House Republicans Try to Create a World Fit for Criminals
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“Neither the public nor economists foresaw that [S&L deregulation was] bound to produce looting. Nor, unaware of the concept, could they have known how serious it would be. Thus the regulators in the field who understood what was happening from the beginning found lukewarm support, at best, for their cause. Now we know better. If we learn from experience, history need not repeat itself” (Akerlof & Romer1993: 60).
Akerlof was made a Nobel Laureate in economics in 2001.
Second, the losers from creating a criminogenic environment that encourages looting are not “merely” the public – the losers include honest businesses. When cheaters gain a competitive market, competition becomes perverse and firms controlled by the least ethical CEOs can drive their honest competitors from the marketplace. Akerlof made this point explicitly in his even more famous 1970 article on markets for “lemons” where he wrote about the economics of anti-purchaser control frauds. He called it a “Gresham’s” dynamic.
“[D]ishonest dealings tend to drive honest dealings out of the market. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence.”
Modern executive compensation causes accounting control fraud to produce a powerful Gresham’s dynamic. CFOs rightly fears that their tenure may be measured in months if they do not mimic their rivals’ use of accounting control fraud to produce what Akerlof and Romer aptly termed a “sure thing” of record reported income that, in turn, produces enormous executive compensation.
Classic economists stressed the essential role of government – providing a rule of law and preventing and punishing criminal acts, including fraud. Ayn Rand stressed that government had a duty to prevent fraud. The essence of crony capitalism is the ability to commit fraud with impunity. The Tea Party opposes crony capitalism and the House Republicans quake in fear of upsetting the Tea Party and being challenged in the Republican primary.
We have deregulated, desupervised, and de facto decriminalized finance in the U.S. and Europe to an unprecedented extent in the last 30 years and the results have been uniformly catastrophic. Governor Romney states that he intends to repeal the entire Dodd-Frank Act and recreate the criminogenic environment that caused the financial crisis and the Great Recession.
We have four dogs that have failed to bark. Conservatives have long claimed to be the party of law and order – where are they. The data are in – the Bush and Obama administrations have been soft on elite white-collar crime (by their largest campaign donors). Libertarians and Tea Party supporters who hate crony capitalism – rise up and demand an end to the elites who grow wealthy by committing fraud with impunity and cost millions of Americans and Europeans their jobs.
And where are President Obama and Attorney General Holder on this issue? The editorial quotes only regulators. The President and the Attorney General should be taking the lead and denouncing the deliberate recreation of a criminogenic environment. Here is the central fact that Holder and Obama have never grasped – effective investigations and prosecutions of epidemics of elite financial frauds are only possible where the regulators and the SEC do the heavy lifting. The regulators will only do the heavy lifting if their leaders understand control fraud and make its detection, termination, sanctioning, and prosecution their top priorities. Bush and Obama have overwhelmingly appointed failed, anti-regulators like James Gilleran, John Reich, John Dugan, Timothy Geithner, Alan Greenspan, Ben Bernanke, Harvey Pitt, and Susan Schapiro. They have also appointed attorney generals who have all been weak on elite financial fraud.