A Stitch in Haste

Before Bernie Madoff, the standard script of the Angry Left regarding the financial crisis went something like this:

“Wall Street is greedy. Greed, for lack of a better word, is bad. Therefore Wall Street is bad and must be regulated to the greatest extent possible. The mortgage bubble, the subprime asset fiasco and the stock market collapse are merely the latest evidence of this.”

There are, of course, holes in this reasoning large enough to fly a jetliner through. Predatory borrowers come to mind, as does the fact that there was in reality no meaningful “deregulation” of Wall Street to speak of. Not to mention the pesky fact that “greed” has always existed — on Wall Street, in Washington and everywhere else. It’s a bit silly to blame something new on something as old as Eve.

What the anti-capitalists are really engaging here is a bait-and-switch between economic regulation and criminal law. They are expecting economic regulation to serve the function of criminal law. Moreover, they are demanding not only that regulation serve a penal function, but they are also demanding that it do so flawlessly and even presciently.

Consider this anecdote from the Wall Street Journal:

The little blue house rests on a few pieces of wood and concrete block. The exterior walls, ravaged by dry rot, bend to the touch. At some point, someone jabbed a kitchen knife into the siding. The condemnation notice stapled to the wall says: “Unfit for human occupancy.”
…
Less than two years ago, Integrity Funding LLC, a local lender, gave a $103,000 mortgage to the owner, Marvene Halterman, an unemployed woman with a long list of creditors and, by her own account, a long history of drug and alcohol abuse.
…
For a $350 fee, an appraiser hired by Integrity, Michael T. Asher, valued the house at $132,000.

The rest of the tale follows the standard subprime-foreclosure-”Wall Street bastards” script. But it was all spawned by one apparently criminal act: a likely fraudulent appraisal by a crooked low-level functionary.

This is a big part of why the anti-capitalist, anti-Wall-Street screechers are so wrong. Besides the pesky problem of borrowers such as the deadbeat, alcoholic Ms. Halterman is the added failure of greed-damning malcontents to distinguish between regulation and criminal justice.

If I go out and murder someone, does that suggest that the penal code “failed” or that the police “failed”? If I go out and rob a bank, does that mean that the Federal Reserve “failed” or that the FDIC “failed”? Of course not.

All the government can do is establish consequences for malfeasance, then make sure I know the consequences of that malfeasance. If I accept those consequences and commit the crime anyway, then what more is the state supposed to do exactly, except assign a prosecutor and impanel a jury?

It cannot possibly be the responsibility of regulatory bureaucracies such as the SEC to prevent criminal conduct a priori. The government can only provide the framework to help people avoid being victims, and to punish malefactors afterwards. The pre-bubble apparatus did exactly that. The fact that people went ahead and allowed themselves to be victimized after the fact doesn’t mean the system was somehow “broken,” any more than the fact that there are still murders suggests that our homicide statutes are somehow “broken.”

—

Here, meanwhile, is a counterexample that nicely illustrates my point:

[Harry] Markopolos saw two possible scenarios. In the “Unlikely” scenario: Mr. Madoff, who acted as a broker as well as an investor, was “front-running” his brokerage customers. … In the “Highly Likely” scenario, wrote Mr. Markopolos, “Madoff Securities is the world’s largest Ponzi Scheme.” Which, as we now know, it was.

Harry Markopolos sent his report to the S.E.C. on Nov. 7, 2005 — more than three years before Mr. Madoff was finally exposed — but he had been trying to explain the fraud to them since 1999. … And yet the S.E.C.’s cursory investigation of Mr. Madoff pronounced him free of fraud.

What Madoff did was unarguably illegal — very illegal. And the criminal justice system is now dealing with him as best it can. Moreover, the regulatory framework — mandatory disclosures, etc. — was already in place. There was no “deregulation” or “laissez faire” for a unhinged leftist to gnash his teeth about. The failure was strictly bureaucratic — strictly governmental. And remind me again who was in the White House, and therefore controlled the S.E.C., in 1999?

—

Another font of regulation-criminalization confusion is the rating agencies:

Moody’s Corp, McGraw-Hill Cos Inc’s Standard & Poor’s, and Fimalac SA’s Fitch Ratings have been blamed for failing to flag problems with mortgage securities that have spread through the financial system.
…
Rep. Stephen Lynch, a Democrat from Massachusetts, said his constituents did not have the ability to scrutinize the various tranches that make up an asset-backed security, but said that they did know what a triple-A meant. “They rely on them and are reduced to relying on them. A lot of people feel like they have been defrauded,” Lynch said.

Of course, no one is actually suggesting that the rating agencies engaged in any criminal or tortious fraud. It just “feels like” fraud. Which these days is all it takes for malcontents and politicians to demand their pound of flesh.

Incidentally, the rating agencies are a government-chartered oligopoly. Remind me again about how this is all a “failure of laissez faire”?

(Via Crime & Federalism.)

Previously:
–What About Predatory Borrowers?
–Mortgage Lending: “I’m From Harvard and I’m Here to Help”
–Is There a “Right” to a Competitive Mortgage?

Filed under: Capitalism, Law