And so the era of lax regulation that began with Enron ends with the Madoff madness looming as a monument to the SEC’s ineptitude. Already under fire for smelling the flowers while Bear Stearns — to cite one example — charged toward collapse, the SEC’s days may be numbered.Like many commentators on the economy, Steffy presents a package deal--a mixture of truths and falsehoods. The SEC is indeed inept, which is a claim that could be made against every regulatory agency. But to claim that we have lived in an era of lax regulation is irresponsible, untrue, and intellectually dishonest. For example, Title 12 of the Code of Federal Regulations, which covers the Banking and Finance regulations, contains more than 4,500 pages of regulations. No reasonable person can honestly say that 4,500 pages of regulations is lax.
Amidst the calls for greater control of the financial industry we keep hearing that more Congressional oversight is needed and that he individuals at the top of the regulatory agencies are incompetent. Both imply that the problem does not lie in what is being done, but who is doing it. Neither addresses the fundamental problem, which is the entire concept of regulation, not the individuals charged with enforcement.
That legislators focus on the who rather than the what is not surprising. This erroneous view stems from the same erroneous view that led to regulations in the first place--reality is malleable to the whims and desires of the collective, that is, reality is negotiable.
The purpose of every regulation is to achieve some "desired" result (or prevent an undesired result). This can allegedly be achieved by compelling individuals to act in some proscribed manner, or by prohibiting certain actions. Ironically, it is a superficial recognition of cause and effect, while it simultaneously ignores cause and effect.
For example, the stated intention of many financial regulations is to prevent fraud. It is believed that if financial institutions are forced to disclose certain information (the cause) then consumers can make informed decisions and avoid being defrauded (the effect). In general, this is valid. Disclosure is the enemy of fraud; fraud depends on the ignorance of its victims.
Regulations attempt to create specific results by controlling the actions of individuals. That control is exercised by reducing or eliminating the choices available. For example, financial institutions must disclose specific information in a particular manner--regulatory agencies have eliminated any choice in the matter. At the same time, this process creates a false sense of security on the part of consumers--if the SEC is satisfied, then the investment must be safe. This false sense of security encourages consumers to neglect responsible decision making.
The justifications for regulations are based on two faulty and interrelated premises: 1. Businesses will be intentionally deceitful and manipulative without regulations; 2. Individuals are easily deceived and manipulated without regulations. (For a good discussion on the difference between regulations and legitimate laws, see Regulations vs Laws.)
Morally, these premises are founded on the false alternative of altruism and hedonism--that individuals must choose between sacrificing for others or sacrificing others for oneself. This alternative holds that life requires sacrifice, and the only issue is who the victims will be. Charlatans such as Bernard Madoff and Key Lay only serve to reinforce this point of view.
But another alternative does exist--rational self-interest. The morality of self-interest holds that life does not require sacrifice of oneself or of others. It holds that each individual has a moral right to pursue his own values without interference from others, so long as he respects their mutual rights. It holds that cannibalism is neither necessary nor proper.
More fundamentally, these premises are founded on the view that truth is a product of the collective. If enough people believe something--such as the notion that we don't have enough regulations--then it must be true. And the seemingly endless reams of federal regulations is ignored as irrelevant.
But reality is not as co-operative as the social subjectivists believe. Reality will not bend to their will and desires, no matter how loudly they shout, or how many laws they pass, or how great their numbers, or who they put in charge.
Despite the vast powers they have over financial institutions, the demands of Congress and the myriad regulatory agencies could not prevent the collapse of Wall Street. Despite assurances that Freddie Mac and Fannie Mae were financially sound, Barney Frank's wishes could not change the fact that both were essentially bankrupt. Despite endless cheer leading and pumping of billions of dollars into the economy, the Federal Reserve cannot entice consumers to return to past spending patterns.
The regulators remained convinced that our economic turmoil is the result of too much freedom. They remain adamant that with enough money, enough Norman Vincent Peale speeches, and enough regulations they can rebuild the economy. In the end, if the economy does not recover through bribes or feel good oratory, they will force it to. And when this doesn't work, they will blame the last vestiges of freedom.