Monday, January 5, 2009
The SEC Makes Wall Street More Fraudulent
So I claim at mises.org, focusing on the Madoff scandal. An excerpt:
Here is a chart that may surprise you:
In the private sector, when a firm fails, it ceases operations. The opposite happens in government. There is literally nothing a government agency could do that would make the talking heads on the Sunday shows ask, "Should we just abolish this agency? Is it doing more harm than good?" It's not just Fannie Mae and Freddie Mac: throughout history, virtually every agency created by the federal government has been deemed too important to fail. (I vaguely remember some Republicans in the mid-1990s holding a press conference and declaring that the Department of Commerce was done, and that voters could "stick a fork in it." I guess they found it was still pink inside.)
The pattern plays out perfectly with the SEC and the Madoff bombshell. Suppose a few years ago, I told a group of MBAs to imagine the worst screwup that the SEC could possibly perform, something so monumentally incompetent that members of Congress might openly question whether the agency should continue. I think that at least half of the class would have come up with something far less outrageous than what has happened in fact.
Here is a chart that may surprise you:
Comments:
The problem of institutions such as the SEC and even the FDIC is that they skew the market's ability to properly price investment risk. Part of the reason the market has been reacting so wildly as some of the most obvious and predictable events unfold is that investors have been unable or unwilling to properly price risk of loss in the normal business cycle - not to mention black swan events.
Bernard Madoff proposed a virtually risk free and consistent 8-10% annual return to investors. Even a young child could perceive that if the 10 year T-bill note is closing in on zero APY, (yes that's '0%' nominal value just to be specific) then Madoff offering 8-10% with the same risk is either turning water to wine, or spending their evening as a tooth fairy - give and take.
(I suppose they could consider the U.S. Gov. a Ponzi scheme with a lesser probability of bust to account for this disparity of return.)
The more 'unnatural' economic activity proposed by government agencies, the more challenging it is for the investment community to standardize and price risk into the market.
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Bernard Madoff proposed a virtually risk free and consistent 8-10% annual return to investors. Even a young child could perceive that if the 10 year T-bill note is closing in on zero APY, (yes that's '0%' nominal value just to be specific) then Madoff offering 8-10% with the same risk is either turning water to wine, or spending their evening as a tooth fairy - give and take.
(I suppose they could consider the U.S. Gov. a Ponzi scheme with a lesser probability of bust to account for this disparity of return.)
The more 'unnatural' economic activity proposed by government agencies, the more challenging it is for the investment community to standardize and price risk into the market.
# posted by 
: January 11, 2009 at 10:59 PM
: January 11, 2009 at 10:59 PM Subscribe to Post Comments [Atom]
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