Why regulation doesn\’t work

Because regulators don\’t have the correct incentives.

A 2009 report by the SEC\’s internal watchdog called into question the conduct of 21 staff members for work related to Madoff.

David Kotz, who wrote the report, had urged the SEC to act on an “employee-by-employee basis” to prevent a recurrence of mistakes that kept the agency from halting the fraud.

However, most staff found culpable were merely docked a week\’s wages or given \”counselling memos\”. The strongest action taken against any employee was a 30-day suspension without pay, after it was determined that if they were fired it would hurt the agency\’s operations, according to John Nester, an SEC spokesman.

Not even one person fired. Recall, the SEC was actually told (by Harry Markopolos) that Madoff was running a Ponzi scheme. He actually laid it all out in a memo to them.

He doesn\’t mince his words either. Either Madoff is doing illegal front-running or it\’s a Ponzi. No other possibilities exiost. And yes, this was formal evidence, presented in 2005. And he\’d made initial comments and a complaint about it back in 1999.

So, the SEC had been informed. And they did nothing. Which is why regulation doesn\’t in fact work.

Because, as we can see, even when spoon fed the truth, the regulators didn\’t in fact work.

Firing everyone involved with this unbelievable fuck up would at leasst align the incentives a little better: but that\’s not how bureaucracies work, is it? Which is why regulation doesn\’t work……

5 comments on “Why regulation doesn\’t work

  1. What Markopolos said in his book was that the SEC went in and looked for compliance with the regulations. No form 37/B/11a? Better fill one out then.

    He pointed out that it would have taken people 5 minutes to know that Madoff was pulling a fraud, but no-one did it.

  2. the problem is that age-old one – if you prescribe rules and get people to fill in forms, the regulators check for the forms and for compliance with the rules. They do not look at the wider picture. The fraudster makes sure of compliance with the rules – was advi9ce given, was there a cooling-off period….etc – while getting rich. It is like all those passport checks – they inconvenience the law-abiding while doing nothing to stop sophisticated criminals forging passports etc.

  3. I wonder what Stella Creasy thinks of Madoff? He borrowed a load of money at a high interest rate (not really but be with me on this), spent it on current consumption, and refused to pay it back. Surely then he should be forgiven, like everyone who patronises “legal loan sharks”?

  4. That’s not THE “reason why regulations don’t work”; it’s simply ONE of the reasons why regulations don’t work.

    Nowhere has the study of economic regulation (and its effects) been undertaken than by the Austrian School.

    Reading Mises may be (somewhat) difficult. But understanding the matter is almost impossible without reading Mises.

  5. whilst regulators are never going to be 100% effective, there is variation in the effectiveness of regulators. I guess that a supine culture under a Bush administration and financier worshipping ideology might have some explanatory power. Similarly, if you want regulators to be effective, then a culture that takes regulatory effectiveness seriously, rather than just throwing up its hands, probably helps too.

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