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Crumbling Institutions, Crumbling Economy

Roman Forum (photo: Mshai)

The foundations of our society have been rotting for years. The Great Crash of 2008 was the inevitable result. As with most things in a complicated society, things don’t crumble from one big change, but from a number of small changes that eat away the pillars on which the society is built. Three of the major contributors to the Great Crash were incompetent academic economists, weakened regulation and fraud.

Academic Economists. Academic economists were entranced by mathematics, and learned to write everything in the form of equations. Once those equations were on paper, they became real, and any outcome you could produce with algebra or calculus became just as real. They began to push those equations farther and farther, without regard to the way real people act.

Consider the Efficient Market Hypothesis. In its weak form, the EMH says that prices of securities reflect all publicly available information. Everyone on Wall Street, and many of the rest of us, knew there was a housing bubble, and that it could not continue. That fact wasn’t reflected in prices on the stock market. There was some academic pushback, but the EMH is still a mainstay of academic thinking.

Even more astonishing is the idea pushed by academic economists that markets police themselves. I first met this argument when I was the Securities Commissioner in Tennessee. A professor at Vanderbilt’s business grad school told me that I was wasting my time regulating securities and prosecuting fraud cases. His view was that people would cheat, but they wouldn’t be able to do so for long because the markets would figure it out and push them out. That nonsense was the rationale for dismantling the regulatory apparatus.

In the wake of the Great Crash, academic economists have not changed their views, let alone offered mea culpas for their sins against good sense. The people who got it wrong are still running things, and still pushing their failed ideas.

Weakened Regulation. The silly idea that markets can police themselves worked its way into the heads of regulators, who quit regulating. Not only did federal officials abdicate their responsibilities, they waged war on state officials trying to enforce their own consumer protection and banking laws.

The drive to end regulation extended to the Supreme Court. In a series of decisions stretching back for years, the ideological bias against regulation expanded to use of courts. The Supreme Court has made it difficult to sue lawyers and accountants who enable fraud, the directors who close their eyes, and the underwriters themselves. Dday reports on a recent example. There is no recourse for small investors.

Even in the face of the Great Crash, politicians cling to the same idiotic views that created the problem. Congress enacted weak legislation, and the financial business and its rich owners are fighting to weaken it.

Fraud. We used to think that our stock markets were reasonably fair, but no more. The precipitating factor in the Great Crash was fraud. Mortgage originators made fraudulent loans, and sold them to banks. Banks knew the loans were fraudulent, but sold them into real estate mortgage-backed securities. Brokers knew that the RMBSs were packed with fraudulent loans, but sold them to pension funds and money market funds and other greater fools. Everyone made money except for the last fool in the chain.

CRASH. Markets didn’t police themselves. Markets didn’t price in the fraud they ignored. Fraud penetrated the entire capital structure. Regulators pacified themselves with dreams of efficient markets and self-policing. Congress lapped up dollars. Academic economists ignored reality. Both political parties said they were opposed to fraud, but Republicans accepted it as the price of free markets, and Democrats were too weak of mind and spirit to resist. And the Great Crash came.

And What of Today? The rich and Wall Street are still in control. Banks decide what regulations are acceptable. Regulators weren’t fired. Investors can’t sue. States don’t have the wherewithal to do anything. US Attorneys won’t even investigate, let alone prosecute. Institutions that should have protected us have completely crumbled under the assault of stupid economists, weakling regulators and fraud.

President Obama is satisfied with the performance of the academic economists who got everything wrong, and leaves them in charge of economic policy. President Obama is satisfied with failed regulators and leaves them in charge. President Obama is satisfied with the performance of his Attorney General, who hasn’t investigated, and his US Attorneys who flatly refuse to prosecute.

The plain fact is that the President encapsulates the position of most Americans. And unlike those uncivilized Greeks, Irish, Italians and Spaniards, most of us will happily agree to accept shared sacrifice as the logical outcome. How could it be otherwise, since most Americans have no idea of what happened?

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