“The only winning move is not to play”—the insanity of the regulatory race to the bottom

By William K. Black

The plot of the movie WarGames (1983) involves a slacker hacker (played by Matthew Broderick) who starts playing the game “Global Thermonuclear War” with Joshua, a Department of Defense (DoD) supercomputer that has been given partial control by DoD of our nuclear forces.  The game prompts Joshua, who has been programmed to win games, to trick DoD into authorizing Joshua to launch an attack on the Soviet Union so that Joshua can win the game.  The hacker and the professor that programmed Joshua realize that the only way to prevent Joshua from attacking is to teach “him” that no one can “win” global thermonuclear war.  The insanity is that the people who created the game “Global Thermonuclear War” thought it could be won.  Joshua races through thousands of scenarios and ends his plan to win the “Global Thermonuclear War” game by attacking the Soviet Union when he realizes that “the only winning move is not to play.”

The JOBS Act is insane on many levels.  It creates an extraordinarily criminogenic environment in which securities fraud will become even more out of control.   One of the forms of insanity is the belief that one can “win” a regulatory “race to the bottom.”  The only winning move is not to play in a regulatory race to the bottom.  The primary rationale for the JOBS Act is the claim that we must win a regulatory race to the bottom with the City of London by adopting even weaker protections for investors from securities fraud than does the United Kingdom (UK).

The second form of insanity is that the JOBS Act is being adopted without any consideration of the findings of the Financial Crisis Inquiry Commission (FCIC), the national commission to investigate the causes of the current crisis.  I am not aware of any proponent or opponent of the JOBS Act (other than me) who has cited the findings of FCIC.  Everyone involved has ignored the detailed finding of a huge investigative effort.  The FCIC report explained repeatedly how the three “de’s” (deregulation, desupervision, and de facto decriminalization) had produced the criminogenic environment that drove the financial crisis.  The FCIC report specifically condemned the “regulatory arbitrage” that the worst actors exploited by choosing to be (not very) regulated by the “winners” of the regulatory race to the bottom.  The FCIC report shows repeatedly how damaging the anti-regulatory fervor in general and the race to the bottom in particular proved.

The third form of insanity is that the JOBS Act was framed without any input from anti-fraud experts.  Anti-fraud experts uniformly condemned the bill.  We have ignored the experts.

The fourth form of insanity is that we have ignored the people who got past crises correct.  The people who were the first to identify prior crises, who designed and implemented successful means to limit the crises, who prevented problems through effective supervision from becoming crises, and who held the most elite fraudulent CEOs culpable for their frauds have all been excluded from the drafting of the JOBS Act.

The fifth form of insanity is that the people who got everything wrong by designing the anti-regulatory policies that drove our prior crises have designed the JOBS Act.  We are reinforcing failure and turning our back on what we know succeeds.

The sixth form of insanity is a counterfactual.  The unique aspect about this crisis is that it is the first one in modern U.S. history in which the CEOs directing the control frauds that caused the crisis have done so with complete impunity from the criminal laws and near impunity from civil suits and enforcement actions.  The worst, most destructive fraudulent CEOs have been allowed to become and remain wealthy through their frauds even though several of them caused greater losses than the entire S&L debacle.  The worst fraudulent CEOs who led the prior epidemics of accounting control fraud that drove the S&L debacle and the Enron-era crisis were prosecuted.  Not a single elite CEO from Wall Street or the largest fraudulent lenders has even been charged with fraud arising from such loans even though they, collectively, made over two million fraudulent loans in 2006.  Had the Bush and Obama administrations prosecuted and denounced these elite frauds it would have been politically impossible for an act as criminogenic and cynical as the JOBS Act to be promoted by the Obama administration and adopted by large Congressional minorities.  We are seeing with the JOBS Act the sick face of crony capitalism.

The seventh form of insanity is that there is no greater killer of jobs than elite financial fraud.  Such fraud epidemics can hyper-inflate bubbles (as they did in the U.S. and several European nations) and cause severe financial crises and recessions.  The resulting Great Recession has cost over 10 million Americans their existing or future jobs in this crisis.  It has cost over another 15 million people their existing or future jobs in Europe.  The JOBS Act is so fraud friendly that it will harm capital formation and produce additional job losses.  It may appear to be an oxymoron designed by regular morons, but that underestimates the abilities of the lobbyists that drafted this bill.  They are not morons.  They are doing faithful, clever service to their fraudulent clients.  That makes them more dangerous.

The eighth form of insanity is that all of this is occurring weeks after the death of James Q. Wilson, a prominent political scientist who became most famous for co-developing a criminological theory – “broken windows.”  The theory held that it was essential to elevate conduct in the public sphere by reorienting enforcement priorities to emphasize seemingly minor crimes and civil wrongs (e.g., cracking down on squeegee men).  Wilson and “broken windows” are near universal favorites of conservatives.  Wilson’s theories are controversial among criminologists in the blue collar sphere, but they are broadly accepted in the white-collar sphere.  The JOBS Act, however, totally repudiates any “broken windows” approach to minimizing elite white-collar crimes.  It encourages the kind of fraud-friendly conduct that has always proven severely criminogenic.  Conservatives are the strongest supporters of the JOBS Act, which allegorically hands out buckets of rocks to the bottom feeders of the world of securities and encourages them to break every window in sight.  Conservatives apply policies designed to prevent and repair immediately “broken windows” only to poor criminals, not the fraudulent CEOs who caused vastly greater financial losses that brought the global economy to its knees.

The ninth form of insanity is that the JOBS Act is being adopted at the same time that the Federal Reserve Bank of Dallas – the most anti-regulatory bank in the entire Federal Reserve system (which is a very large statement) warned in its recently released annual report that the largest U.S. banks drove the ongoing crisis and posed “a clear and present danger to the U.S. economy.”

The Dallas Fed used to object vociferously to all financial regulation because it claimed that markets were “self-correcting” absent regulation.  It now warns that market “incentives often turn perverse, and self-interest can turn malevolent. That’s what happened in the years before the financial crisis.”  Only effective regulatory “cops on the beat” can prevent frauds from creating a perverse “Gresham’s dynamic” (when frauds prosper, market forces become perverse and bad ethics drives good ethics out of the marketplace).  Effective securities regulation has led to U.S. equities trading at a significant premium compared to other nations, which aids U.S. equity issuers.  The JOBS Act threatens the continuation of that premium.  Even the Dallas Fed’s most senior economist and President – and the Dallas Fed has been the leading opponent of financial regulation – now agrees that effective regulation is essential to strong financial markets.  The Obama administration and Congress still worship at the temple of the faith-based economics that has caused our recurrent, intensifying financial crises.  When the temple’s high priests (the Dallas Fed’s leadership) become apostate the politicians should shed their dogma.                          

The tenth form of insanity is that the JOBS Act’s primary theme is dramatically reducing transparency in securities law.  If there is any nearly universal principle that writers about the ongoing global crisis emphasized that we needed to learn it was the exceptional virtue of transparency.  Greater transparency makes private market discipline possible, it greatly enhances regulatory effectiveness, it discourages fraud, and it aids investors in making decisions.  The JOBS Act repeatedly embraces opaqueness.  We have known for millennia that this increases fraud.

For every one that doeth evil hateth the light, neither cometh to the light, lest his deeds should be reproved.

John 3:20 – 1769 Oxford King James Bible ‘Authorized Version

William K. Black is an Associate Professor of Economics and Law at the University of Missouri-Kansas City.  He is a white-collar criminologist, a former senior financial regulator, and the author of The Best Way to Rob a Bank is to Own One.

28 responses to ““The only winning move is not to play”—the insanity of the regulatory race to the bottom

  1. Thee.. William Black, Esquire..

    Slayer of Corrupt Bankers!

    A Hero to Hero’s!

    God Love and Bless him in his fight against the Celebrated Corruption on Wall Street and thusly following the trail of Lobby Dollars to Washington DC!

    Any time you want a free dinner! it is on me! Ocean Grille Crab Cakes are second to none! (Breakers)

    Thank You for your NEVER! ENDING!! SERVICE!!!

    and stop by ZeroHedge and have them run some of your work! Tyler is Great and would be more than Happy too!

  2. Professor Black,

    Excellent article. I have listened to all of your interviews on the net since 2008 or so. The most recent interview on RT Capital Account was superb! You are truly the voice of reason in a cesspool of corruption that is our financial services industry. Thank you for your tireless efforts to put a stop to this madness.

  3. Prof. Black, what if it’s not “insanity” but willful destruction of the nation-state according to plan? What form today will “The night of the long knives” take, do you suppose? Now do we see how “Hitler happened” in the 1930’s? Veblen had it right. As then, so now. The Genovese couple covered it, and today ZH draws the parallel between pre-Civil War Master Class slave wealth (slave reproduction as commodity profit-center: by then the Deep South became slave manufacturers for profit) and today’s employee wealth (extraction of productivity from “employee” worked out by McKinsey).

    This is “pound of flesh” wealth by Global Extraction Capitalists writ large: The 99% are but beets and cane to be squeezed for maximum sugar extraction. When all “currency” becomes digital and traced, the 99% will have reached their commodity apogee as slave wealth, as in 1860, but with “surplus populations” exterminated, just as Himmler, Heydrich, and Hitler arranged (“Architects of Annihilation” and “HITLER’S BENEFICIARIES” by Goetz Aly). “The Mind of the Master Class” never has changed. The ZH blog made me realize how implacably, and for how long, McKinsey has positioned the Reichmeisters for victory. It made me much more pessimistic that I was just days ago.

    Prof. Black, the .o1% and their .99% Agents are impervious to light. Not that Veblen didn’t warn us, before the rise of Hitler. Guido Giacomo Preparata’s words have fallen on deaf ears. The same DNA then as now have achieved the same ends, but with deadlier technology against the 99%. Who are the *Allies* now?

    Jack London: “THE IRON HEEL.” It’s deja vu all over again. It’s global on the ground. What’s to stop them?

    • Prof. Black, this (in my caps below) should mean something especially to you:

      Dealbook’s top story e-mailed to me this AM re LAURIE FERBER (“MF Global’s general COUNSEL”) expected “to tell Congress she was UNAWARE of a gaping shortfall in customer money” … Ms. FERBER, who previously worked at DREXEL BURNHAM LAMBERT and Goldman Sachs…”

      Enuff said, Prof. Black? Only connect the dots, follow the money and the DNA through ranks to the City.

  4. Dear Bill Black,

    This past Saturday, Occupy Dallas reached consensus on the formation of a Bank Action Team.
    We will be drafting a petition to remove city/county funds from TBTF institutions.
    We need NEP help.
    Please send someone to Occupy Dallas.
    We are bringing the fight against TBTF to the local level.
    We need your help, assistance, and above-all guidance.

  5. Hi Bill, I’ll meet your John 3:20 and raise you Neil 2009 (old guys rule!):


    “There’s a fork in the road ahead
    I don’t know which way I’m gonna turn
    There’s a fork in the road ahead

    I got hope
    But you can’t eat hope
    I’m not done
    Not giving up
    Not cashing in
    Too late

    There’s a bailout coming but it’s not for me
    It’s for all those creeps watching tickers on TV
    There’s a bailout coming but it’s not for me

    There’s a bailout coming but it’s not for you
    There’s a bailout coming but it’s not for you
    It’s for all those creeps hiding what they do”

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  8. Peter J. Pike

    I am confused by this regulatory race to the bottom. When did it become more important to allow rich people to make money, than to have sane rules in place to protect the innocent?

  9. Robert J Shiller, Professor of Econimics, Yale University TV interview today was asked about MBS. He said they can be very beneficial. When asked about the problems they caused in contributing to the recession he said basically that many were done “wrong” and that there are bad people in every profession. He did not say anything about what should be done about those bad people. If there are bad people in evert profession (which there are) then why not de-regulate all professions.

    After 30 years as an investigator in a regulatory agency to say that enforcement facilitates compliance and higher standards of practice, not to mention protects the Health, Safety and Welfare of the Public seems too obvious.

    If you don,t remove ( put away) the bad people, they don,t just go away. They multiply!

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  11. I used to think that all that was required in politics was showing up with good ideas. Clearly, policymakers would hear the truth and enact it. When they didn’t I learned how to help elect candidates to our local legislature. Clearly, once we put folks into office, they’d hear those good ideas and enact them. Well, that’s not worked, as corporate leaders have continually outflanked populist electoral participation.

    No, coming to the table with good ideas having elected candidates will not be sufficient to contest political power against those who get to write off their political interventions from their taxes and who have just been granted freedom to open their corporate treasuries to double down on corruption.

    These are all wonderful ideas, spot on and correct. Government is like the honey badger, it is crazy, badass and doesn’t give a shit, it just takes what it wants and leaves other animals to pick up the scraps. That’s disgusting.

    No, in addition to providing a pool of good ideas, the only way we’re going to be seeing those implemented is with organized resistance that gives elected officials no other option but to do the bidding of the 99%.

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  13. I don’t mean to dip my fly into your ointment, but with all your commentary (commentary I have valued for a long time) in this post, I learned very little about the JOBS Act.

    You have demonized it (and that may very well be necessary–with your credentials I tend to trust you on this) but I don’t know any more particulars than I did before I read this post. *what* part makes it less transparent? *what section* makes it more prone to fraud? *how* does it repudiate broken windows? *what part* of it “encourages the kind of fraud-friendly conduct that has always proven severely criminogenic”? For those of us who aren’t experts at reading text of legislation, some detail would be nice, and I hope some following comment will point to something I might learn such detail from.

    Again, I’m not disagreeing with your conclusion or denying your credentials–far from either. Just that for all the length of your post, I learned very little factually from it other than that you are angry.

  14. You’re right, Bill. It’s a lost cause. The only way to win the game is not to play. It’s time for the public to withdraw their support from these criminal enterprises, abandon the government and begin organizing themselves in the private sector. As you say, these are simply horrible business practices — and what an opportunity they create for someone with better business sense to offer a superior business model! After all, politics is nothing but an expression of business interests. The public just needs to get back to minding their own business.

    So instead of writing our congressman, maybe we should….

    Use existing consumer organizations to charter cooperative banks in every major economic center.
    Start a member-owned geonomic land trust.
    Steer capital investment into these land values and away from rentiers.
    Buy up media outlets, public utilities, transit systems, telecom companies and other natural monopolies.
    Start a virtual currency tied to a basket of commodities, loan it out productively and accept it as repayment for all associated services.
    Hire fancy accountants and lawyers to help the members dodge their taxes just like the big boys.
    Invest in the education and health care of the member-owners.
    Franchise this process and help other towns and cities get started.
    If you still have an interest in national politics at that point, maybe start a Super PAC with all the discretionary income you’ve generated.

    Seriously, though, you should stop wasting your energy on the government. There is no way it will ever be able to compete with the more nimble corporate form.

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