Blackadder’s Lair

The home of many a cunning plan

More Failure of Imagination

A propos of yesterday’s post, I came across a blog post the other day about the Madoff scandal which I found quite interesting. Madoff, as anyone not living under a rock for the last few months knows, was the famed investor whose ponzi scheme milked America’s rich and famous out of nearly fifty billion dollars. The fact that this scheme went undetected for so long (despite the efforts of some to sound the alarm) and was only uncovered when his own sons turned him in, is, to put it mildly, a rather bad screw up for the S.E.C. In fact, as Robert Murphy notes, if you had asked people beforehand to come up with a situation where the S.E.C. screwed up so badly that it would be abolished, they probably would not have come up with something nearly as bad as the Madoff scandal. And yet, the response to these failures at the S.E.C. will undoubtedly be for it to be given more money, more power, and an even greater mandate to root out scams in the investment world.

No doubt for some the problem here is not so much a failure of government as a failure of Republican administrations. If the S.E.C. wasn’t doing its job, it must be because Bush gutted the agency, or filled it with ideological hacks who refused to enforce the law.

Of course, under Bush the S.E.C.’s budget more than doubled, but assuming the above is right, it does raise a rather interesting question. If having the government do something (say, regulatory oversight) only works when you have committed, capable people at the helm, and if Republican administrations are liable to fill the relevant positions ideological hacks, then isn’t that a fairly compelling argument for not putting the government in charge of things? I mean, like or not, if history is any guide Republicans are going to be in charge around half of the time, right? Would you want nice, liberal Dr. Jekyll managing your retirement, or health care, or making sure you don’t get ripped off, if you knew that he spent half his time as that right-winger Mr. Hyde? I know I wouldn’t.

When I made this argument on another site recently, he responded by saying that “half a loaf was better than none” and that even if government enforcement was going to be screwed up at least half the time, in the absence of government oversight, there would be no one to keep people from getting ripped off by financial scams.

Now Madoff’s scam was what’s called a Ponzi scheme, named after the investment scam perpetrated by Charles Ponzi in 1920. Ponzi was operating prior to the creation of the S.E.C., so it should not be surprising that his scheme went on longer and bilked investors out of far more money than Bernie Madoff was able to do.

Except, of course, that that isn’t true. Unlike Madoff, who managed to get $50 billion out of investors over the course of nearly a decade, Ponzi’s scheme was uncovered after six months and even in inflation adjusted terms he stole far less money than Mr. Madoff. Nor did the scheme run aground because, like all such schemes much, Ponzi eventually ran out of investors. His scheme could have and would have gone on much longer except for the fact that, on July 26, 1920, the Boston Globe began a series of articles asking questions about the validity of his system. These questions raised suspicions among investors, who began to ask questions of their own, which quickly brought down the whole house of cards.

Which brings me to the blog post I mentioned at the beginning of this entry (forgotten about that, hadn’t you?). It begins thus:

Ray Pellecchia is right: if Harry Markopolos had taken all of his evidence about Bernie Madoff and put it on a blog, instead of submitting it to the SEC, there’s a good chance that would have been the end of Madoff right there.

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February 6, 2009 - Posted by | Government

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