June 13, 2012 |
Photo Credit: Shutterstock
In criminology, we recognize that one of the leading restraints on the
effectiveness of law enforcement is what is known as “systems
capacity.” Indeed, my mentor, Henry Pontell (UC Irvine), defined the
concept. In the context of crimes of the street (other than Wall
Street), there is normally no lobby trying to allow the typically lower
class criminals to commit their crimes with impunity. In crimes of the
business suites, however, it is the norm that there are well-funded,
powerful, and seemingly legitimate lobbyists for the elite criminals who
seek to allow them to commit their crimes with impunity.
Similarly, it
is rare for street criminals to consult a lawyer before they commit
their crimes. Elite white-collar criminals often consult with expert
legal counsel before, during, and after they commit their crimes in
order to try to minimize the risk of being sanctioned.
One of the most obvious ways to produce a criminogenic environment is
to create systems incapacity to detect and sanction crime. House
Republicans are doing that in the context of elite white-collar crime.
That context also happens to be the leading campaign donors for both
parties.
On June 9, 2012, The
New York Times published an important editorial entitled
“Lost the Vote? Deny the Money.”
The editorial will be ignored by the Obama administration and
Republicans but it is well worth reading in full. Here are some key
excerpts.
If you wanted to reproduce the conditions that led to the Great Recession in 2007, the easiest way would be the plan unveiled last week by House Republicans: gut the regulators who are supposed to keep the worst business practices in check.
At a time when the economy is still reeling from the downturn, House
Republicans released a spending bill that would severely cut the budget
of the Commodity Futures Trading Commission, which would keep it from
regulating potentially toxic swaps and other derivatives. It refused to
give the Securities and Exchange Commission the extra money it needs to
carry out the Dodd-Frank financial reform bill.
And the bill would cripple the Internal Revenue Service, limiting its
ability to detect tax avoidance, particularly by businesses and the
wealthy. (The I.R.S. cut, designed to impede the agency’s role in health
care reform, will inevitably increase the deficit.)
With 710 employees, the C.F.T.C. staff is barely big enough for its current responsibilities, let alone its new mission
under Dodd-Frank to oversee the huge over-the-counter swaps market. Its
budget is $205 million, which President Obama proposed increasing to
$308 million for 2013 to deal with swaps. The House Appropriations
Committee has proposed slashing next year’s budget to $180 million.
The agency’s chairman, Gary Gensler, said:
“The result of the House bill is to effectively put the interests of
Wall Street ahead of those of the American public, by significantly
underfunding the agency Congress tasked to oversee derivatives — the
same complex financial instruments that helped contribute to the most
significant economic downturn since the Great Depression.”
As Mr. Gensler pointed out, the market in swaps, at $300 trillion, is
eight times larger than the futures market his agency has been
regulating, and yet the House wants to cut the agency’s budget
significantly. The House committee chairman, Harold Rogers, said the
agency should return to its “core duties,” a statement that brazenly
ignores a new set of duties Congress put on the books.
In this essay I make four brief points. First, the House Republicans’
proposals would produce the most criminogenic environment in the world
that risks an even larger financial crisis and outright depression.
This isn’t simply the lesson of the current crisis. George Akerlof and
Paul Romer explained the point in 1993 in their classic article
(“Looting: the Economic Underworld of Bankruptcy for Profit”). They
made this paragraph their conclusion in order to emphasize the message.
“Neither the public nor economists foresaw that [S&L deregulation
was] bound to produce looting. Nor, unaware of the concept, could they
have known how serious it would be. Thus the regulators in the field
who understood what was happening from the beginning found lukewarm
support, at best, for their cause. Now we know better. If we learn from
experience, history need not repeat itself” (Akerlof & Romer1993:
60).
Akerlof was made a Nobel Laureate in economics in 2001.
Second, the losers from creating a criminogenic environment that
encourages looting are not “merely” the public – the losers include
honest businesses. When cheaters gain a competitive market, competition
becomes perverse and firms controlled by the least ethical CEOs can
drive their honest competitors from the marketplace. Akerlof made this
point explicitly in his even more famous 1970 article on markets for
“lemons” where he wrote about the economics of anti-purchaser control
frauds. He called it 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.”
Modern executive compensation causes accounting control fraud to
produce a powerful Gresham’s dynamic. CFOs rightly fears that their
tenure may be measured in months if they do not mimic their rivals’ use
of accounting control fraud to produce what Akerlof and Romer aptly
termed a “sure thing” of record reported income that, in turn, produces
enormous executive compensation.
Classic economists stressed the essential role of government –
providing a rule of law and preventing and punishing criminal acts,
including fraud. Ayn Rand stressed that government had a duty to
prevent fraud. The essence of crony capitalism is the ability to commit
fraud with impunity. The Tea Party opposes crony capitalism and the
House Republicans quake in fear of upsetting the Tea Party and being
challenged in the Republican primary.
We have deregulated, desupervised, and
de facto decriminalized
finance in the U.S. and Europe to an unprecedented extent in the last
30 years and the results have been uniformly catastrophic. Governor
Romney states that he intends to repeal the entire Dodd-Frank Act and
recreate the criminogenic environment that caused the financial crisis
and the Great Recession.
We have four dogs that have failed to bark. Conservatives have long
claimed to be the party of law and order – where are they. The data are
in – the Bush and Obama administrations have been soft on elite
white-collar crime (by their largest campaign donors). Libertarians and
Tea Party supporters who hate crony capitalism – rise up and demand an
end to the elites who grow wealthy by committing fraud with impunity and
cost millions of Americans and Europeans their jobs.
And where are President Obama and Attorney General Holder on this
issue? The editorial quotes only regulators. The President and the
Attorney General should be taking the lead and denouncing the deliberate
recreation of a criminogenic environment. Here is the central fact
that Holder and Obama have never grasped – effective investigations and
prosecutions of epidemics of elite financial frauds are only possible
where the regulators and the SEC do the heavy lifting. The regulators
will only do the heavy lifting if their leaders understand control fraud
and make its detection, termination, sanctioning, and prosecution their
top priorities. Bush and Obama have overwhelmingly appointed failed,
anti-regulators like James Gilleran, John Reich, John Dugan, Timothy
Geithner, Alan Greenspan, Ben Bernanke, Harvey Pitt, and Susan
Schapiro. They have also appointed attorney generals who have all been
weak on elite financial fraud.
The epidemic of accounting control fraud by financial institutions that
drove the Great Recession was the largest and most costly example of
white-collar crime in history. But all we have heard from Obama and
Holder is minimization of the role of fraud in the crisis and the same
abject failure as the Bush administration to prosecute the elite frauds
that drove the crisis. The minimization of fraud comes from the death
of criminal referrals by the regulatory agencies. Neither the banking
regulatory agencies nor the FBI has conducted what would have been
considered in our era a serious investigation of an elite financial
institution. When it comes to elite frauds; if you don’t look you don’t
find. Having falsely claimed that there were only trivial violations
of the law, the Obama administration has emasculated its ability to go
credibly to the public and warn that the House Republicans are about to
recreate the criminogenic environment that produces our recurrent,
intensifying financial crises. Holder and Obama cannot credibly claim
that the House Republicans are about to allow our financial elites to
again grow wealthy through fraud because Holder and Obama are continuing
Mukasey and Bush’s policy of granting d
e facto immunity to the elite criminals who caused the crisis.
Prominent Republican writers have recently urged their Party to destroy
crony capitalism. Instead, their representatives are trying to
entrench it. Prominent progressives have been urging Obama to destroy
crony capitalism. Instead, he has entrenched it by taking his financial
advice from Robert Rubin, Lawrence Summers, Geithner, and Bernanke.
Neither party is willing to take on their leading source of political
contributions. We need a party, an attorney general, and a slew of
regulators who will make it their mission to end crony capitalism in
America. Europe needs the same thing.
Bill Black is the author of 'The Best Way
to Rob a Bank is to Own One' and an associate professor of economics
and law at the University of Missouri-Kansas City. He spent years
working on regulatory policy and fraud prevention as Executive Director
of the Institute for Fraud Prevention, Litigation Director of the
Federal Home Loan Bank Board and Deputy Director of the National
Commission on Financial Institution Reform, Recovery and Enforcement,
among other positions.
No comments:
Post a Comment