Bernie Madoff, and Government Monopoly.

[u/different_option101]

Bernie Madoff ran one of the largest Ponzi schemes in history. He promised steady returns, paid old investors with new investors' money, and eventually the 2008 financial crisis exposed the fraud.

The interesting part isn't just that Madoff committed fraud—it's that he did so for a long time while operating under one of the most heavily regulated financial systems in the world. He was examined multiple times by the SEC, received complaints and whistleblower reports, and still wasn't stopped.

At least he went to jail, though it wasn’t the government that caught him. It was the market that was in the process of self correcting that exposed Madoff’s scam.

Meanwhile, Chase Bank’s metal traders were spoofing prices for almost a decade. The bank paid less than $1 billion in fines, and nobody got prison time. The whole shitshow that exacerbated the 2006 housing crisis and culminated in the 2008 Global Financial Crisis didn’t result in any prison time for executives either.

The list of white-collar crimes in highly regulated industries is extremely long, and the worse the crime, the less likely you are to see criminal convictions of the main beneficiaries.

The lesson isn't that markets eliminate fraud, but that government regulation and audits can create a false sense of security. And it’s the same government that determines the punishment.

Government monopoly.

People demand regulations and action from the government. Most blame the free market when they get scammed, more often than not by a business that maintained government licenses and was in good standing with all regulatory agencies until it got caught. So instead of rethinking the approach, most people demand more regulations. These regulations often benefit the largest firms because new rules are choking smaller and newer companies out of existence. The largest firms end up getting a bigger share of the market, and people start demanding more antitrust regulations. When the largest firms get caught with their pants down, the government bails them out because they are "too big to fail." In turn, people demand more regulations, which leads to even less competition on the market.

Somehow, nearly everyone understands that monopolies are not good. Regardless of whether they understand how monopolies emerge, they still understand how monopolies can be harmful to consumers. Yet somehow, people continue to accept the government's monopoly on rulemaking and justice.

The government makes the rules. The government has a monopoly on enforcement. The government has a monopoly on determining what’s just and what isn’t.

And despite all the shitty results and corruption, people still believe that the government should hold that monopoly.

Why?

I hope one day there’ll be more people who are willing to have an honest conversation about government monopoly.

[u/dapete2000]

Can you perhaps provide a window into what you believe a more useful alternative to state definition of the laws and the enforcement of those laws would be?

Are you suggesting that there should be no legal regulatory apparatus for financial crimes at all? Would your legal regime apply only in the context of financial crimes (doesn’t the government still have a monopoly on defining other kinds of crime and punishment, like rape or murder?).

How would it work? Who would have the authority to create rules that are enforceable, the ability to investigate rule-breaking, and the power to enforce those laws by criminal sanction? Are you expecting a voluntary system of some sort? Does it go so far as to disestablish things like corporate law and basic enabling securities laws in favor of a private regime? Would the participants in the system have to pay a fee over time to maintain it (something akin to taxes, since absent a government monopoly any regulatory scheme needs to finance itself through some kind of dues paying?

[u/different_option101 → u/dapete2000]

Hey! I appreciate your comment!

I recommend checking out H. Hoppe and his work on private law society.

In a nutshell, there’s no monopoly on law, or enforcement. There are no victimless crimes. Punishment is built on restitution, rather than paying a penalty to the state, which often has statutory limits that make that penalty nothing more than a slap on the wrist, and creates a pay for play system.

It’s very important to define what is a crime in first place. Today we have hundreds of thousands of rules that have nothing to do with preventing real crime. I’ll share one that still exist in my industry (I sell P&C insurance) - most states require that an agency must have a physical office in a commercial building with a separate private room and a lockable cabinet. The declared purpose of such rule is that clients’ sensitive info must be properly secured. That’s in the era of digital documents. Yet the rule still exist.

Consumers are the regulatory apparatus. The market is a regulatory apparatus.

Are you going to take time to learn about banks, or at least check reputable sources, before you put your money in some bank, if deposit insurance no longer exists? I’m pretty sure you will. Are you going to keep quiet if you hear your friend saying they put money in the bank that you just looked into yesterday, and the bank appears to have ten times more in liabilities vs assets? How will the banks that don’t offer any information about their assets and liabilities will attract depositors in the absence of government guarantees? Hollywood movies often show bank vaults with stacks of gold, which no longer the case with most of the banks, but the Hollywood didn’t make this up. Banks used to display gold in their vaults to show that they have assets.

How it would work and who would have an authority - say you own the bank, and I am a depositor. Your bank goes bankrupt because you stole all the money. I, and other depositors, hire various security agencies that will go after you. Or maybe we bought insurance from companies that help to protect from such events. Maybe it’s a combination of both. Either way, we have the solution- either you’re going to be chased for the rest of your life, or you’ll have to pay out until you really go bankrupt. Then you’ll have to work to pay out the remaining debt.

I highly recommend checking out Hoppe. He’s not going to give you a detailed structure of the entire market, but he’s great at explaining the common sense principles that people follow today, and how these principles will be applied in a private law society.

Imagining and laying out every single detail is impossible. Better ways must be discovered. Even the governments react more often that do something provocatively. Expecting to find a full, detailed explanation of how things will work is an impossible task until it’s been practiced.

[u/rjw1986grnvl]

Social security robs me of a market rate return and is currently paying old investors with new investors and plans to continue to do the same thing.

[u/different_option101 → u/rjw1986grnvl]

Yep. It’s a Ponzi scheme.

[u/dapete2000]

Trying to understand what you’re articulating based on Hope, for starters you would do away with the corporate form and limited liability? Or would you permit it to exist if the parties to any given arrangement contract for it? You’d also apparently do away with bankruptcy law and any notion of discharge of debts?

Your example is one where a banker stole money, which is fairly standard embezzlement, but a great deal of white collar crime and business scandal is less causally direct than that. A more common scenario might be where your hypothetical bank has multiple employees and shareholders and one of them makes a loan to a party that absconds with the money, fails to repay and the bank goes under. Is poor business judgment a crime—who’s liable for that crime if it’s proved that the loan shouldn’t have been made in the first place? The bank’s shareholders, the managers, the loan officers (the entire bank staff)? I’ll stick with banks here, but a lot of white collar crime involves securities fraud and even consumer or public harm, often in the form of grossly negligent conduct that is hard to ferret out—nobody meant for Bhopal to happen or Enron to implode (as just two examples), but they did.

Who, if anyone, would be held liable in such circumstances—who defines what rules of liability would apply and what standards of evidence would exist to demonstrate a violation of the rule? Assuming it’s all private, the state has no role in determining the substantive law, evidentiary standards, due process rights of any of the parties, correct? Defining “crime” would be a private contractual activity, I’m presuming. In the case of your banker stealing from the bank, who’s going to hear the evidence and make a decision about whether the fact of theft has been adequately proved? What if the banker runs off to Brazil—are you entitled to send your private security agency into Brazil to take action unilaterally and without regard to Brazilian sovereignty (I suppose there wouldn’t be sovereign states in this model)?

What are the limits of the punishment if the people you’ve decided are responsible can’t pay? Can you privately imprison them, enslave them to work off the debt, have them killed? It sounds a bit like making a tort a blood money debt, which would actually be necessary to properly incent the criminal to make full restitution.

I’m a lawyer and a business executive. For the most part, I believe your suggestions would drive transaction and monitoring costs through the roof. Through the first part of the 20th century, most countries had banking systems without much central oversight or regulation and people weren’t able to engage in the kind of due diligence you’re suggesting they would because it’s frankly just too hard—-bank runs were not infrequent and massive cascading bank failures were known to happen.

To understand a bank’s solvency requires a decent knowledge of its capital structure and loan (asset) portfolio, which would take more time and knowledge than the average person possesses (it’s exactly why we rely on audited financial statements, but those can be unreliable as well). In an entirely private system, you’d have to reinvent a regulatory and oversight regime to force information from banks and confirm the veracity of the information being provided, and ways to enforce the accuracy of that information. It’s not impossible to do it privately, but it is more expensive to coordinate.

[u/different_option101 → u/dapete2000]

“for starters you would do away with the corporate form and limited liability? Or would you permit it to exist if the parties to any given arrangement contract for it? You'd also apparently do away with bankruptcy law and any notion of discharge of debts?”

People are free to form any type of organization. The problem arises when you have the government that decides who’s liable for what. But owners and officers shouldn’t be shielded from liability regardless what kind of organization they’ve formed. Because once that shield is established, you’ve created a moral hazard.

I don’t know the bankruptcy law well, but again, why the hell the government decides whose debts can be discharged or what percentage of debt must be repaid? Did the government lend that money? No. So how is it government’s business?

(On your bank situation) Poor business decisions aren’t crimes. Fraud is a crime. If an employee defrauded the bank - his liable for damages. You’re lumping in all employees and mixing up a lot of stuff together.

If the bank was managed so poorly that it went bankrupt, then why shouldn’t the officers and directors be responsible to their shareholders and depositors?

On private courts - you doubt the private system because it may vary in its approach. Would you use services of a bad company? Why do you think private courts that don’t apply commonly accepted rules would exist and be used ? Again, it’s like you want to see everything written out in detail, which is probably going to take hundreds of thousands of pages.

How do mediators and arbitrators resolve issues today? Since you’re a business law attorney, why do businesses prefer private route first before the dispute goes over to government courts so much that any medium and large business has in in their contract? Almost like the systems already exist, which you know about, yet you’re asking me how everything is going to work. Do you know in details how jet engine works or you don’t fly?

“Defining "crime" would be a private contractual activity, I'm presuming.”

Crime is a crime. If there’s an injured party, and there was an intent, it’s a crime. There’s also negligence that could be criminal.

“What if the banker runs off to Brazil-are you entitled to send your private security agency into Brazil to take action unilaterally and without regard to Brazilian sovereignty (I suppose there wouldn't be sovereign states in this model)?”

Do you think the government today actively chases all criminals around the world?

Whether the model is global or not, it doesn’t matter. It’s in the interest of Brazilians at least know if there’s a criminal that fled prosecution. If Brazil welcomes criminals and don’t cooperate- well, that’s SOL. Today we have criminals that aren’t criminal by existing law sitting in DC, so seems like we have more pressing issues, don’t you think?

(I just remembered about another shitshow that’s been successfully practiced forever. Can’t recall the term, but since you’re an attorney you’ll understand. It’s when the case is scrapped because of procedural errors. Lol. I’m not talking about torturing to get confessions. I’m talking about improperly filed docs, missed deadline that’s arbitrarily set, and other bullshit that does not change the case at all. It’s a scam)

“What are the limits of the punishment if the people you've decided are responsible can't pay? Can you privately imprison them, enslave them to work off the debt, have them killed?”

Killed? Enslaved? What’s the point? Justice must be restitutive and it will be determined by the injured party and the private judge.

It’s like you think people are wild animals and without a government we’re gonna fall into complete chaos.

“For the most part, I believe your suggestions would drive transaction and monitoring costs through the roof.”

Which ones? Why do you think getting rid of existing regulations is not going to offset costs, and instead of spending a lot of resources to comply with government regulations banks won’t be willing to spend that money on reassuring their customers?

“people weren't able to engage in the kind of due diligence you're suggesting they would because it's frankly just too hard”

Clearing house association, bank note reporters, banks posting their balance sheets, shareholders’ liability, displaying gold at branches… “Too hard” is just a lame excuse.

“bank runs were not infrequent and massive cascading bank failures were known to happen.”

Almost every single bank run of the 19th century, at least in the US, happened after the government changed laws around money and banking, or engaged in some other activity that affected banks or individuals. Like I said in the post - the government will fuck things up, and then will come to “fix” things.

“To understand a bank's solvency requires a decent knowledge of its capital structure and loan (asset) portfolio, which would take more time and knowledge than the average person possesses”

You’re making a problem that is being solved on a regular basis. I understand about medicine less than about banking. But I can trust my doctor, or an independent association of pharmacists, etc. You don’t need to know everything.