Madoff and Regulation

There has been a lot written about the Madoff scandal, but I wanted to offer a few comments. The Ponzi scheme has been around (and illegal) since, well, Ponzi. It was not the product of some financial innovation, is clearly against the law, and should have been prevented (at least on such a large scale). The regulatory agencies therefore cannot blame imperfect foresight (as they have done with capital ratios and securitization) for their failure to detect and shut down the Madoff scam.

Nonetheless, there are a few lessons to be drawn here:

1.) Regulation is important and we need rules in place against such schemes. Free enterprise operates best when there are rules (whether enforced by government or private entities).

2.) Regulation is only useful if it is actually enforced. One point that I have made regarding the financial crisis is that it was not merely a failure of regulation, but also of regulators. Decisions within regulatory agencies to relax the regulatory standards renders such standards useless. Thus, even with regulation in place, we need regulators who will actually do their job. The Madoff scandal highlights the fact that the regulatory agencies have become nothing more than a joke in terms of enforcement.

One response to “Madoff and Regulation

  1. Regulation costs money, money that could be spent on new measures to prevent the problem occuring in the first place.

    Also, legislation takes quite a while to put into place, so when the plan is finally drawn up, the actual details may be inaccurate.

    Great little article, a good read.

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