Free Market Ideology, Epilogue

In the most recent post in the Causes series, I expressed a fair amount of agreement with Joseph Stiglitz’s criticism of an excess of faith in the free market and the lax regulation that results. With the Bernard Madoff scandal (New York TimesWSJ has more information but requires subscription), Felix Salmon is asking, where were the regulators?

(By the way, if you’re wondering how the Madoff fraud was possible, remember that a hedge fund is like a bank in the sense that you put your money in and you generally leave it there for a while, and although you may take some out now and then you may also put some more in now and then, and other people are putting it in, and so on. With a bank, not all depositors can get their money out at the same time because it is tied up in long-term loans that the bank can’t call in. With Madow’s fund, investors couldn’t get their money out because he had, effectively, burned it. They had been getting periodic paper statements showing returns, but there were no real returns, and hence no assets behind that paper.)

4 thoughts on “Free Market Ideology, Epilogue

  1. Seriously, where were the regulators? Recently read another story about mortgage fraud on WSJ, some executive in FL changed mobile homes mortgages to single family homes mortgages. Events like this have shaken up the confidence completely.

    Oh well, as Warren Buffett said perfectly:

    “It’s only when the tide goes out that you learn who’s been swimming naked.”

  2. I’m not sure what everyone doesn’t get. This is fraud on a massive scale. Free market capitalism would work in theory and would be a most fair merit-based system in which people from any socioeconomic class could rise to the top based on some combination of hard work and ability.

    I’ve worked at a couple unnamed firms and I’ve seen some shady characters. I could have made substantially more money by abandoning my values, but I wouldn’t. Finance in almost every capacity I’ve seen is basically criminal. How can someone in good conscience tell a client that what they are doing for them is in their best interest when it clearly is not?

    I’ve worked in this industry and it is rife with ignorance and bereft of values.

  3. We don’t want a policeman on every corner to prevent armed robbery and we don’t expect the FBI to prevent every crime. We already have loads of regulations and loads of regulators. To think that regulators can or should prevent all financial crime is nonsense…

    We do want people who commit crimes to be punished and hope that Madoff and the undoubtedly many co-conspirators in and out of his firm will serve long jail sentences. I vote to put the accounting firm first in line after the executives of the firm, but let’s not fail to appreciate the work of many others that are required to make this fraud float from programmers to clerks.

    (It might also be interesting to ask what high level pressure was placed on the SEC in the last decade to avoid looking at the Madoff firm.)

  4. What exactly is your argument?

    Your assumption seems to be that more regulation would have prevented this.

    Have you ever run a business?

    A) there are already so many regulations on the books that if most business followed the letter of the law they would get nothing done.

    B) Most laws and regulation can easily be circumvented if someone chooses to do so. More regulation would not have prevented a maniac like Madoff. He would have found other loop holes.

    C) Over regulation can almost guarantee chronic rent-seeking.

    Lastly, free markets does not mean no regulations. Just minimal. There is a reason for this. The benefits of most regulations do not out way their costs. If you don’t believe me, start your own business and see for yourself.

    Lastly, in my opinion, if regulations are necessary, they should usually be in the form of increased transparency. Why the costs of more transparency is high, few things are better for free markets than increased information.

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