’s why I’ve so reluctant to post on the world wide interwebs that my young daughter has been kidnapped and abused in some sort of blood ritual by the satanic Joos. Namely, the Lehman Brothers and Mr. Goldman Sachs himself.

    But let’s not get carried away here. I entirely disapprove of stereotyping, namecalling, pitchforks, torches, etc. By no means should you carry the filthy hebes off in the night in order to avenge my poor daughter, whom I have neglected to name or list any specifics about.

  17. Where do the regulations come from?
    the regulators!
    Who were the regulators?
    Greenspan, Rubin, the people who decided the amount of regulation Fannie Mae and Freddie Mac had.
    How much regulation did Fannie and Freddie have? – well, they shared OFHEO – yup, one half of a regulatory agency, just for them. Obviously, if only we had had 1 regulatory agency each for Feddie and Fannie, we wouldn’t be in this mess. Well, maybe 2 regulatory agencies each…no, make that 3.

  18. Have to agree with Mr. Gray on this one. White collar prisons with tennis courts, house arrest, and lax visitation rules make the risk of getting caught less threatening. Madoff needs a filthy pound-him-in-the-ass prison. They can transfer some unfortunate potheads to the tennis court prison. Or, just let them go for not hurting anyone. I know, that’s just crazy talk.

  19. You take money from new investors to pay off previous investors, and you keep doing it until the new infusions can’t keep up with the withdrawals.

    There’s another scheme that works this way, but its name escapes me at the moment…

  20. “how can Major League Baseball be expected to define the strike zone, when pitchers still throw at people’s heads?”

    So what new rules can Major League Baseball enact to keep pitchers from throwing at people’s heads? After all, joe, this must be stopped.

  21. As Nick nicely put it above, this entire argument is a fallacy. You argue against regulation because the regulators didn’t do their job in this one instance. But you don’t offer an alternative means to prevent the fraud. It was prudent government regulation that prevented banks from engaging in the schemes you referred to, regulations that were repealed with the help of characters like Phil Gramm.

    This is where libertarians take a left turn into goofy land. Every human activity in the world has rules and regulations. Somehow the sport of baseball needs rules about the number of stitches on a ball, but the marketplace will magically work out for everyone without the slightest amount of pragmatic regulation. And how will this happen? It just will!

  22. Paul,

    So what new rules can Major League Baseball enact to keep pitchers from throwing at people’s heads?

    None. The only way keep pitchers from doing that would be the more vigorous enforcement of existing rules.

    They could, however, change the definition of the strike zone to make the bottom at mid-thigh instead of at the knees, and the behavior of pitchers would reliably change in accordance with the regulation.

    Rather than your question being any kind of a rebuttal to my point, it is in fact a demonstration of my point: that rule-breakers don’t make an effort to comply with the rules, while most people are not going to deliberately break the rules, but stay within them.

    Because, you see, these are two different issues.

  23. TonySaid:

    This is where libertarians take a left turn into goofy land. Every human activity in the world has rules and regulations. Somehow the sport of baseball needs rules about the number of stitches on a ball, but the marketplace will magically work out for everyone without the slightest amount of pragmatic regulation. And how will this happen? It just will!

    No rational libertarian – no rational anybody – thinks things work out “for everybody” all the time, or even over time. The one thing baseball and the markets have in common is that there are winners and there are losers.

    The proper interpretation of regulating baseball relative to markets is in baseball you “regulate” to keep the game fair. The goal of regulations in markets is apparently something different at this point, its trying to insure everyone “wins.” Good luck with that.

    If you tried that in rules for baseball – the idea you can regulate the game so everyone wins – the hated umpires would be so many in number they outnumber the actual players, the game would move turgidly because after every pitch the umps need to have a committee meeting. Eventually, no one would give a shit about even playing the game. Wow, I just described communism.

  24. HAL-9000,

    I agree with you. Regulations shouldn’t, and don’t, exist to ensure everyone “wins.” If there’s any competitiveness to the marketplace at all, some will win and some will lose. The point of regulations is, as the rules of baseball, to ensure fairness. Everyone starts the game with the same number of points. That’s fair. In the libertarian version the children of rich people start out way ahead and with a guaranteed win. I don’t think society can or should make everyone rich. But what’s the point of society at all if we can’t at least attempt to have a level playing field?

  25. Tony,

    In a fair “game” rich people (especially the rich’s children) are as likely to lose as win depending on the capacities of the rich in question. Look at the Yankees…lol.

    The problem with Madoff vs. regulations and the way the game works in the US capital markets at this time is the rules are increasingly irrelevant. The important quality to have is an inside with the umpires, so you can have the inside dope on the fix.

    In my first post on this thread I alluded to Madoff getting away with what he did primarily because of his reputation and affiliation in the elite of Jewish society, which is obviously intertwined with the people who run financial markets more than any other demographic in this country.

    Why would you hire Madoff to run your baseball team? Well, he sucks at the draft, and can’t truly prove anything on his resume, but he knows the umpires! Think of how many photos have quietly been removed from various “power walls” on the eastern seaboard in the past month…haha. That’s really what his credibility boiled down to.

    No regulatory regime of any kind will work so long as its designed for a select group of umpires to be the gatekeepers (I’m not talking about Jews here either). By the nature of the tax code, Federal Reserve structure (Federal Reserve Bank of NY is the Robin to the actual Fed’s Batman) and securities laws, the only game in town is that disaster of an industry in South Manhattan. The other trick of over-regulation is to make the game so confusing and convoluted the fans can’t tell when someone’s cheating, even while watching the game on live TV.

    All they can perceive is the scoreboard going up or down. The umps really control the outcome game at that point, don’t they? That makes it no game at all.

  26. I’m with Joe here. The following is clearly a “false choice” fallacy:
    “Advocates of stricter regulation often talk as though the choice for protecting investors is between imperfect market mechanisms and foolproof government regulations. In fact, governments, like every other institution, are staffed by fallible individuals who can be fooled as easily as anyone else.”

    I don’t blindly want “more” regulation. I want better regulation. That implies better regulators as well. It might even result in less regulation. I want this for the same reason I want better cops. You know, the kind that aren’t on the take, aren’t asleep at the donut shop, the kind that perform their job responsibly.

    Reason has published several articles like this, with the central theme being that since financial crooks are so clever (or regulators so dumb), regulation will never work.

    When did capitulation to criminals become the right answer?

  27. jasa said:

    “I don’t blindly want “more” regulation. I want better regulation. That implies better regulators as well. It might even result in less regulation. I want this for the same reason I want better cops. You know, the kind that aren’t on the take, aren’t asleep at the donut shop, the kind that perform their job responsibly.”

    I think most people, including libertarian types like me share your sentiments. However the political choice now isn’t even “more” of the same bad regulations or not, its which flavor of bad regulations do you want? Do you want bad regulations that give Uncle Sugar more control and power, or do you want bad regulations that give more control and power to banks and anybody with a FINRA membership?

    Crappy choice. So, I say neither.

  28. “…the political choice now isn’t even “more” of the same bad regulations…”

    I agree. I just wish Mr. Chapman, et al., would stop implying that our only choices are “imperfect market mechanisms” or more bad regulation.

    To borrow from another thread, perhaps Mr. Chapman is a “structural libertarian”, and believes good regulation is currently impossible. 😉

  29. The reality that people miss is that corporate crimes happen for a reason – because they won’t get caught, and if they get caught, it is highly likely they won’t be personally held accountable because they can defer to the corporate shield.

    Honestly, the best solution to stop corporate crime is something libertarians and the Left could agree upon: remove the artificial legal creation that protects managing owners of a company from putting their individual wealth and liberty on the line for illegal business decisions. Stockholders should be able to sue executives for all they are worth for illegal actions that led to significant business losses. Executives who commit fraud should rot away in jail, completely broke. Obviously, this won’t solve all fraud problems or end corporate crime, but executives would have much more interest in stopping corporate crime – and policing themselves at risk of complicity.

    I mention also that this is a completely free market solution – in a market without government interference, there would be no such a thing as a corporation. Every business would be a proprietorship, partnership or cooperative where the owners are liable for their actions. Removing the corporate veil would put us closer to a real free market – and it should make the Left extremely happy as well. Corporations would have less incentive to conglomerate if they were exposing themselves to significantly more risk by doing so.

    Gee, I guess one can be a libertarian and a progressive after all…oh yeah, weren’t those things called classical liberals?

  30. Joe said:
    The drawing of lane markings on the road works. It effectively establishes the rules of the road for the 99% of drivers of who intend to drive like responsible, law-abiding people. By doing so, it makes the roads much safer and more efficient.

    This remains true even though drawing lane markers doesn’t do much to influence psychotic road ragers, drunk drivers, and others who deliberately set out to break the law.

    Amusingly, even your attempt at analogy is not true. Experiments in Europe have demonstrated that intersections where the traffic lights have been removed and the roads left unmarked are actually safer than their counterparts. It turns out that all those “regulations” only gave people the perception of safety, with the result that they drove more carelessly and caused more accidents. I’m sure there is a lesson here.

    FWIW, there are no lane markings on my street, and I manage to get to work each day.

  31. Mr. Madoff simply decided that it was time to “get caught”. He played the game on the line allowing him to align his practices closely enough with the regs that his explanations trumped suspicions by a narrow margin. Now, stating his activities as a scam, opens the door for his retirement at taxpayer expense, takes the heat off of his family, and provides the only possibility of any recovery for his clients. It was a business decision with the writing clearly on the wall that his operational model would no longer generate more money. Again he is able to play the system his own way. You can speculate all you wish about regulation etc. but as someone I believe already stated the people charged with enforcement will never be at the same level as the operators in the field.

  32. I always thought that the elimination of non-living entities in the finance of politics was the best way to “clean” money. But the elimination of such from a private perspective is an interesting thought.

    A side benefit of this would be the litigation side. It would be a serious pain in the ass if trial sharks had to sue the owners of Exxon – for example – versus the “one stop shop” of the corporate structure that they sue (daily, I’m sure) now.

    There are lots of non-living legal entity structures though. How would you define ownership in a cooperative sense of something like the Catholic Church, or Harvard? Its got me thinking…

  33. There is one regulation which would have ameliorated the mortgage mess — margin requirements for mortgage backed securities. The Fed sets loan to value limits for corporate securities, and it should have done the same for mortgage backed securities.

  34. In a truly free market, those defrauded by Madoff would rightfully have access to a share of Madoff’s personal wealth. It might be pennies on the dollar for what they actually invested. If Madoff were running a proprietorship (an entity of a free market – where the owner bears full risk for the actions of the business) instead of a corporation, that’s how it would have worked – he would have been fully accountable from a legal standpoint for his own actions.

    Proprietorships have become rarer and rarer because people want the profits without the risk. That’s why libertarians should argue for replacing all business income, capital gains and other taxes with a corporate value tax (as payment for the legal protection the corporate entity grants) – and eliminate all taxes on proprietorships, partnerships and cooperatives. In a free market, a proprietor would have to pay for insurance to protect his personal wealth, so why should a corporation be granted automatic protection without paying for it? The more value a corporation has, the more worthwhile such protection is. This is why I believe corporate value taxes are completely justified (as I realize we can’t actually get rid of corporations).

    Non-profit corporations are an interesting dilemma, one which I have not thoroughly thought about, but I guess they should remain tax-exempt, even though they too are artificial legal entities.

    This is why libertarians and the Left need to realize that our economic ideas aren’t incompatible – libertarians want less regulation and more personal responsibility, the left wants less corporate power and more responsible business practices; this solution accomplishes both.

    I’m hoping to start a website very soon arguing for what I call “free progressivism” or basically, a reconciliation between the anti-corporate/anti-war progressive left and the free market/limited government right towards the mutual interests of increasing freedom and equality. A return to the principles of truly free market progressives like Adam Smith, Thomas Paine and Henry Thoreau as applicable to the modern world, without the orthodoxical rigidity of the far left or of hardline libertarianism. There needs to be a worthwhile forum for the many of us on the libertarian left who recognize that inequality breeds more unnecessary government power, that community-based solutions and localism are alternatives to the imaginary pure government vs. pure charity dichotomy, that a free market means less corporations (as corporations are not natural entities of a free market, as argued by many free marketeers since and including Adam Smith) – and a more responsible economy, and that things like the preservation of the environment are vital property rights issues.

    The Left is a schizophrenic beast – they hate the government’s excesses of power [Patriot Act, Oscar Grant, etc.], discrimination, violations of privacy and right and war, yet they argue for more of it at the same time and elected someone who promised even more government control. After Bush, the “most horrible president of all time,” you woulda thunk they woulda learned a good lesson or two about why it’s a bad idea to make the government super-powerful and self-regulating.

    Meanwhile, over in la-la land, libertarians never understand why nobody cares about them – and there’s a really good reason: because the world that they advocate for is:

    – Darwinistic (survival of the fittest, the core assumption that everyone has the capacity care of themselves)
    – Simplistic (claiming government as the primary evil of the world, when there can often be greater evils)
    – Blind to social inequalities (when a meritocracy is really a prerequisite of a truly free society)
    – Ignorant of market failures and core inefficiencies (health care is a perfect example: a truly free healthcare system with no disclosure requirements and no oversight would be a disaster of epic proportions, as doctors and pharmaceuticals profit from you remaining sick – not that socialized care is any better, where the government cuts costs by deciding who lives and who dies).

    This is before we even start talking about radicalism, conspiracy theories and anarchism…and we wonder why we get

  35. >1% at the polls. Libertarians and progressives have ideals that could be >80% compatible, yet they are not collaborating on policies, and thus neither gets what they want.

  36. Regulations for the public are the problem: Cameras and puritanical laws.

    Regulations for the Markets are not.
    1. Free Market is a slogan, not reality. The field is not level, was not intended to be, and will not ever be.
    2. In the Securities Industry, for the most part, industry writes its own regulations. Goldman the Investment Bank and Goldman the Treasury Department. Remember this one? “They crammed $20 Billion down my throat, the bastards. The SOB that did it looked like my old boss.”

  37. NIck,
    Let me know when you get this project off the ground.

    drop a comment at http://petemuldoon.blogspot.com/

  38. Yes, but Mr. Chapman is creating a straw man when he uses the Madoff scandal as an epigone for the present crisis. Not only did Madoff do something flagrantly illegal for which there are already adequate laws and penalties for violating them, his fraud neither caused the crisis nor has it had any significant effect upon it. Its discovery was simply precipitated by the collapse in market prices. The major economic problem has been the perfectly legal increase in economic risk by money-center banks and mass-market insurers which were permitted by regulators and encouraged by their shareholders to get involved in highly leveraged activities without understanding how those activities were all linked to the same dubious economic hypothesis: that property prices never fall in the aggregate. When something turns out to be both stupid for the individual and dangerous for the broader population, yet is perfectly legal, this is exactly when one needs to consider changing the law to discourage further occurrences of that activity.

    In this case, if the activities in question were regulated to take them partially or entirely out of the domain of deposit-taking banks or major insurance companies, there is no reason to think that larcenous individuals would automatically try to circumvent the law, since the payback is not the inordinate one of undetected theft in any case. The purpose of banking or securities legislation should not be to add more penalties to activities that are already illegal, but to fix flaws in practice which had made the system imprudential or otherwise unstable.

    Andrew Clearfield
    Glen Ridge, NJ

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