Daily Archives: February 3, 2014

Finance Refuses to Take Akerlof and Romer Seriously about Looting

By William K. Black
(Cross posted at Benzinga.com)

I have often written and spoken of my frustration that economists refuse to read George Akerlof and Paul Romer’s classic 1993 article (“Looting: The Economic Underworld of Bankruptcy for Profit”) and apply it to an analysis of the current financial crisis.   Note that their title expresses the paradox they were reporting – the best way to loot the bank is for its controlling officer to cause it to make extraordinary amounts of terrible loans that will typically cause the bank to fail.

In my fantasy world I am even frustrated that they refuse to read the white-collar criminology literature that my colleagues and I have spent decades developing about “accounting control fraud” (what Akerlof and Romer called “looting”).  Economists do not study fraud and in my flights of fantasy I imagine a world in which they would read the work of those who specialize in that field.  Silly, I know, though that is exactly what Akerlof and Romer did, see their beginning note*, because they wanted to get the facts correct.  If you think that is the obvious approach that any scientist examining an issue would take – congratulations – you just might be a scientist, but you’re almost certainly not an economist.

Continue reading