By William K. Black
May 16, 2016 Bloomington, MN
John Cochrane is a theoclassical economist. I struggle to explain to readers how radical theoclassical economics has become. The more their anti-regulatory policies prove disastrous the more extreme their policies become. Cochrane wrote a column recently in the Wall Street Journal that exemplifies this pattern. We are just emerging from the worst financial crisis since the Great Depression. The three “de’s” (deregulation, desupervision, and de facto decriminalization) caused the three most destructive epidemics of financial control fraud in history. Much of this was driven by the perverse financial incentives that CEOs crafted to rig the system and produce an intensely criminogenic environment.
The United State’ government’s response to these epidemics of accounting control fraud is unprecedented in modern times. There have been zero prosecutions for leading any of the three catastrophic fraud epidemics – appraisal fraud, liar’s loans, and the resale of these fraudulently originated mortgages through fraudulent “reps and warranties” – that drove the financial crisis. There have been zero civil or administrative cases brought for leading any of the three fraud epidemics that drove the crisis that has required the leader to even return their fraud proceeds from their own pockets.
In sum, as the Bank Whistleblowers United have explained, the rule of law has ended for financial elites. Financial CEOs became ever wealthier by leading the fraud epidemics that crushed our economy and caused immense harm to our people – and in every case the prosecutors and regulators did not even attempt to hold them personally accountable for their frauds.
This is contrary to the response to our other two modern financial crises that were also driven by epidemics of control fraud. In both the savings and loan debacle and the Enron-era frauds there were many hundreds of successful prosecutions of the most elite CEOs. The destruction of the rule of law is so obvious and so total and the rigged nature of the economy so blatant that Americans are outraged.
Cochrane is outraged. He is outraged about “pernicious incentives,” but not about the pernicious incentives that CEOs shape in order to suborn others to aid and abet their frauds that drove the financial crisis. Instead, he demands that we slash Social Security protections for the disabled. Consider how depraved Cochrane’s position is. His response to the most destructive epidemics of financial fraud in history – frauds that made financial elites massively wealthy – is to demand immediate steps to make the lives of disabled even more miserable. When Greg Mankiw says he wants to teach your freshman son or daughter “to think like an economist” this is the kind of demented and dishonest theoclassical “thinking” that they want to instill in your child. Indeed, Mankiw praised the Cochrane column I am discussing.
Cochrane is outraged by other matters as well. He demands that we immediately begin “restoring the rule of law.” Except that for Cochrane, his Orwellian definition of what that phrase means is that we must permanently destroy the rule of law for corporate elites. If you have ever taken part in a Seder you will recognize the word “dayenu” (e.g., it would have been sufficient had G-d given Jews their escape from bondage in Egypt). It is a song that calls on us to reflect on G-d’s many acts of generosity to us. For Cochrane, however, nothing the government does to eviscerate the rule of law for CEOs is ever sufficiently generous. It is not sufficient for Cochrane that CEOs have become wealthy by looting “their” firms and that those financial fraud epidemics drove the financial crisis. It is not sufficient that no CEO, indeed no senior officer, has been prosecuted for leading those fraud epidemics. It is not sufficient for Cochrane that no civil suit or enforcement action against the senior officers that led the three control fraud epidemics that caused the crisis has required a single senior officer to even repay from their own funds a portion of their massive fraud proceeds.
Cochrane demands that we stop even “investigating” the CEOs’ massive frauds that drive our recurrent, intensifying financial crises or the auto frauds that at VW alone produced over 11 million fraudulent sales. For Cochrane, who exemplifies “thinking like a theoclassical economist,” the (oxymoronic) “rule of law” he desires for CEOs is that they be able to defraud with impunity – and never have their frauds disclosed to their victims by investigators. Cochrane is enraged that “every step” CEOs take “risks a new criminal investigation.” He obviously shares the CEOs’ fear that these investigations will lead to the public learning of their frauds – many of them life-threatening” to the public. Cochrane claims that fear of being investigated for their crimes leads CEOs to decide not to “invest, hire or innovate.” Don’t try to search for Cochrane’s logic, this is simple dogma and protection of his elite patrons. For Cochrane, only the total destruction of the rule of law for CEOs is capable of “restoring the rule of law.”
When I criticize Mankiw and Cochrane I am not picking on obscure theoclassical economists, but rather what their movement considers its stars. The public has no idea how radical the views of these people are, how often and destructively their predictions and policies have failed, and how impervious their dogmas are to change when their predictions fail. The naked shilling for their elite patrons is the moldy cherry on their odious sundae.
Oh, and if modern CEOs are failing to invest and hire because they are afraid that their frauds will be investigated – then they need to be investigated, prosecuted, and removed from the C-suites so that honest CEOs can come to power in America. If Cochrane’s Randian fantasy were correct, and CEOs were refusing to hire or invest because of fears of having their crimes investigated and exposed to their customers and the public, then Cochrane would have been describing a “Gresham’s” dynamic in which bad ethics has driven good ethics entirely out of the C-suites. Only vigorous prosecutions of the crooked CEOs that had rigged the system could end such a dynamic.
Wall Street regulates the Congress and the Presidency, when it should be the other way around. There are no “checks and balances on Wall Street. There are no taxes or regulations of derivative transactions such as “credit default swaps, “collateralized debt obligations” and other exotic “traunces”, nothing but sophisticated “Ponzi Schemes that brought down the economy in 2008. They are just renaming them something else and continue on speculating against their own clients that a particular investment stock or bond will fall in price. If you read or see the “The Big Short,” you will see this. It is nothing other than the “Golden Rule: them that has the gold, write the rules.” Or as my high school social studies teach used to say, “talks, B.S. walks and we are all running a close third.”
It takes true courage to act on the vision of short term financially engineered gains, I mean researching, developing and building a quality product that yields returns over the long term is for schleps. Any old boring engineer can do that, but where are the spoils and adulation?
Judge Rakoff’s decision against Countrywide was overturned on appeal. The appeals court found that Countrywide (and many, many other mortgage companies likely) did not commit fraud as it turns out. They merely breached their contracts. So when we talk about the GFC, we can no longer talk about fraud!