The Free Market Did Not Fail - Our Regulators Did

I'm guessing this is old news to most people, but today I stumbled upon the documents in the Madoff case citing extensive, substantiated warnings by Harry Markopolos in the Wall Street Journal, "Documents Harry Markopolos submitted to the SEC in fall 2005, making a case that Bernard Madoff's business was a Ponzi scheme."

Here we had an independent securities analyst and derivatives expert, offering his in-depth analysis using widely-accepted options pricing models and claiming in 2005 that the Madoff investment strategy was a Ponzi Scheme. Subsequent dialogue and review by the SEC completely failed to recognize the fraud. Mr. Markopolos persisted in trying to uncover the issue, citing that the SEC investigators did not have his expertise and weren't aware of the true story. His warnings, while cursorily reviewed, now show that the SEC did not have the resources, nor apparently, the desire to delve deep enough into a scandal that has now ruined many lives and charities.

When looked at under the light of free market economics, I couldn't hope for a more clear example of how independent, private review was able to catch a thief, and government regulation did more to protect him. We must call for more private review of business. I have a feeling this type of independent investigation is going to become far more valuable going forward. When we cannot trust our government to protect us, we will seek alternative sources.



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1 Comments:

  1. Great post Melina. I think you've hit on a bigger point - whenever it seems that capitalism (or its invisible hand) has failed, look for things that may have intervened. In this case, you had a deeply influential Madoff influencing policy to the point where there is actually a thing called the "Madoff Exception" - really. It seems that besides his influence through lobbying, he had contacts, including family members at the SEC - this is going to get ugly. One of the keys and tenants of successful capitalism is transparancy and the rule of law. Well, here we go. People using undue influence to alter policy to to block transparency. This is not a case against free markets, but restricted ones. This is the very reason that hedge funds need to lose some of that special treatment. whenevery you hear of "special treatment" or "exceptions", look out!

    The other blaring case of inappropriate regulation is the case of FNMA, GNMA, etc. Here you had the gov't implying that they'd back something regardless of the quality causing banks to make loans they wouldn't have in a normal market. This causing investors to buy junk they wouldn't have in a normal market, and up it goes. All because - not capitalism - but because of government intervention in a free market.
    -P
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I'm curious to see what you are thinking...

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