Disclosure and Judgment: 'We Have Met Madoff and He is Ours'

Abstract:     
This short essay addresses the role of securities regulation of mortgage-backed in the present financial crisis. While there is certainly a role for securities regulators to play in curing systemic flaws that contributed to the present situation (for example, the regulation of credit rating agencies), the federal system is primarily based on disclosure, not the merit of the underlying security. My view is that the problem here is not the availability of information in the markets for these securities, now or in the past, but judgments made with respect to that information. To paraphrase Kant, judgment without information is empty; information without judgment is blind. Information without judgment gives us bubbles; judgment without information leaves us at the mercy of Madoffs.

This is an essay prepared for the "Fallout from the Bailout" symposium at the University of Dayton on March 20, 2009.

Number of Pages in PDF File: 13

Keywords: mortgage-backed securities, disclosure, judgment, SEC, Kant, Berkshire Hathaway, Buffett, induction, rule-following

JEL Classification: K22

Accepted Paper Series