John Cochrane’s Witch Hunt for Witch Hunters

By William K. Black

John Cochrane is an economist at the University of Chicago.  The Wall Street Journal has just featured his op ed piece entitled “The Failure of Macroeconomics.”

I’ll focus on his foray into criminology as a component of economic growth. Cochrane’s column ignores the paramount role that the three epidemics of “accounting control fraud” played in hyper-inflating the bubble and causing the financial crisis – which cost over 10 million American jobs and a projected $21 trillion loss of production.  Instead, he claims that the economic recovery is weak because “Who wants to hire, lend or invest when the next stroke of the presidential pen or Justice Department witch hunt can undo all the hard work?”

Is the Witch Hunt Not Prosecuting Banksters or Not Clawing Back their Fraud Proceeds?

When last we saw Cochrane venturing into criminology he was explaining that he never read of the relevant literature by criminologists or economists about fraud.  I have done a full take down on Cochrane in a prior column that notes Cochrane’s hypocrisy about critiques, so I will simply provide the link to that column and move on.

The key point for purposes of this article is that Cochrane had never read our multi-disciplinary work on fraud, bubbles, and financial crises and made clear that he would never read our work even though he was responding to a reporter who was explaining that it had repeatedly been proven sound while Chicago’s work on these fields had repeatedly proven criminogenic.

What Research Led Cochrane to Find a Prosecutorial “witch hunt?”

Because Cochrane does not read the criminological research or the multi-disciplinary research on finance and criminology it is clear that he did not research corporate fraud or the supposed “witch hunt” against business.  He simply launched a real witch hunt in his imagination and declared the Department of Justice (DOJ) was engaged in a (mythical) witch hunt against corporations – and claimed that this explained the positive, but far from stellar growth of the U.S. economy.


If Cochrane’s imagined DOJ “witch hunt” against corporate crime was real and if it discouraged investment, then under Cochrane’s economic beliefs corporate profits and stock prices would have fallen precipitously in response to a world in which thousands of honest CEOs were imprisoned without any legal basis.  So, what has happened to corporate profits and stock prices under President Obama since the acute phase of the financial crisis?  They are up massively.

If DOJ’s mythical prosecutorial witch hunt against business were real, DOJ would have taken a series of steps to aid its persecution of CEOs.

  • It would dramatically expand the number of FBI agents and prosecutors assigned to prosecuting elite white-collar crimes
  • It would reassign to the white-collar crime section the FBI agents transferred to national security in response to the 9/11 attacks
  • It would greatly increase the priority it gave to prosecuting such crimes
  • It would appoint an Attorney General with a reputation as a tough prosecutor of elite white-collar criminals
  • It would appoint a head of DOJ’s Criminal Division with the same reputation
  • It would appoint heads of the regulatory agencies with reputations for rooting out corporate crime and direct them to make criminal referrals against corporate officers a top priority
  • It would have required the banking regulatory agencies to reestablish criminal referral coordinators and to make such referrals a high priority
  • The President and DOJ’s senior leadership would conduct a joint presentation to the Nation calling on whistleblowers to come forward with information allowing the prosecutions of corporate officers
  • DOJ would enormously increase corporate prosecutions and bring criminal (as opposed to civil) fraud prosecutions
  • It would dramatically increase the number of corporate crime prosecutions, particularly banking, compared to prior administrations

DOJ, under Bush and Obama, has taken none of these actions as I have documented in scores of articles and will not repeat here.  In response to the three most destructive epidemics of financial fraud in history (appraisal fraud, originating fraudulent “liar’s” loans, and selling fraudulently originated loans to the secondary market through fraudulent “reps and warranties”) not a single elite banker who led the frauds has been prosecuted or lost his fraud proceeds.  Some “witch hunt!”

Cochrane is not guilty of over-generalization – he has crafted a falsehood that is the reverse of reality – and pronounced it as if it were fact.  He did so without bothering to read any of the relevant literature.  He did so without any citation of data because the data all refuted his claims.  He did so in contravention of all logic because he is a pure ideologue and a political partisan.

How did Cochrane Demonstrate that DOJ’s Cases are Baseless?

To prove a “witch hunt” Cochrane must demonstrate that DOJ’s white-collar crime prosecutors, in breach of their ethical duties, are bringing baseless cases against elite corporate officers.  CEOs are not powerless.  Charles Keating’s Lincoln Savings, which had only $6 billion in assets bragged that it spent $50 million to try to defeat one examination we conducted.  That figure was greater than our regional regulatory office’s annual regulatory budget. Keating was able to recruit through political contributions the support of the President of the United States (Ronald Reagan), the five Senators that became known as the “Keating Five,” and Speaker of the House James Wright.

Large U.S. corporations hire many of the top defense attorneys in the world.  JPMorgan is over 500 times larger than Lincoln Savings.  CEOs are better positioned and funded than anyone in the world to defeat any DOJ witch hunt.  Many of the facts that establish corporate liability have been made public and they are damning in both the legal and ethical senses of the term.  CEOs agree to deals in which banks pay billions of dollars of fines because they make the business decision that they would be far worse off if the facts came out in an extended trial.  Note that Cochrane reports no benefits to prosecuting elite white-collar criminals.  What we have in Cochrane is another example of “Mankiw morality.”  N. Gregory Mankiw, in his capacity as discussant for George Akerlof and Paul Romer’s 1993 paper (“Looting: The Economic Underworld of Bankruptcy for Profit”) responded that “it would be irrational for savings and loans [CEOs] not to loot.”  Cochrane (and Mankiw) also failed to read or understand Akerlof’s even more famous 1970 article on a market for “lemons” that explained why it is essential to prosecute frauds to prevent 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” (Akerlof 1970).

Given his family name, Cochrane may also feel some special affinity for the Irish genius that explained the same “Gresham’s” dynamic over two centuries before Akerlof.

“The Lilliputians look upon fraud as a greater crime than theft.  For, they allege, care and vigilance, with a very common understanding, can protect a man’s goods from thieves, but honesty hath no fence against superior cunning. . . where fraud is permitted or connived at, or hath no law to punish it, the honest dealer is always undone, and the knave gets the advantage” (Swift, J., Gulliver’s Travels).

Economists recognized long ago that dishonest businesses pay better for economists’ services.  But our door remains open.  We would love Cochrane to join us in our efforts to ensure that “the knave [no longer] gets the advantage” through fraud and the “honest dealer is [not] undone.”

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