Megan McArdle - always worth reading on matters financial and economic - warns against assuming that the Madoff scandal could have been avoided with tighter regulation. This was a simply a good old-fashioned case of breathtaking fraud meets jawdropping incompetence.
Somehow, even though everyone agreed that this was the sort of thing
the SEC should be aggressively rooting out, and the SEC has perfectly
adequate resources to investigate high-profile fraud at a 20-person
operation, the SEC dropped the ball so hard it's probably even now
still falling through the Earth's mantle towards China.
The market failed as badly as the government.
The people he bilked weren't unsophisticated consumers of the sort that
we assume need regulatory protection. They were extremely rich people,
many of them with backgrounds in finance.
The market failed.
The government failed. Leaving us with a big WTF? We cannot fix this
either by new rules--the SEC hardly needs new rules to make it clearer
that you shouldn't fake financial statements while paying current
investors out of the funds invested by new ones. Nor by better
reliance on private institutions--it's hard to argue that super rich
people with considerable financial savvy were somehow blinded by some
badly designed government intervention. Everyone just screwed up.
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