Many Americans are screaming at our government right now, wondering why we allowed deregulation of the financial markets over the last thirty years or so. Me? Not so much.
After all, deregulation was designed to get the markets moving again, so that not only the very wealthy could benefit from trading, but the middle class could as well. We tend to forget this every five years or so (eighteen bear markets in eighty years equals one bear market every five years or so). The truth is, no one complains when the markets are rising. No one also notices that over the last eighty years, there were bear markets caused by shady schemes and silly bubbles even with regulation in place.
This is America; when things go to hell, someone or something has to be found to blame. This year’s scapegoat is deregulation. It bears (no pun intended) repeating that bear markets and investment bubbles happen even with strong regulations in place.
The last three bear markets have all been caused by a small sector of the market taking down the rest of the market. This would lead one to believe that the stock market is almost one hundred percent psychological exercise, as in, “Everybody out of the pool, now!”
“No one knew” is the reply when “experts” who knew the perpetrator of the fiduciary crimes are asked “How could this happen?”. “I’m shocked!” is the second most popular response. In the case of Bernie Madoff, we have all the necessary ingredients at our fingertips. We have a criminal passing himself off as a financial genius (Madoff actually advised the SEC on how best to regulate the market). We have a Regulation Authority who never bothers to investigate a new advisory firm, and we have an “adviser” who, it seems, never bothered to register certain parts of his business. You can read more about that here.
Okay. We had regulation in place, and the regulation failed in its duties. We also had an adviser circumvent regulation by purposely keeping his money-management business unregistered with the SEC. One business regulated, one not. Both were involved in stealing possibly as much as fifty billion dollars from individual and institutional investors alike. You could ask, “Where were the regulators”? In this case, it hardly matters. They were there, but they failed. In the case of Madoff’s unregistered business, well, you can’t regulate something that doesn’t legally exist; which is why Madoff didn’t want it registered.
Add to all of this the fact that Bernie Madoff knew the ins and outs of SEC regulation, and soon you have a case of a very greedy predator using the system he helped devise to steal money from people who trusted him. Call him a con man. Confidence is what he sold. Money is what he stole. The regulation was in place to stop him and he beat it anyway. We can scream bloody murder until we are blue in the face. We can call for more regulation, but speaking as one who is in the financial industry, I fail to see how even more regulation could have stopped a predator determined to beat the system, especially one who knew the system as well as Bernie Madoff. Rules or lack thereof do not cause bear markets and losses of trillions. People do that.
Just as we can blame the sub-prime mortgage meltdown, and Credit Default Swaps for the most recent bear market, extra regulation would not have stopped this bear market. Only common sense, wise investing, and sustainable confidence can do that. By sustainable confidence, I mean growth without that blinding greed which causes men to do stupid things with other people’s money.
In essence, without a strong moral code, the markets will always develop bubbles that no one will stop until it’s too late. You can’t regulate morals into existence, just as you cannot legislate crime out of existence. It only takes one person to come up with a stupid idea that is so brilliant, it can’t miss, for a while. But once it misses, it takes everyone with it, all of the lemmings following the herd off the cliff, because the guys in front are high on greed.
Cry for more regulation if you will. The market won’t care what you put in its way. Human emotions drive the market, and so long as they do, we will continue to have surges followed by bubbles, followed by crashes. You cannot legislate emotion out of human beings.
