Madoff and the regulation of financial markets
18 December 2008
SUGGESTED
Energy and Environment
29 December 2008
Monetary Policy
22 December 2008
Government and Institutions
The Madoff scandal is yet more bad news for the financial sector. Several major banks may have lost hundreds of millions of dollars in the alleged scam.
An important question is whether this would have happened under a different regulatory environment. Without the false sense of security given by the government regulation of financial markets, investors would surely have been far more careful about where they put their money. They would have investigated the risks involved more fully and favoured reputable, conservative institutions.
Instead of investors in general having a responsibility for monitoring their counterparties we have handed the job over to a government institution. When that fails – tough. Also, the key objective for a financial institution is not to build reputation and trustworthiness but to make sure it complies with what the regulator wants. Financial institutions look upwards towards the regulator and not downwards towards their clients.
An important question is whether this would have happened under a different regulatory environment. Without the false sense of security given by the government regulation of financial markets, investors would surely have been far more careful about where they put their money. They would have investigated the risks involved more fully and favoured reputable, conservative institutions.
Instead of investors in general having a responsibility for monitoring their counterparties we have handed the job over to a government institution. When that fails – tough. Also, the key objective for a financial institution is not to build reputation and trustworthiness but to make sure it complies with what the regulator wants. Financial institutions look upwards towards the regulator and not downwards towards their clients.
4 thoughts on “Madoff and the regulation of financial markets”
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Two aspects of over-regulation are damaging. It seriously dilutes the ‘caveat emptor’ principle, which may not be sufficient but is surely a necessary part of sensible behaviour. And (as Richard implies) it can all too easily mean there is little purpose in providers of goods or services exceeding the standards imposed by the regulator.
We talk about government failure, the A Level syllabus talks (ad nauseam) about ‘market failure’, but regulatory failure has tended (until now) to be downplayed.
Two aspects of over-regulation are damaging. It seriously dilutes the ‘caveat emptor’ principle, which may not be sufficient but is surely a necessary part of sensible behaviour. And (as Richard implies) it can all too easily mean there is little purpose in providers of goods or services exceeding the standards imposed by the regulator.
We talk about government failure, the A Level syllabus talks (ad nauseam) about ‘market failure’, but regulatory failure has tended (until now) to be downplayed.
I would like to attract your attention to two different approaches taken recently in the US and Russia towards car producers liquidity: 1) US wants to transfer some $17 blns to bailout 3 producers;
2) Russia has provided state guarantee to back new bonds Russia’s car producers are to issue; with the latter more market oriented; and the former as urgent one.
I would like to attract your attention to two different approaches taken recently in the US and Russia towards car producers liquidity: 1) US wants to transfer some $17 blns to bailout 3 producers;
2) Russia has provided state guarantee to back new bonds Russia’s car producers are to issue; with the latter more market oriented; and the former as urgent one.