How Dodd-Frank Resembles Bernie Madoff

Chidem Kurdas

Fears about the stability of the financial industry have become rampant more than five years after Congress passed the gigantic financial regulation law, Dodd-Frank, supposedly to ensure stability. It seems that the historical pattern I described in my 2014 book continues:

“Looked at closely, financial regulation bears a striking similarity to a Ponzi scheme that promises highly attractive returns. The scheme may make some profit but its main effect is to transfer wealth. Similarly, financial regulation has not protected investors as promised these 80 years. But it does transfer wealth—foremost to regulatory insiders and their allies.

Another similarity is noteworthy. A Ponzi scheme is a vortex that pulls in people and money. … Regulation, also, builds on itself—the more it fails, the more rules pile up. Failure is attributed either to a lack of regulation or shortage of proper staff and money. This results in more powers and more resources for regulators after every major debacle, including the most recent financial crisis.

A third common ground is that such operations look exceptionally successful and may continue to look fine for a long time. (Michael) Berger, (Bernard) Madoff and (Allen) Stanford took different paths, but all three were known as exceptional money managers. Failure is invisible until it crops up seemingly with no warning. But in fact financial disasters do not happen quickly; they are in the making below the surface.”

Same with regulatory systems; they promise what they cannot deliver; pullulate the more they fail; and seem to work until suddenly a regulatory debacle erupts into full view.

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