Why Government Regulation is a Lie (and what you can do about it)

07/09/20130 Comments

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by James Corbett
July 9, 2013

Every time we see a systemic failure such as the 2008 collapse of Lehman Bros and subsequent market panic, the inevitable question is “what is the government going to do about it?” Just as inevitably, the answer is that the government will pass more legislation, or even give more power to the very regulators who failed so signally to stop the crisis from occurring in the first place. The assumption is that the regulators are the defenders of the public interest and that they only need more money and authority to properly fulfill their mandate.

Quite the contrary. The pattern that has emerged over decades of experience is by now undeniable: the regulators that are designed to oversee the system are not just inept, but actually complicit in the creation of the crises themselves, safe in the knowledge that no matter how spectacularly they fail their budgets will continue to increase and their leaders will continue to be praised as defenders of the public interest.

Nowhere is this more apparent than in the realm of financial regulation.

Famously, when the Securities and Exchange Commission was created in 1934, President Roosevelt tapped Joseph Kennedy, a man who did business with mobsters and bootleggers and made his fortune in inside trading on the stock market, as its first chairman. When asked why he would appoint an admitted Wall Street crook to run the SEC, Roosevelt quipped “Takes one to catch one.” Sadly, the idea of putting criminals in charge of regulating the criminals has never fundamentally changed.

Beginning in 2000, financial fraud investigator Harry Markopolos began alerting the SEC that Bernie Madoff’s wealth management business was in fact, a Ponzi scheme, but he was ignored by the commission. Over the next eight and a half years, his continued efforts to blow the whistle were repeatedly dismissed by the SEC. As Markopolos himself testified in 2009 over the Madoff scandal, he “gift wrapped and delivered the largest Ponzi scheme in history to the SEC” but they did nothing whatsoever to stop it. After the scam came to light, it was revealed that Madoff’s niece had married one of the SEC compliance officials who had found “no problems” at the firm in 2005.

In 2009, the SEC admitted in a FOIA response that it had destroyed the records of their investigation into the 9/11 insider trading scandal. The next year, the Dodd-Frank Act intended to “clean up” the financial industry in the wake of the Lehman Bros collapse actually provided the SEC with exemptions from providing documents under FOIA.

In April of 2010, former Goldman Sachs trader Andrew Maguire blew the whistle on manipulation of the gold and silver markets by JP Morgan and HSBC. Despite providing the Commodities and Futures Trading Commission with detailed information on how the manipulation was taking place, and even correctly predicting a manipulation event in an email to the CFTC two days before it took place, the CFTC has not pursued any criminal action in the case.

One of the most startling testimonials comes from Richard Grove, a former software salesman for Legato/EMC Corp. In the wake of the Tyco/Enron/Worldcom accounting scandals, his company was selling compliance software that was supposed to help companies meet reporting requirements introduced in the Sarbanes-Oxley Act of 2002. When he discovered that the software actually helped clients perform the very fraud it was supposed to be preventing, Grove went to the SEC to blow the whistle. Not only did the SEC threaten him with arrest for attempting to blow the whistle on the scam, they later purchased the very software with the fraudulent back door that Grove had warned them about for their own accounting use.

In 2010 Divergent Films released the film “20/20 Hindsight: Censorship on the Frontline” detailing Richard Grove’s remarkable whistleblowing experience, and how the SEC is in fact engaged in the same fraud and abuse as the financial institutions they are supposed to be regulating.

Examined in isolation, skeptics dismiss stories like those of Markopolos or Maguire or Grove as incidents of corruption in an otherwise sound system. But examined together, they paint the picture of institutions like the SEC that are not just susceptible to influence by the entities they regulate, but that in many cases are functionally indistinguishable from those entities.

Government agencies with the power to write and selectively enforce regulations are the first place that smart criminal-minded organizations turn when trying to consolidate their power. There remains no better conceivable return on investment than corporate lobbying, except perhaps for outright bribery, blackmail or extortion of regulators and legislators.

The perfect example comes from the realm of food safety. Last year we saw a massive movement spring up in California attempting to pass Prop 37, a ballot initiative that would have required mandatory labeling of genetically modified foods. The initiative ultimately ended up being voted down and GMO foods continue to go unlabeled in the US.

This narrative reinforces the idea that the USDA and other government agencies are merely passive instruments that can be wielded by the people to regulate the corporations. In this case, the ballot failed, but we could equally imagine a world in which the ballot succeeded and GMO foods would have been properly labeled and consumers could have made informed decisions about what they are eating.

But this is a lie. Even now, the biotech giants are working behind the scenes to make sure that when labeling laws are inevitably passed, that they contain key exceptions and are selectively enforced to ensure that they can continue business as usual.

The inevitable question, then, is what can be done about this state of affairs. The answer is equally inevitable: if fundamental change is to occur within this system, it almost by definition will not come from within that system. Any conceivable authority that is set up to oversee the system will itself become prey to the exact same corruption as the regulatory framework that currently exists.

This means that rather than waiting for Washington to pass some law or regulation that will magically make the SEC start heeding the whistleblowers and prosecuting the criminals, what is needed is a fundamental change in our perception of the government watchdog system itself. Instead, the public needs to start taking matters into their own hands and realizing that no one is going to look out for your interests but you.

Take the GMO labeling example. Given that the biotech giants are even now plotting to get around labeling laws and continue to flood the markets with their GMO monstrosities, why should the public sit around waiting for the government to require labeling, especially when there are initiatives that are taking advantage of modern communications technology to allow people to label these foods themselves without the need for any bought-and-paid for government agency to pass any sort of booby-trapped law or regulation?

This is the model for a paradigm that can work for the future: citizen-led and citizen-run initiatives that bypass the current government regulatory structure entirely and put the power back where it belongs: in the hands of the people. The best part is that whereas the current paradigm rewards failure—expanding budgets and powers for regulatory agencies that are shown to have failed in their mandate—the citizen regulation paradigm rewards success. Organizations like the Non-GMO Project have a devoted user base because they have proven themselves trustworthy. If it were revealed that they were receiving funds from biotech companies behind the scenes to give certain products the Non-GMO label fraudulently, that user base could (and would) abandon the project in a heartbeat, flocking to (or creating) a competing organization that would not be so compromised.

The model becomes more complex in the realm of financial institutions, but the principle is the same. If you bank at an institution, it is your responsibility to know what that institution does with your money. In the current system, people simply trust that government regulators will ensure that the companies play by the rules. In a system where that responsibility devolves back to the customers, organizations with an actual stake in providing true, accurate information about the institutions in question would thrive.

Sadly, we are still light years from an understanding amongst the general public of the utility of such citizen-led regulatory organizations, let alone their possibility. Still, there is the hope that as the crises, corruption and scandals of the current government regulatory paradigm continues to mount, people will begin to seek a real alternative.


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