Capitalism Without Failure: Bill Black: The Fraud Recipe for CEO's…

Bill Black: The Fraud Recipe for CEO's, Why Banks Hate Free Markets and Love Crony Capitalism, and the Dysmal Legacy of Mainstream Economists

Via Capitalism Without Failure

The selected notes below are from William K. Black's presentation at the Modern Monetary Theory Summit in Rimini, Italy, in Febuary of this year.  The audio is embedded in this post following the text. 

On the "technocrats" running the show in Europe: There are no 'technocrats,' especially ‘genius’ technocrats.  I suggest a new rule of thumb for judging a 'genius technocrat.'  They have to be right at least two out of ten times.  There is not a single economist in Europe, who calls himself a technocrat, that could do the equivalent of making two penalty kicks out of ten.

What we learned from the Savings & Loan crisisGeorge Santayana famously said that, "those who cannot remember the past are condemned to repeat it." But, even if we remember the mistakes we have made, the new policy we pick could be another mistake.  Here is what we learned about the incidence of fraud leading up to the savings and loan crisis, according to the national commission that investigated the causes of that crisis:

"'The typical large failure [grew] at an extremely rapid rate, achieving high concentrations of assets in risky ventures… [E]very accounting trick available was used… Evidence of fraud was invariably present, as was the ability of the operators to 'milk' the organisation.' 
On Control Fraud: Control fraud occurs when the person who controls a seemingly legitimate entity uses it as a weapon to defraud.  In finance, accounting is the weapon of choice.  These accounting frauds cause greater losses than all other property crimes combined, yet economists never talk about it.

On the danger Control Frauds pose to society: When many of these frauds occur in the same area, they hyperinflate financial bubbles, which is what causes financial crises and mass unemployment.  It makes the CEOs wealthy, produces Balzac scandals, and destroys democracy.

On how perverse incentives encourage fraud: Perverse incentives produce criminogenic environments that encourage fraud. When people are able to steal a lot of money, with no threat of imprisonment, nor having to live in disgrace, an environment conducive to fraud is established.  Establishing such an environment in practice requires the 3 D's: Deregultation, Desupervision, and de facto Decriminalization. Deregulation: you get rid of the rules.  Desupervision: any rules that remain, you do not enforce.  Decriminalisation: even if you sometimes sue the perpetrators and get a fine, you do not put them in prison.  

On the ideal perverse incentives for accounting fraud: Accounting fraud thrives most with really high pay based on short-term reported income with no way to claw it back -even when it proves to be a lie.  Also helpful is for assets to not have a readily verifiable market-value; this makes it easy to inflate the asset prices and easy to hide real losses.  For a true epidemic of fraud, it is also helpful to have easy entry into the industry.

Keep reading: Capitalism Without Failure: Bill Black: The Fraud Recipe for CEO's, Why Banks Hate Free Markets and Love Crony Capitalism, and the Dysmal Legacy of Mainstream Economists.

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