Get Mad at Bernard Madoff, Not Hedge Funds

Bernard Madoff's Ponzi scheme is likely to raise calls for further regulation and oversight of hedge funds. Before jumping on the bandwagon, however, keep in mind that Madoff's fund had been registered with the Securities and Exchange Commission for over two years before the alleged fraud was uncovered. Also keep in mind that despite numerous published warnings that go back years and tips from whistleblowers, the government agency never stepped in to investigate.

In reality, it's likely that registering with the SEC actually prolonged the fraud by bestowing on Madoff a false credibility. As Alan Greenspan pointed out over 40 years ago in Ayn Rand's "Capitalism: The Unknown Ideal," "A fly by night securities operator can quickly meet all the S.E.C. requirements, gain the inference of respectability, and proceed to fleece the public." Indeed, regulation doesn't eliminate the potential for fraud, it simply makes it harder to detect.

The key to preventing the next Madoff scheme is deregulating the antiquated web of securities laws that keeps hedge funds outside the scrutiny of the watchful public eye.

I make a brief appearance in "Broke: The New American Dream," a film by Michael Covel set to be released on DVD and in select theaters in early 2009.

The movie is a thoughtful overview of many of today's major economic themes, including the housing collapse, stock-market volatility and the rapidly growing nanny state. Throughout, the film deals with issues of particular importance to traders: uncertainty, risk and the importance of not following the herd.

Trailer for the film "Broke"

Covel, who previously wrote the excellent book "Trend Following," nails compelling quips from many of the trading world's most influential voices including Jim Rogers, Eric Bolling, Barry Ritholtz and fund manager David Harding. He also happens to be a clever storyteller. Amid interviews with the requisite deadbeat homeowners now upside-down on their house payments are a few particularly funny bits.

Legendary economist and Nobel Prize winner Harry Markowitz's hilarious remark about how "Bartiloni is a cute kid" — he's mistakenly referring to CNBC's Maria Bartiromo — is worth the price of admission alone. "I can watch it for 20 minutes," he says, referring to cable business television, "but I wouldn't invest in anything they say."

More ironic than amusing is Bill Miller's take on controlling risk, which is particularly notable since the interview with the Legg Mason fund manager was given in the fall of 2007, right around the time Miller's historic track record began to crumble.

In the wake of the recent economic turmoil, we're likely to see a rash of books and movies that stress how destructive and dangerous markets are. Without minimizing the severity of the decline, the message of Covel's film is thankfully one of empowerment and potential. Covel seems to suggest that it's neither capitalism nor the markets that are "broke," but the American spirit of rugged individualism, decimated to the point where we've become sheep, recklessly betting our retirements on has-been mutual funds for "the long haul,") a worthless a cable-TV tip or even the lottery.

From a Tokyo fish market to a deserted real-estate development, the film will challenge your pre-existing bias about financial markets and the endless torrent of talking heads to which they are now inextricably intertwined.