You Make a Difference!

Our mission and operations are funded entirely by Patriots like you! Please support the 2020 Year-End Campaign now.

John Stossel / Jan. 14, 2009

A False Sense of Security

The $50-billion investment scam allegedly pulled off by Wall Street insider Bernard Madoff has ignited predictable calls for more regulation.

The “massive fraud … was made possible in part because the regulators who were assigned to oversee Wall Street dropped the ball,” said President-elect Obama.

“This scandal underscores the need for a 21st century regulatory approach,” writes Arthur Levitt Jr., former chairman of the Securities and Exchange Commission (SEC), in The Wall Street Journal.

Notice the disconnect. Regulation failed, so we need more regulation. I see it differently. Regulation failed, so let’s try free markets. That would be a change.

Regulation did indeed fail. “An executive in the securities industry, Harry Markopolos, contacted the SEC’s Boston office in May 1999, urging regulators to investigate Mr. Madoff. Mr. Markopolos continued to pursue his accusations over the past nine years,” The Wall Street Journal reported.

Of course, when a regulatory agency fails, the usual response is to make it bigger, not abolish it. Economist Robert Murphy notes, “In the private sector, when a firm fails, it ceases operations. The opposite happens in government. There is literally nothing a government agency could do that would make the talking heads on the Sunday shows ask, ‘Should we just abolish this agency? Is it doing more harm than good?’”

Most people won’t like the suggestion that we dump regulation for free markets. We can’t let markets run themselves, they’ll say. Someone has to protect the unsuspecting from conmen. The Madoff case shows why this view is wrong. We’ve always been told that regulation of financial markets protects the least knowledgeable investors. Sophisticated people know what they are doing and can fend for themselves.

But Madoff’s alleged Ponzi scheme is fascinating precisely because it caught some very knowledgeable people. They knew Madoff. Everyone trusted him, including the regulators.

That’s one reason those savvy investors gave him their money. But there is surely another reason. Since the 1930s, investors have been led to believe the regulatory system watches out for dishonest investment schemes. That creates a false sense of security – and sets people up to be conned.

Advocates of regulation attribute almost magical powers to regulators, but clever cheats can get around any system. They always have. It’s their chosen profession, and the regulators can’t look everywhere. Regulation advocates also assume that bureaucrats are disinterested and incorruptible, but we know this is not always true. People who work in government are like anyone else. There will always be a percentage of individuals who can be tempted by corrupt opportunities. The logic of regulation would require that super bureaucrats be appointed to watch over the regulatory agencies.

But who will watch over them?

This is why regulation is counterproductive and a poor substitute for investor vigilance. The more rigorous the regulatory effort appears, the more risky it is.

Regulation by market discipline is better, but in our state-dominated culture few people realize this. Arthur Levitt says, “The complexity of today’s products, markets and investment strategies calls for a laser-like focus [by the SEC] on risk assessment.”

But the opposite is true. Savvy investors would do their own risk assessment if they didn’t believe the government was doing it for them. And wouldn’t they do a better job, considering it was their own money at risk? Regulators risk nothing.

Of course many of us investors are unqualified to assess risk for ourselves. But we could pay specialists for the service, generating a competitive market for risk assessment – in contrast to the monopolistic SEC and other agencies.

That form of investor protection would be superior in every way to a system that gives a bureaucracy arbitrary power. After all, private risk assessors would have to justify their fees, which clients would pay voluntarily.

Current government regulation interferes with honest voluntary exchanges by imposing arbitrary terms and requiring tons of paperwork disclosing information no one wants anyway.

Fraud will always exist. Enforcement of anti-fraud laws is a useful deterrent, but in the end there’s no substitute for investor vigilance. Government regulations provide a false sense of security – and that’s worth less than no sense of security at all.

COPYRIGHT 2008 BY JFS PRODUCTIONS, INC.
DISTRIBUTED BY CREATORS SYNDICATE, INC.

Who We Are

The Patriot Post is a highly acclaimed weekday digest of news, policy and opinion written from the heartland — as opposed to the MSM’s ubiquitous Beltway echo chambers — for grassroots leaders nationwide. More

What We Offer

On the Web

We provide solid conservative perspective on the most important issues, including analysis, opinion columns, headline summaries, memes, cartoons and much more.

Via Email

Choose our full-length Digest or our quick-reading Snapshot for a summary of important news. We also offer Cartoons & Memes on Monday and Alexander’s column on Wednesday.

Our Mission

The Patriot Post is steadfast in our mission to extend the endowment of Liberty to the next generation by advocating for individual rights and responsibilities, supporting the restoration of constitutional limits on government and the judiciary, and promoting free enterprise, national defense and traditional American values. We are a rock-solid conservative touchstone for the expanding ranks of grassroots Americans Patriots from all walks of life. Our mission and operation budgets are not financed by any political or special interest groups, and to protect our editorial integrity, we accept no advertising. We are sustained solely by you. Please support The Patriot Fund today!

★ PUBLIUS ★

“Our cause is noble; it is the cause of mankind!” —George Washington

The Patriot Post is protected speech, as enumerated in the First Amendment and enforced by the Second Amendment of the Constitution of the United States of America, in accordance with the endowed and unalienable Rights of All Mankind.

Copyright © 2020 The Patriot Post. All Rights Reserved.

The Patriot Post does not support Internet Explorer. We recommend installing the latest version of Microsoft Edge, Mozilla Firefox, or Google Chrome.