Best of the Week
Most Popular
1.The Greatest Stock Market Crash Of Your Life Is Just Ahead… – Warns Harry Dent - GoldCore
2.Budget 2016: Borrowing, Lifetime ISA, House Prices, Economy, Syria, Brexit and Stocks - Nadeem_Walayat
3.Gold Price Intermediate Top - Clive_Maund
4.Brussels Terror Attacks, Death of the European Union, BrExit Wake up Call - Nadeem_Walayat
5.Stock Market Maybe This Time is Different? - Tony_Caldaro
6.UK House Asking Prices Break Above £300k! Housing Market Paralysis - Nadeem_Walayat
7.A Big Reason Why Silver Price Is Set To Soar - Hubert_Moolman
8.The Financial Crisis Has Just Begun; Is The American Dream Is Over? - Chris_Vermeulen
9.Gold Stocks Spring Rally - Zeal_LLC
10.GLX, GLDX, Baby Gold Bull Market Stillborn? - Rambus_Chartology
Last 7 days
A Few Facts About Gold That Nay-Sayers Conveniently Ignore - 5th May 16
Save the Environment and Your Retirement: Sell Tesla - 4th May 16
Silver Bullion Has Key New Player – China Replaces JP Morgan - 4th May 16
Gold Stock Picks Up Over 400%, What's Next ? - 4th May 16
U.S. Treasury Secretary Jack Lew: Puerto Rico Needs Urgent Action - 4th May 16
Technical Trading Mastery for Traders & Investors - 4th May 16
Derivatives Crisis Of Banks…Worldwide - 3rd May 16
Bank of North Dakota Soars Despite Oil Bust: A Blueprint for California? - 3rd May 16
Stock Market Technical Analysis - 3rd May 16
Central Banks Need a Higher Gold Price : Hello GATA - 3rd May 16
A Currency War Battle That Europe and Japan Can’t Afford To Lose - 3rd May 16
When the Truth is Found to be Lies, Confidence in Currency Dies - 2nd May 16
How Brexit Could Help All of Europe - 2nd May 16
US House Prices Outpacing Official Inflation Rate, Household Income - 2nd May 16
USD Still Declining... - 2nd May 16
Gold & Silver Rally Huge as Central Bankers & Analysts Flub - 2nd May 16
Stock Market Bounce Day - 2nd May 16
Stock Market Uncertainty Following Two-Month Long Rally - Will It Continue? - 2nd May 16
Stock Market Correction Underway "Upside Objective Reached" - 2nd May 16
USD, Yen and an ‘Inflation Trade’ Update - 2nd May 16
Gold Commitments of Traders and More - 1st May 16
The Magic of Gold Ratio Charts - 1st May 16
Consensus Forming: China Heading Back Into Financial Crisis - 30th Apr 16
The Next Technical Price Targets for Gold & Silver - 30th Apr 16
Stock Market Downtrend Should be Underway - 30th Apr 16
Gold And Silver – A Clarion Alarm Call For All Paper Assets - 30th Apr 16
US Economic Statistics LIES, LIES AND OMG, MORE LIES - 30th Apr 16
Stock Market Strong Elliott Wave Relationship is Developing - 29th Apr 16
Fed's Kaplan: Brexit to Factor in US June Interest Rate Decision - 29th Apr 16
Silver Miners Strong in Grim Q4 - 29th Apr 16
Is Silver a better bet than Gold in the Near Future? - 29th Apr 16
How to Use the CoT Report in Gold Investing? - 29th Apr 16
Sri Lanka is Intriguing: Areas to Consider for Value Investing - 29th Apr 16
Gold “Chart of The Decade” – Maths Suggest $10,000 Per Ounce Says Rickards - 29th Apr 16
Are We or Are We Not in a New Gold Bull Market? - 29th Apr 16
Silver: The “Five Year Plan” and the Great Leap Forward - 28th Apr 16
Michael Hudson: The Wall Street Economy Has Taken Over The Economy and Is Draining It! - 28th Apr 16
AUD/USD - Trend Reversal or Just a Bigger Pullback? - 28th Apr 16
A Gold Revaluation Could Transform Your Financial Status - Overnight - 28th Apr 16
Monetary Policies Misunderstood - 28th Apr 16
Gold Bullion vs Gold Miners - 28th Apr 16
OECD Suggests BrExit Would Cut Net Migration by 1.2 Million by 2030 - 28th Apr 16
MP Naz Shah Punished for Tweets Made During Israel's Genocide of Gaza Palestinian People - 28th Apr 16
Global Recession in 2016 and Beyond - The Obvious Evidence - 27th Apr 16
Why Gold Bugs Need to Stop Listening to The Fear Mongers and Start Thinking for a Change - 27th Apr 16
BlackRock’s Fink: Fed to Raise Interest Rates by Quarter Point ‘at Best’ - 27th Apr 16
Gold More Productive Than Cash?! - 27th Apr 16
Donald Trump Will Fire Janet Yellen and Be Trapped - 27th Apr 16
Money Saving Gardening by Propagating Roses From Cuttings - Propagating Rose Plants Over 2.5 Years - 27th Apr 16
Facebook Censors Pro Trump and Negative Hillary News - 27th Apr 16
This is the Era of the Democrats and Your Taxes are Going Up - 27th Apr 16
Long Awaited Gold Price Breakout - 26th Apr 16
Crude Oil Price Double Top or Further Rally? - 26th Apr 16
Madness in the Crimex Gold and Silver Trading Pits - 26th Apr 16
Britain's Prospects: GBP and BREXIT - MAP Wave Analysis - 26th Apr 16
CRB, Gold, Oil, Cotton, Coffee - 7 Must See Commodities Charts - 26th Apr 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Catching a Falling Financial Knife

Scandalous Market Regulators

Politics / Market Regulation Dec 23, 2012 - 10:56 AM GMT

By: Mark_Thornton

Politics

The Democratic Party had its message on the economy well-prepared for the recent election. From President Obama to his campaign directors to campaign advisor-hacks, all the way down to the local party patsies, the message was uniform and well rehearsed. “We do not want to return to the failed economic policies of four years ago. Those policies caused the economic crisis that almost put the country back in a great depression. We cannot return to the naïve policy that deregulation is good for the economy.


The Romney campaign essentially left this crucial talking point unchallenged. When confronted with this charge from the Obama campaign, Romney’s response was to concede that capitalism requires regulation to work, but to insist that the regulation cannot be excessive and burdensome, or ultimately the consumer will be hurt.

This is an entirely unsatisfactory response. The problem is that Romney and his campaign do not really know how capitalism works. They do have some idea of how the actual interventionist economy works. That is the economy where Romney made all his money. However, it is not a platform from which you can see how an economy works without interventions, regulations, and “favorable” injections from the Federal Reserve. Romney made his money during a time of “easy money” under Alan Greenspan.

What the Democratic spin boils down to is that a lack of regulation allows greed and irrational behavior to destroy the economy and hurt consumers.

This simply is not true. When you look at the cases where this was supposed to exist, you find the Democratic party spin is wrong. Regulations do not make markets safer, more efficient, or work better for consumers in anything but a superficial sense. Regulation only provides “confidence” and assurance that only leads to crisis. Regulation does not produce harmonization of markets or insurance for consumers.

Regulation simply does not work. It is designed with hopes of success, but with no mechanism to achieve this success. We hope for efficiency, but what we get is bureaucracy. We hope for effectiveness, but what we get is rules and red tape that serves neither producer nor consumer. We hope for safety, but what we eventually get is chaos. Let us take a look at the prominent cases where regulation was supposedly lacking and examine the real cause of chaos.

The Bernie Madoff scandal involved Madoff’s tightly controlled firm taking client money and supposedly generating spectacular and consistent investment returns. However, Madoff was not really a great investor; he was running a Ponzi scheme where he used investors’ money to pay for redemptions by his clients. Most of the money apparently went into his own pockets.

First, how did he get away with this scheme for so long? It was not because he was unregulated. He was officially under the scrutiny of the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority, and probably other government regulatory agencies. Despite ever-increasing budgets and staff, and even warnings from outsiders, the SEC failed to act.

Second, how did he finally get caught? He was only caught after the stock market crashed and investors sought to redeem large amounts of their funds. He confessed to his sons that he was operating a Ponzi scheme and his sons turned him into authorities.[1]

If the stock market had not crashed, Madoff might still be celebrated as a genius investor. Many said that Madoff’s investment returns were too good to be true. Experts agreed that they could not be true, and still the SEC failed to act. The fact that he was licensed and regulated by the government gave investors in his firm “confidence” that Madoff’s investment strategy was truly the work of a genius.[2]

The housing bubble and the financial crisis that followed are considered a classic case of a lack of sufficient regulation, which in turn permitted unmitigated greed and irrational behavior to cause a massive amount of manic speculation.

The idea that banking and finance are unregulated is just plain laughable. There are various regulatory agencies at the state, federal, and international level. Thomas Woods reports that there are over 12,000 bureaucrats devoted to financial regulation in Washington DC alone and that inflation-adjusted spending on it has tripled since “deregulation” began in 1980. There are at least 115 agencies that regulate the financial industry at the state and federal levels alone.[3]

Three regulatory factors that contributed importantly to the crisis and its magnitude were as follows:

1. Regulation of credit rating agencies resulted in toxic assets being labeled AAA trustworthy.

2. The regulations and requirements imposed on banks forced them to make bad loans under the Community Reinvestment Act.

3. The squabble between competing federal regulatory agencies prevented credit default swaps (CDS) from operating in a transparent and liquid market place.

The housing bubble is a classic case of how regulation cannot prevent such problems, but can only help increase their magnitude. The biggest regulator of money, banking, and housing is the Federal Reserve. It is the dominant umbrella regulator, and it caused the housing bubble with its long policy of easy credit from 2001 to 2006. Chairman Alan Greenspan denied a bubble could exist and about the same time, his Vice Chairman Ben Bernanke even provided words of encouragement for an audience of independent community bankers:

Our examiners tell us that lending standards are generally sound and are not comparable to the standards that contributed to broad problems in the banking industry two decades ago. In particular, real estate appraisal practices have improved.[4]
Other officials at the Federal Reserve would continue to laud Federal Reserve policies and the financial innovations such as mortgage back securities and credit default swaps well into 2007. They were the cheerleaders for the housing bubble, providing confidence for both leaders and speculators.

Another example: the BP Gulf oil spill was certainly a tragedy, especially for the company. Being so far off shore and drilling for oil in such deep waters made it seem that there was absolutely no government regulation. The government had no assets to stop the oil spill or to prevent it from spreading. We all had to just sit, watch, and wait for the company itself to fix the problem.

The irony is that the reason that BP was drilling in such an inhospitable environment was precisely because of government intervention. The Federal government prohibits drilling in the relatively safe and shallow eastern Gulf of Mexico and permits it in the deeper; more storm prone western Gulf of Mexico. Federal regulators also administer a tax and fee structure that encourages oil companies to drill primarily in the deepest, riskiest regions of the Gulf.

Federal regulation of oil drilling rigs is conducted by the Mineral Management Service (MMS). They are supposed to conduct monthly inspections of these massive rigs, publish reports and issue safety citations when necessary, and put rigs on a regulatory “watch list” for any rig with repeated safety violations.

Well that simply did not happen. The inspections were not held on a monthly basis. Inspectors spent little time on the rigs during inspections; they often relied on the company itself for safety information, and issued very few safety citations. Sadly, regulators actually designated the Deepwater Horizon rig's safety record as exemplary and based on that track record the agency named the rig a model for industry safety in the year prior to the disaster.[5]

In fact, the MMS never required compliance with regulations related to inspecting the blowout preventer device, which ultimately caused the spill to spiral out of control.[6] The reason MMS was lax in its duties and even allowed company officials to write up its reports[7] is probably because MMS employees were accepting all sorts of kickbacks, bribes, and other benefits.[8] Officials in charge have expressed regret, and promised it won’t happen again: at least for the next couple of years, for sure.

As these examples illustrate, when examining this type of scandal, you do not find unregulated firms fleecing their customers. What you do find are highly regulated firms that are being pushed and pulled by regulations into unstable and unethical activities. Enron is another good example. It was probably regulated by more agencies than any company in existence and yet it created a gigantic mess that was never noticed by regulators, but had to be uncovered by a single independent financial analyst.[9]

The regulator is portrayed as a public-spirited specialist. They know the public good. They know the results that are expected. They know how to bring about those results. It is as simple for them to regulate their corner of the economy as it is for Emeril Lagasse to make crab cakes or for Martha Stewart to make a simple doily.

The public is told that regulators do not cause problems; they prevent them. They police the economy. They are the watchmen that have been endowed with the wisdom, ability, and selfless devotion to the public good.

There are indeed many people who work as government regulators that are very smart and well-trained that have public spirit and the public good in their hearts. There are also plenty of cads and knuckleheads that work as regulators.

The problem with government regulation is that you cannot fine-tune the regulations: nor can you perfect the regulatory work force in such a way to make regulation work in anything but a superficial way. The truth is that regulation instills confidence in the public so that they let down their guard and makes them less cautious while at the same time distorting the competitive nature of firms in the marketplace.

After every economic crisis there are calls for new regulations, more funding, and more controls. Economic wisdom dictates that we be ready to contest those calls when the next crisis of the interventionist state occurs.[10]

Notes
[1] Lieberman, David; Pallavi Gogoi, Theresa Howard, Kevin McCoy, Matt Krantz (December 15, 2008)."Investors remain amazed over Madoff's sudden downfall". USA Today.

[2] http://en.wikipedia.org/wiki/Harry_Markopolos

[3] Thomas E. Woods, Jr., Rollback: Repealing Big Government Before the Coming Fiscal Collapse, Regnery Publishing Inc., p. 60

[4] Bernanke, Ben S. 2006a. Speech to the Independent Community Bankers of America National

Convention and Techworld, Las Vegas, Nevada, March 8. Available at:

http://www.federalreserve.gov/BoardDocs/Speeches/2006/20060308/default.htm

[5] http://www.nola.com/news/gulf-oil-spill/index.ssf/2010/05/federal_inspections_on_oil_rig.html

[6] http://www.nola.com/news/gulf-oil-spill/index.ssf/2010/06/bp_says_mms_never_enforced_blo.html

[7] According to my sources, it is apparently common for company officials in many industries to fill out forms that are meant to be filled out by regulators.

[8] http://www.nola.com/news/gulf-oil-spill/index.ssf/2010/05/gulf_region_minerals_managemen.html

[9] http://scottgsherman.com/investigations/onenron.php

[10] http://mises.org/daily/1773

Comment on this article.

Mark Thornton is a senior resident fellow at the Ludwig von Mises Institute in Auburn, Alabama, and is the Book Review Editor for the Quarterly Journal of Austrian Economics. He is the author of The Economics of Prohibition and co-author of Tariffs, Blockades, and Inflation: The Economics of the Civil War. Send him mail. See Mark Thornton's article archives. Comment on the blog.

© 2011 Copyright Ludwig von Mises - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife