ABSTRACT
Chapter 2 documented two historical patterns. The last chapter looked at the first pattern: the regulatory subsidy cycle, in which governments enact regulatory stimulus during market booms and respond with a regulatory backlash after bubbles collapse. This chapter examines the second pattern. It explores the causes and contributing factors to the epidemics of fraud that have historically accompanied asset price bubbles. This exploration, in turn, sheds light on how compliance with financial laws and regulation radically deteriorates during bubble periods. The fecund market of a bubble promotes widespread disobedience of financial rules, or what this book labels “compliance rot.”
