Monday, May 25, 2009

William Black on Fraud

Criminal fraud was endemic over the last 30 years. That is not a widely debatable statement. Even people that would disagree with me ideologically or would typically have opposing economic views would have a hard time denying that the backdating of stock options, mortgage fraud, accounting fraud, appraisal fraud, and many other types of fraud have gone on without notice from law enforcement, regulators or journalists - the people typically charged with exposing such crime.

Even though such a consensus can be reached on the prevalence of fraud, it hardly garners a mention in the media or in congressional hearings. Typically, the focus will be laid on easier subjects like greed or underfunded regulators who could not keep up with the innovations of "the rabid free-market." The targets are very vague. And therefore the solutions prescribed to address the problems are also very vague and typically avoid the real issues or even endorse them by providing support.

Why is this the case? Well, it should be obvious. The people we have put in charge of tackling the crisis are the same people that would eventually be implicated if the charges of fraud were investigated. Scapegoats and strawmen are sought that will deflect attention away from the true culprits that encouraged the fraud toward their minions that went ahead and carried it out. Nowhere is this more apparent than in the handling of the crisis by the mainstream media, all of whom were cheerleaders of "the great moderation" and the "cinderella economy" that masked such blatantly obvious shenanigans.

However, there are a number of individuals (not to mention entire schools of thought) that have a clean history and are able to speak out without implicating themselves in the process. Among those people is William Black. He is a former regulator of the S&L crisis and subsequently went on to specialize in white collar crime. Two weeks ago he gave a presentation in Iceland on how prevalent fraud was in the bubble economy that has now burst. (Why he needed to go to Iceland in order to gain an audience is supportive of the media's muzzling attempt toward those that would implicate the media itself as accessories to fraud.)

Black is not considered an Austrian, nor does it sound like he has roots in the Minsky-Shumpeterian school. But I was constantly struck by the wisdom (and valiance) of a man who was a former government bureaucrat in telling it like it is. In the presentation he makes references to:

- failures of the neoclassical Efficient Market Hypothesis (EMH)
- how hierarchal power structures perpetuate fraud (what he refers to as "control fraud")
- the benefits of "mutually beneficial exchange" in a truly capitalistic society
- how the implicit endorsement of fraud creates "moral hazard" and a "misallocation of resources"
- that we are and have continued to follow the same regulatory and economic policies which have continually resulted in widespread fraud over decades

The complete presentation can be viewed in two parts: Part 1 and Part 2. The intro is in Icelandic and takes a few minutes to get going. It is well worth the time.

From what I have heard previously, Black's solution appears similar to most in that he argues for "better regulation." But he seems to have a far better grasp than others in that he understands if existing criminal laws were enforced for white collar fraud, the need for excessive regulation would be minimized. For that, Black's common sense is a message worth rallying around.

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occdude said...

Fraud is only part of the problem. A system that allows someone to lend out 10,12,24,50 to 1 dollar in reserves is inherently flawed and unstable. As far as enforcement of laws on the books, lets extend that to something near and dear to all of us, namely our own personal conduct.

How would you like to have an enforcement officer around everytime you spit on the sidewalk? Would you be better off? Would society be better off?? They have a name for this scenario, it's called a police state ala Cuba. How safe do you think they feel? I fear the "authorities" arbitrary,incompetent and authoritarian rule just as much as I fear the fraud (even more so because government has a monopoly on the legal use of force). Besides how efficient do you think government paid bozos are going to be righting the wrongs of the market?

The real solution is to redesign a system that isolates parties and prevents these contangious economic systems from spreading to other uninvolved parties, to prevent "externialities" if you will. The way to do that is simple. Declare that fractional reserve banking is fraud itself, then let the market reconfigure a new system. Minimal enforcement would be needed, and we can keep the governmental "dogs of war" on their leashes while people work on mutually beneficial trade.

Unfortunately we are going in the exact opposite direction, so there will continue to be market manic bahavior as it constantly adjusts to the manic behavior of all those benevolent government officials, who but for their halos weighing them down, would fix this system toot sweet.

Matt Stiles said...


Indeed. Fraud was systemic. That is, fractional reserve is fraud. It is counterfeiting done by whoever manages to get the government's blessing. Those who attempt printing money without such a blessing go to jail for fraud.

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