On having something that looks vaguely like regulation

[nancylebov]

The SEC was getting warnings for 16 years about Bernie Madoff's Ponzi scheme.

This isn't a matter of one administration.

Was anyone saying that the SEC wasn't doing enough 15 years ago? This is a real question-- my impression is that the two major points of view were that we needed to keep up the regulation we had or that we had too much.

I see the financial crisis as a government failure as well as a market failure [1]. I haven't been seeing anything in the way of institutional recommendations to keep this from happening again-- it's all just "let's have honest, competent regulators with sufficient political clout, and then things will be all right". They might be better, but they won't be stably better. If you don't have checks and balances, you're way too dependent on the quality of the people in charge.

Afaik, there hasn't been progress in checks and balances (nor in thinking about them) since the Freedom of Information Act. (As always, if I've missed something, I'm pleased to find out.)

My two notions at this point is that a parlimentery system would help. If you can routinely dump your President when enough people start thinking he or she is a bad idea, rather than having the huge drama of impeachment, then you don't get excess years of goddawful leadership.

The other one is for it to become standard for much more information about investments to be publicly online. Apparently, there was quite a bit fishy about Madoff's fund, though you had to be somewhat sophisticated and not blinded by his social skills to see it. While I realize it's a lot of work for people to go over that kind of thing, some people get geeky fun out of it. And if you're right a few times, you can leverage that into an expensive investment newsletter.

[1] It was rather painful when I realized it, but I didn't think the discipline of the market was needed to keep the financial meltdown from happening. I had a background assumption that people just wouldn't neglect their businesses so badly.

I still suspect that excessively long working hours in the financial industry was part of the problem-- they make it harder to think about whether what you're doing makes sense. When I first proposed that theory, I kept getting told that everyone was just doing what local pressures required them to do. I've since found out that not everyone drank the Koolaid. And it occurs to me that the people applying the pressure also weren't getting enough time for thought and rest.

Comments

[fengi.livejournal.com]

I recommend Thomas Frank's The Wrecking Crew and In Market We Trust, which detail how the last three decades involved a systematic dismantling of social and government standards which limited self destructive greed.

In 1980 Reagan said "Government is not the solution, government is the problem." When the person in charge of an institution is fundamentally opposed to it and believes it can't work, it's no surprise when he proves himself correct. Reagan started the policy of backdoor deregulation - if a rule couldn't be removed, then they'd take away the funding and staff which enforced it. This was the policy of every Republican presidents for 22 of the last 28 years, and Bill Clinton did little to counter it.

[fallenpegasus]

e.g. "let's have honest, competent regulators with sufficient political clout, and then things will be all right"

[osewalrus.livejournal.com]

Enforcement is always a thankless job, especially against the well connected. But yes, there were complaints about Clinton's SEC as well. The failure to enforce just accelerated under Bush.

[subnumine.livejournal.com]

Yes, this is the effect of the "era of big government [being] over". (Not that it was, of course; we now have the largest government we've ever had - it's just avoiding doing anything useful.)

[papersky.livejournal.com]

The other advantage of a parliamentary system is that you can't cynically ignore the people except in an election year, because if they get sufficiently pissed off any year can be an election year. I keep telling people -- Canada is trying to go to fixed term elections -- that this is an advantage worth the disadvantage of the government timing elections for when they think they can win.

The worst democratic system in the world was that they had in France between 1870 and 1940. They had fixed terms for parliament but not for government, so you couldn't go back to the country and get a different mix or a mandate, but you could have endless collapses of government reforming with the same people. Ghastly.

[subnumine.livejournal.com]

No, only if Parliament gets sufficiently pissed off. Since the ruling party can keep its members in line by threatening to abandon them at election time, this is only a credible threat to minority governments. The present Canadian government happens to be one; but consider how blandly Blair and Gordon have ignored popular annoyance in Britain.

I hold no brief for the Third Republic; but observe that there were elections in that seventy years, which still returned the same people, because the alternatives were worse than corruption. This is beyond a constitutional fix; it needed a new France.

[fidelioscabinet.livejournal.com]

Regulators are human, too, and I think some of them knew they were destined to always be the Bad Guys who were No FUn, and that they couldn't count on much back-up from above as the 1980s became the 1990s, and the 190s became to 2000s--Volcker got canned as head of the Federal Reserve for bring No Fun, after all, and Greenspan, who replaced him, was about as happy with regulation as a teenager is with the grown-ups' rules--I think the rest of the regulatory people begin to see the writing on the wall. They were overworked, disregarded, and poorly supported.

Another book to take a look at is Michael Lewis's Liar's Poker, which involves the years he worked for Salomon Brothers in the 1980s. He was deeply astonished to discover, as the the old saying goes, with how little wisdom that world was governed. There are a lot of ignorant people in high places on Wall Street, as well as quite a few, like Greenspan, who were smart enough to know better but were so fixated on what they thought was correct that they never stopped to work their way through the consequences of "What if I am really, truly wrong about this?" or "What is this doesn't work the way I think it does?".

We've had people screaming for years (since they were first set up, in fact) that the investment and banking regulations put in place both after the Panic of 1907 and the Crash of 1929 were too restrictive, and that they weren't really needed, because the market could regulate itself. The market does indeed regulate itself, just as a 1968 Buick Roadmaster going 100 MPH will stop if it hits a brick wall instead of just using the brakes--but the consequences of that sort of self-regulation are a lot messier than using the brakes, or just not going quite so damn fast.

The Panic of 1907 is not as well known these days as the Crash of 1929, but it's got a lot of similarities with the current situation, and you might want to take a look at the Wikipedia article on it, which may not be perfect but will give a basic overview with some references to follow up with. It is well worth noting how many major financial scandals and collapses have involved either inadequate internal oversight (see the Wikipedia article on the Barings Bank collapse, plus some of the others, like the Société Général mess, and Parmalat, among others) or external oversight, like the Madoff mess, or all these credit default swaps and mortgage-based securities. Glass-Steagall and the other Great Depression-era financial regulation laws may have slowed the markets down some, but they were passed to address very real problems inherent in allowing the markets to self-regulate--see the car wreck analogy above.

The Panic of 1907 is not as well known as the

[fidelioscabinet.livejournal.com]

Sorry about the sentence fragment. I swear I proof-read and everything.

[womzilla.livejournal.com]

All of the information necessary to discover Madoff's scheme was available at least a decade ago--Harry Markopolos's analysis was based on public information and was completely accurate. The fact that the SEC took no serious action when Markopolos approached them is much more relevant than any hidden information. The SEC apparently handed off the investigation to someone who was personally traduced by Madoff's family, "traduced" in the sense of "married to".