Some books have spectacularly bad timing, like Moral Markets: The Critical Role of Values in the Economy, which was published in 2008 as a celebration of market and their nourishment of high ethical values. The book has many interesting chapters and I recommend it, but even lifelong market apologists now refer to the “corrupt culture of banking.” Ian Ayres, a brilliant professor of law and economics at Yale, published his book Super Crunchers: Why Thinking-By-Numbers is the New Way To Be Smart to critical acclaim on August 28, 2007. Ayres’ book is an ode to how much better decision-making becomes when it is made empirically on the basis of very large data rather than through human judgment. There is a great deal of support in the literature for that thesis, and the result is one of the reasons why behavioral economics has become increasingly dominant. The general idea is that humans bring significant, unexamined biases to our decisions and that systems that rigorously examine the data are superior because they avoid these biases. That general idea continues to have considerable support and I have no personal problem with the general idea.
Johan Norberg, of Cato, wrote a book in 2009 entitled Financial Fiasco. Norberg is an Austrian School economist and the author of In Defense of Global Capitalism (2001). As his 2009 book demonstrates, however, the quintessential global capitalists were preparing to blow up the global capitalist system in an orgy of “accounting control fraud” at the time he wrote his “Defense.”
He agrees that Fannie and Freddie were used by their controlling officers as accounting control frauds in order to enrich themselves through lush executive compensation. He aptly explains President Bush’s hypocrisy about Fannie and Freddie.
NEP’s Bill Black on The Real News Network discussing his recent testimony in Ireland for a banking inquiry and the challenges the country faces in acknowledging its financial crisis. Video is below. For the transcript, click here.
In my first column in this two-part series I explained how the Department of Justice’s (DOJ) non-prosecutorial effort against the banksters’ frauds that caused the financial crisis had ended with a pathetic whimper uttered by Deputy Attorney General James Cole during his ritual exit interview with Bloomberg. Cole’s explanation for DOJ’s failure to prosecute a single senior banker for leading the three fraud epidemics that drove the financial crisis was that DOJ was “dealing with financial rocket science.” My first column made the point, which escaped DOJ and Bloomberg that if this were true it would presumably have been modestly important for DOJ to do something about the ability of “rocket scientists” to grow wealthy by leading the frauds that cost the U.S. $21 trillion in lost GDP and 10 million jobs. I also promised this column explaining why it was not true. In light of a reader’s comment I’ll add a third piece on “rocket science” in the financial context.
Here’s an unintentionally–but riotously–hilarious mea culpa by Olivier Blanchard.
Here’s the CliffsNotes version: Yes, we didn’t see nothing coming. But that isn’t our fault. The Global Financial Crisis—the biggest calamity since 1929—was invisible to us because it had been lurking in the dark corners of the financial system.
However, we had been creating highly sophisticated economic models in which there were no financial institutions—at least nothing like those in the real world. Ours were transparent. They were well-capitalized. Their risks were perfectly hedged. There was no uncertainty. There was no chance of financial instability because the market forces always—inevitably—drove toward equilibrium. We had very nicely behaved DSGE models—models with no default risk. Where everyone was civilized and played nice. No one ever missed a payment. All debts were always paid. On time.
In our world, even Lake Woebegone would have been impossibly unruly.
One of the great lies of the financial industry is that it is the engine of Main Street’s growth. Giving the finance industry an enormous share of total business profits was supposed to super charge Main Street’s growth. It has never delivered on this promise. The truth is the opposite. The efficiency condition for a middleman like finance is that its size and profits should be minimized. Finance’s fraud epidemics blew up the world economy and devastated Main Street. Finance is a parasite that saps Main Street. The latest example of this comes in a New York Times article about European bank’s bad loans.
Slate has replaced one minor member of the Society of Apologists for Plutocrats (SAPs), Matt Yglesias, with another, Zachary Karabell. The transition has been seamless. As I noted in my prior column, Karabell’s initial columns served up apologias for extraordinary executive compensation and extreme inequality, high youth unemployment, and high frequency trading (HFT) scams. Karabell is the type of Wall Streeter who thinks it reflects well on him that he has been a “regular” on CNBC, rather than an admission of grave defects of character and intellect. Similarly, he thinks it is an honor that he was dubbed a bright young thing (a decade ago) by the denizens of Davos, the club for selfless plutocrats eager to “take up the white man’s burden.”
This is the first installment of a series of articles about the media, finance industry, political, and Department of Justice (DOJ) reaction to Michael Lewis’ new book about high frequency trading (HFT). The media ballyhooed the book as if it were an amazing revelation of a fact of surpassing importance. The industry demonized the book and Lewis. DOJ immediately announced it had begun a criminal investigation and the SEC it had multiple investigations pending. Whether the industry or Lewis is correct about HFT practices (which he asserts are lawful) is unimportant for some purposes. My series will focus on the difference between the frenzied DOJ, political, and media reaction to Lewis’ criticism of allegedly lawful HFT practices and the “yawn” reaction of these same groups to the vastly more damaging criminal frauds runs by our elite financial leaders that caused the financial crisis is astronomical, ludicrous, and disastrous. Similarly, the reaction of these three groups to the finding by multiple investigations that 16 of the largest banks in the world committed crimes by setting LIBOR rates through frauds and cartels (the largest cartel, by several orders of magnitude, in history) was less than a yawn, as I described in prior articles.
American economist Hyman Minsky died in 1996, but his theories offer one of the most compelling explanations of the 2008 financial crisis. His key idea is simple enough to be a t-shirt slogan: “Stability is destabilising”.