Notes from Howard's Sabbatical from Working. The name comes from a 1998 lunch conversation. Someone asked if everything man knew was on the web. I answered "no" and off the top of my head said "Fidel Castro's favorite color". About every 6-12 months I've searched for this. It doesn't show up in the first 50 Google results (this blog is finally first for that search), AskJeeves says it's: red.
Dissention in the ranks of the world's greatest economic minds.
What's going on here?
I think I know.
I believe what has happened is the misapplication of a body of knowledge - modern economic theory - to an event, the recent global economic meltdown, for which modern economic theory offers only inadequate and partial explanations. The meltdown event, I assert, was not economic in its origin and evolution, but rather, criminal.
Professor William Black, Associate Professor of Economics and Law at the University of Missouri – Kansas City (UMKC), offers a different explanation from those offered by Economists.
He developed the theory of Control Fraud over decades of investigative work into major financial crises.
The following, excerpted from one of Prof. Black's papers, explains what Control Fraud is and why economists can agree on what caused the recent meltdown:
"Control frauds are crimes led by the head of state or CEO that use the nation or company as a fraud vehicle. Waves of “control fraud” can cause economic collapses, damage and discredit key institutions vital to good political governance, and erode trust. The defining element of fraud is deceit – the criminal creates and then betrays trust.
Economic theory about fraud is underdeveloped, core neo-classical theories imply that major frauds are trivial, economists are not taught about fraud and fraud mechanisms, and neo-classical economists minimize the incidence and importance of fraud...
Neo-classical economics’ understanding of fraud is so weak that its policy prescriptions, if adopted wholly, produce strongly criminogenic environments that cause waves of control fraud. Neo-classical policies simultaneously make control fraud easier and more lucrative, dramatically reduce the risk of detection and prosecution by maximizing “systems capacity” problems, and encourage crime by making it easier for fraudsters to “neutralize” the social and psychological constraints against deceit and fraud."
The full text of Professor Black's paper can be found at:
When Fragile becomes Friable: Endemic Control Fraud as a Cause of Economic Stagnation and Collapse
Please remember that it was written in 2005, three full years before the collapse of the global economy due to the creation, manipulation, deception and dispersal involving fraudulent financial instruments, based on risky mortgages of highly questionable value.
The following paragraph from this paper is incredibly prescient and accurate:
"Second, only the CEO can optimize the company for fraud. He optimizes the company by having it invest primarily in assets that have no readily ascertainable market value. Professionals must value such assets – this allows the CEO to hire an appraiser or accountant that will provide a grossly inflated asset value. Because the asset has no obvious market value it makes it extremely difficult for the regulator (much less prosecutor) to contest the valuation. Such assets are also optimal for extending the life of the fraud. I have explained that rapid growth extends the life of the fraud, and increases the “take”, by allowing a Ponzi scheme. The CEO has the unique ability to cause the firm to follow such a scheme. The CEO can also extend the fraud by arranging false “sales” of the troubled assets to “straws” or related parties – at grossly inflated prices that produce additional profits."
This was written in 2005 not 2009!
Economists cannot and did not predict the recent financial crises because it was not "economic" in its origin.
A criminologist, Professor Black, did in fact predict the origin and evolution of the crisis in remarkable detail, because the crisis was rooted in criminal activity.
Read Professor Black's writings on the concept of Control Fraud and decide for yourself.
1 comment:
Hmmmm...
Dissention in the ranks of the world's greatest economic minds.
What's going on here?
I think I know.
I believe what has happened is the misapplication of a body of knowledge - modern economic theory - to an event, the recent global economic meltdown, for which modern economic theory offers only inadequate and partial explanations. The meltdown event, I assert, was not economic in its origin and evolution, but rather, criminal.
Professor William Black, Associate Professor of Economics and Law at the University of Missouri – Kansas City (UMKC), offers a different explanation from those offered by Economists.
He developed the theory of Control Fraud over decades of investigative work into major financial crises.
The following, excerpted from one of Prof. Black's papers, explains what Control Fraud is and why economists can agree on what caused the recent meltdown:
"Control frauds are crimes led by the head of state or CEO that use the nation or company as a fraud vehicle. Waves of “control fraud” can cause economic collapses, damage and discredit key institutions vital to good political governance, and erode trust. The defining element of fraud is deceit – the criminal creates and then betrays trust.
Economic theory about fraud is underdeveloped, core neo-classical theories imply that major frauds are trivial, economists are not taught about fraud and fraud mechanisms, and neo-classical economists minimize the incidence and importance of fraud...
Neo-classical economics’ understanding of fraud is so weak that its policy prescriptions, if adopted wholly, produce strongly criminogenic environments that cause waves of control fraud. Neo-classical policies simultaneously make control fraud easier and more lucrative, dramatically reduce the risk of detection and prosecution by maximizing “systems capacity” problems, and encourage crime by making it easier for fraudsters to “neutralize” the social and psychological constraints against deceit and fraud."
The full text of Professor Black's paper can be found at:
http://www.networkideas.org/feathm/may2006/William_K_Black.pdf
It is entitled:
When Fragile becomes Friable: Endemic Control Fraud as a Cause of Economic Stagnation and Collapse
Please remember that it was written in 2005, three full years before the collapse of the global economy due to the creation, manipulation, deception and dispersal involving fraudulent financial instruments, based on risky mortgages of highly questionable value.
The following paragraph from this paper is incredibly prescient and accurate:
"Second, only the CEO can optimize the company for fraud. He optimizes the company by having it invest primarily in assets that have no readily ascertainable market value. Professionals must value such assets – this allows the CEO to hire an appraiser or accountant that will provide a grossly inflated asset value. Because the asset has no obvious market value it makes it extremely difficult for the regulator (much less prosecutor) to contest the valuation. Such assets are also optimal for extending the life of the fraud. I have explained that rapid growth extends the life of the fraud, and increases the “take”, by allowing a Ponzi scheme. The CEO has the unique ability to cause the firm to follow such a scheme. The CEO can also extend the fraud by arranging false “sales” of the troubled assets to “straws” or related parties – at grossly inflated prices that produce additional profits."
This was written in 2005 not 2009!
Economists cannot and did not predict the recent financial crises because it was not "economic" in its origin.
A criminologist, Professor Black, did in fact predict the origin and evolution of the crisis in remarkable detail, because the crisis was rooted in criminal activity.
Read Professor Black's writings on the concept of Control Fraud and decide for yourself.
TT
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