Perhaps the only useful thing to come out of the Obama administration’s inept contest between Larry Summers and Janet Yellen as Ben Bernanke’s successor is the purported agreement among economists and other policy makers that the Fed Chair should make the introduction of effective regulation and supervision by the Federal Reserve a top priority. It would be even better if this agreement were real and would be sustained. Regulation and supervision have never risen above tertiary concerns at the Fed and every institutional pressure will push the new Fed Chair to ignore supervision.
The Appraisers’ Warning of the Lenders’ Fraud Epidemic
Two of my recent columns have explained the effort by a very large number of appraisers to combat the “Gresham’s” dynamic that home lenders and their agents were deliberately generating by extorting appraisers to inflate appraisals. A “Gresham’s” dynamics perverts market forces. When cheaters prosper the markets drive honest firms and professionals out of business. Honest appraisers tried to block this dynamic.
There are many forms of control fraud. I have written primarily about accounting control frauds because they drive our recurrent, intensifying financial crises and we are in the midst of the worst such crisis in modern history. I wrote recently about the intersection of anti-purchaser and anti-employee control fraud in Bangladesh that killed 1,127 employees (and injured roughly twice that number) and made the point that control frauds kill and maim more people than traditional blue collar crimes and cause greater financial losses than all other forms of property crime combined. Control frauds also cause a greater number of crimes than do traditional blue collar crimes. Think for example of the number of victims of the Libor scams, measuring in the hundreds of thousands and the foreclosure frauds.
The central questions for a theorist are whether his theory showed strong explanatory power and to what extent it proved useful in diverse settings. A distinguished economist, Dr. Jayati Ghosh, has addressed those questions in an article in which she was explaining to Indian readers that a large fraud, Satyam, was not the product of unique defects in Indian regulation.
I was invited back to the give the welcoming keynote address last week to the 33rd SFOA International Bürgenstock Meeting. SFOA is an acronym for the Swiss Futures and Option Association and their meeting (long held at Bürgenstock, Switzerland but now at Interlaken) is the preeminent meeting in Europe on financial derivatives. The meeting attracts industry participants, regulators, and academics from all over the world. I’m writing from the Munich airport, where I get to wait overnight for a flight back to the U.S.
This is the second part of my discussion of N. Gregory Mankiw’s column asserting that governmental competition is desirable for the same reason that private competition is. Mankiw was Chairman of President Bush’s Council of Economic Advisors from 2003-2005. He was one of the principal architects of the perverse incentive structures that proved so criminogenic and drove the ongoing financial crisis. He gave no useful warnings of the necessity for containing the developing crisis – even after the FBI’s September 2004 warning that mortgage fraud was become “epidemic” and would cause a financial “crisis” if it were not contained. He is now Mitt Romney’s principal economic advisor. His column favors the “competition” argument that led him to support crippling financial regulation even as private sector competition led to endemic fraud. Mankiw is a moral failure as well as a failed economist. His infamous response to Akerlof and Romer’s 1993 paper (“Looting: the Economic Underworld of Bankruptcy for Profit”) was that it would be “irrational” for CEOs not to loot “their” corporations. He ignored all of the prescient warnings we made about how accounting control fraud drove our crises and he continues to ignore those warnings and the reality of our recurrent, intensifying financial crises. He wants the U.S. to move even more rapidly downward in the “competition in regulatory laxity” that is driving those crises.