THE BIZOP NEWS

Richard Posner has a blog at The Atlantic Monthly, in which he updates, responds to, and refines his ideas about the current financial crisis. The blog is a continuing update to the ideas he wrote about in his book A Failure of Capitalism: The Crisis of '08 and the Descent into Depression

Posner believes that the US regulators are deserving of more criticism, and I disagreed with his anaylsis -stemming from a different view about the proper role of the regulator of financial products.

""I also disagree that "the regulator never has the job to prevent, only to clean up in a satisfactory manner."

That is like saying the government should do nothing to prevent an epidemic, just swing into action after the epidemic hits.

On the contrary, the government through production of vaccines, medical research, and early-warning networks right engages in precautionary activity before an epidemic strikes; and the same should have been true, mutatis mutandis, with regard to the financial "epidemic" that brought on the current depression."

Posner's view about what we ought to expect from the regulator of financial products is common one, but he is wrong. (His analogy fails, it is important why it fails, and using the same term "epidemic" to describe health contagions and financial failures does not assist.)

Erving Goffman was correct is assigning the regulator the analogous role in a confidence crime of "cooling out the mark". The regulator has to make sure that those caught up in a confidence crime don't complain too much about their failure to detect the fraud.

I present these two different views, and suggest that the adequacy of each view can be tested with a simple thought experiment.

Ponzi schemes are the simplest confidence crimes. Routinely, after shutting the enterprise down, the regulator will pronounce something like this:

""These get-rich-quick schemes are especially insidious during these tough economic times," said Suthers. "

I would encourage Coloradans to be cautious of any investment opportunity that promises unusually high rates of return.

If any investment opportunity sounds too good to be true, it probably is."

On the Posner view, it becomes a mystrey as to how so many people can fail to perceive and understand the too good to be true warning.

On the Goffman view, the regulator is simply using a well known phrase to cool down the mark after the fact, without enquiring into why or or how the mark can to be deceived. The mark comes to see that the investments was too good to be true, knows other saw it, and stops his or her complaining.

Which view better explains the constant repetition of useless advice by regulators of finanical products, Posner or Goffman?