Ponzi Finance, Regulatory Capture and the Credit Crunch
21 Pages Posted: 19 Mar 2009
Date Written: March 19, 2009
The unfolding financial market instability provokes questions about the safety of all financial investments and, in doing so, reveals some large investment frauds, which can flourish only in buoyant markets. More broadly, as is now recognized by market regulators, there has been insufficient attention to fraudulent practices, conflicts of interest and evasion of regulatory controls, notably in relation to promotion of sub-prime mortgages, the role of ratings agencies, the packaging and selling on of the resulting debt instruments to investors worldwide, and circumvention of risk controls. So, where were the regulators? This paper proposes that institutional capture of the regulators by the market - in terms of adoption by the regulators of technical assumptions, 'models' and data defined as relevant by the private sector - provides a narrative on 'what went wrong'. Moving towards a vision of the way forward for regulatory reform, the paper argues against the exclusionary notion of regulation that makes it a matter of coordination between those possessing technical expertise, separated off from moral questions, public politics and debate amongst citizens. The literature on security governance and 'public goods' is explored as one way of opening up the debate on financial regulation, reversing regulatory capture.
Keywords: credit crunch, regulatory capture, Ponzi finance legal and illegal, security governance
JEL Classification: A14, D63, F30, K22, K42
Suggested Citation: Suggested Citation