Obligatory Bernard Madoff Post

Isaac Newton mused that he could measure the movement of distant celestial bodies but could not gauge the magnitude of human folly.

There are many who will opine that the primary lesson from Bernard Madoff’s Ponzi scheme is that financial deregulation has failed utterly. The argument is evolving in the N.Y. Times, Washington Post and L.A. Times is that a return to rigorous oversight is needed immediately.

The blog of a former Clinton appointee which I read daily offers the following: “Whatever its theoretical costs, regulation is dramatically cheaper than intervention.”

I disagree.

If individuals are incapable of making correct decision why should we trust a group of financial elite to make those decisions for us?

The financial mess in which we currently find ourselves is based on two factors: 1) Housing Bubble and 2) Credit Default Swaps.

I will disagree with the President’s comments of 24 February where he attributed the current mess to: 1) Education shortfalls, 2) Our health care system, and 3) Foreign oil (I wish I were making this stuff up).

The Housing Bubble can be attributed to numerous items but two items stand out with a degree of primacy: 1) Low interest rates post-9/11 and 2) Housing and Community Development Act.

The Housing and Community Development Act had the noble intention of providing access to capital to individuals who’d not previously owned homes. A downside to the legislation was the criminalization of tools used by the financial industry to make adverse decisions – it became very difficult for banks to say no. The access to capital by those without credit experience combined with low interest rates made millions of American eligible to buy a home who’d not done so before. And today there are politicians in D.C. who call the lenders “predatory” because they complied with the laws congress enacted.

Credit Default Swaps were supposed to limit risk for lenders by off-setting risk with insurance. The idea was good until you had an entire sector go South: in this case real estate. For the record: it was under Mr. Clinton that Credit Default Swaps were first approved (and re-authorized under Bush 43).

So: who to blame? Greenspan for low interest rates? Barney Frank for the Housing and Community Development Act? Clinton for Credit Default Swaps? Hard to say, as the financial market is a complex beast and defies clear lines of responsibility and authority.

But to the matter of regulation: It was the government which lowered interest rates. It was the government which passed the Housing and Community Development Act. It was government which approved the use of Credit Default Swaps. Why does anyone think that government will do any better job regulation the financial market now than it did then?

Bottom line: There is a silver lining to this – Bernard Madoff will surely die in jail. An object lesson which should not be lost on anyone.