Global Economic Intersection
Advertisement
  • Home
  • Economics
  • Finance
  • Politics
  • Investments
    • Invest in Amazon $250
  • Cryptocurrency
    • Best Bitcoin Accounts
    • Bitcoin Robot
      • Quantum AI
      • Bitcoin Era
      • Bitcoin Aussie System
      • Bitcoin Profit
      • Bitcoin Code
      • eKrona Cryptocurrency
      • Bitcoin Up
      • Bitcoin Prime
      • Yuan Pay Group
      • Immediate Profit
      • BitQH
      • Bitcoin Loophole
      • Crypto Boom
      • Bitcoin Treasure
      • Bitcoin Lucro
      • Bitcoin System
      • Oil Profit
      • The News Spy
      • Bitcoin Buyer
      • Bitcoin Inform
      • Immediate Edge
      • Bitcoin Evolution
      • Cryptohopper
      • Ethereum Trader
      • BitQL
      • Quantum Code
      • Bitcoin Revolution
      • British Trade Platform
      • British Bitcoin Profit
    • Bitcoin Reddit
    • Celebrities
      • Dr. Chris Brown Bitcoin
      • Teeka Tiwari Bitcoin
      • Russell Brand Bitcoin
      • Holly Willoughby Bitcoin
No Result
View All Result
  • Home
  • Economics
  • Finance
  • Politics
  • Investments
    • Invest in Amazon $250
  • Cryptocurrency
    • Best Bitcoin Accounts
    • Bitcoin Robot
      • Quantum AI
      • Bitcoin Era
      • Bitcoin Aussie System
      • Bitcoin Profit
      • Bitcoin Code
      • eKrona Cryptocurrency
      • Bitcoin Up
      • Bitcoin Prime
      • Yuan Pay Group
      • Immediate Profit
      • BitQH
      • Bitcoin Loophole
      • Crypto Boom
      • Bitcoin Treasure
      • Bitcoin Lucro
      • Bitcoin System
      • Oil Profit
      • The News Spy
      • Bitcoin Buyer
      • Bitcoin Inform
      • Immediate Edge
      • Bitcoin Evolution
      • Cryptohopper
      • Ethereum Trader
      • BitQL
      • Quantum Code
      • Bitcoin Revolution
      • British Trade Platform
      • British Bitcoin Profit
    • Bitcoin Reddit
    • Celebrities
      • Dr. Chris Brown Bitcoin
      • Teeka Tiwari Bitcoin
      • Russell Brand Bitcoin
      • Holly Willoughby Bitcoin
No Result
View All Result
Global Economic Intersection
No Result
View All Result

Another Nobel Prize for Failure

admin by admin
October 16, 2014
in Uncategorized
0
0
SHARES
1
VIEWS
Share on FacebookShare on Twitter

Hold Your Wallet When the Swedish Central Bank Prize Rewards “Clever”

by William K. Black, New Economic Perspectives

The Swedish Central Bank’s (the “Bank”) prize in economics has gone to Jean Tirole. It is always good to test such an award by looking at the writings of the recipient in an area in which the reader has particular expertise. In my case, that would include the Savings and Loan debacle, financial regulation, and control fraud. Tirole’s book: The Theory of Corporate Finance was published on January 1, 2006 during the heart of the three raging epidemics of accounting control fraud that were hyper-inflating the world’s largest financial bubble and about to create the financial crisis and the Great Recession.

As I have long emphasized and will be explaining at greater length in a book about the failures of economics and economists as exemplified by far too many of the recipients of the Bank’s Prize, economics is the only discipline in which the understanding of the field’s subject of study has gone backwards. In particular, the praxis recommended by economists has proven highly criminogenic and is the primary explanation for why we suffer recurrent, intensifying crises, the rise of crony capitalism that cripples democracy and ethics, and spiraling inequality and low growth in the regions that suffer the greatest predation by our parasitical financial centers. Tirole wrote at the ideal time to judge his understanding of corporate finance as it was actively causing these catastrophes.

The Bank’s prize announcement stresses that Tirole was selected because of his “clever” approach to regulation, including financial regulation. So the obvious question is how Tirole, in authoring his book on corporate finance theory and as the exemplar of “clever” approaches to financial regulation missed the crisis, missed the causes of the crisis, missed the causes of past crises, and advance ideas on financial regulation that would not have prevented our banking crises? The subsidiary question, also close to unique in economics, is how he could get so much so wrong by ignoring the work on these crises by a recipient of the Bank’s prize in 2001 (George Akerlof) by savings and loan regulators, white-collar criminologists, and a series of successful civil, administrative, and criminal actions? In other fields, the failure to cite and discuss the relevant work of a recent Nobel Laureate would cause the author to be viewed as an embarrassment to the field.

I want to reemphasize that the book Wesley Marshall and I are authoring on these prize winners chose them because of their intelligence. Tirole is considered particularly clever.

The context of Tirole’s discussion of junk bonds and the savings & loan debacle is that he notes that Drexel Burnham Lambert and Michael Milken, the officer that controlled it (though he was never the CEO), were prosecuted and sued successfully for a wide range of fraudulent actions. In the course of this discussion Tirole notes in passing that a number of S&Ls that were heavy purchasers of these junk bonds failed. His “analysis” of these interrelated matters is relegated to a footnote (p. 44 & n. 88).

“The difficulties faced by the S&Ls did not stem from the junk bonds, but with the interest rate shock of the late 1970s, and several mistakes of prudential regulators in the 1980s. However the S&L disaster added to the general negative feelings about junk bonds.”

It is true that the S&L crisis was not caused by junk bonds. As I wrote in 1993, there were roughly a dozen S&Ls that purchased substantial amounts of junk bonds. “Junk Bonds.” Staff Report 7. San Francisco: National Commission on Financial Institution Reform, Recovery, and Enforcement (NCFIRRE) (April 8) (cited in Akerlof, George and Paul Romer, “Looting: The Economic Underworld of Bankruptcy for Profit” 1993). Each of the S&Ls was a “captive” of Milken. Akerlof & Romer explain how Milken used the captives to suppress the reported default rates on Drexel-issued junk and to ensure that the initial offerings would succeed. These Milken-related frauds caused several billions of dollars in losses, but that represented a small percentage of the total present value cost of $150 billion ($ 1993). Conversely, the interest rate shocks ended up costing roughly $25 billion (NCFIRRE 1993).

The great bulk of the S&L losses were caused by loan defaults, principally through fraudulent commercial real estate loans instigated by the controlling officers of the S&L control frauds. These frauds included the Drexel captives.

We can all agree that there were (more than) “several mistakes of prudential regulators,” but given that Tirole’s claim to fame is largely in the field of financial regulation and he is writing about corporate finance his failure to display any evidence of researching the failures is disappointing. It is difficult to respond to such an amorphous claim about regulatory mistakes, particularly from a scholar who typically (and correctly) emphasizes that closely understanding the specific industrial context is essential to for proper analysis and praxis.

One of the larger “mistakes of prudential regulators” was that Federal Home Loan Bank Board Chairman Edwin Gray wanted to ban S&Ls from purchasing junk bonds, but he was unable to do. He could not act because the agency’s economists told him that the economic literature showed that the default rate on junk bonds was so low, and their yield premium so large, that there was no rational basis for preventing S&Ls from purchasing junk bonds. Given that Charles Keating, who ran the Nation’s most notorious S&L control fraud, was a Drexel captive and was always threatening to sue the agency to strike down our rules, our economists’ position doomed the adoption of any rule. Our economists, as Akerlof & Romer implicitly explain, fell for Milken’s successful use of the captives to suppress the true default rate on Drexel-issued junk bonds.

Had economists not undermined Gray’s determination to stop S&Ls from purchasing junk bonds, the junk bond bubble that Milken generated would have burst years earlier and caused far less harm to the world for the reasons Akerlof and Romer explain in their article on looting. One sad irony is that former senior Bank Board economists now work for Michael Milken.

Similarly, Richard Pratt, Gray’s predecessor, tasked the agency’s economists with exploiting a “natural experiment” provided by the diverse asset powers granted by the states and the federal government. The economists found that Texas-chartered S&Ls reported the highest earnings in the Nation. At that time, the State of Texas had the greatest deregulation of asset investment powers and one of the weakest supervisory staffs in the Nation. Pratt and the economists never considered the reality that the higher reported profits among Texas-chartered S&Ls was produced because its combination of deregulation and desupervision created the most criminogenic environment for S&L control frauds and that such S&Ls were guaranteed to report extreme (fictional) profits on our their commercial real estate loans.

By choosing Texas’ deregulation as the template for federal deregulation he had created an environment that was inherently criminogenic and which also triggered an even more criminogenic regulatory “race to the bottom” that was “won” by Texas and California. S&Ls in those two states produced 60% of total resolution costs for the S&L debacle. When Pratt, an economist, listened to the advice of economists instead of experienced examiners he made a grave regulatory mistake.

Starting from these deep holes dug by the regulators’ mistake in listening to economists, however, the overall supervisory response to the S&L debacle can now be appreciated because it can be contrasted with the conduct of supervision during the recent crisis. S&L reregulation and resupervision began at Gray’s direction within a year of Congress passing the Garn-St Germain Act of 1982. As I have previously explained in detail, Gray took on – simultaneously – the Reagan administration, OMB, a majority of the members of the House, Speaker of the House James (Jim) Wright, the five U.S. Senators who became known as the “Keating Five,” the state S&L commissioners, the industry trade association (ranked number three in the U.S. by some political scientists in terms of national political power), over 300 control frauds growing annually at more than 50 percent, and the media. He stopped cold two of the primary means by which new frauds were gaining control over S&Ls. Gray made the closure of the frauds the agency’s top priority, even though they reported high profitability, and their prosecution the agency’s second-highest priority. Gray adopted a rule raising capital requirements and limiting growth that no only limited losses but struck the Achilles’ “heel” of every accounting control fraud scheme – the need for rapid growth. Gray personally selected and recruited the Nation’s two best financial supervisors to run the Texas and California regions beset by the worst frauds. These two supervisors transformed supervision. Under Joe Selby, the agency deliberately burst a commercial real estate bubble in the Southwest.

In 1990, the examiners working for the top California supervisor, Michael Patriarca, identified a new loan product being offered under the euphemism “low documentation” (“low doc”) loans. Like all good major U.S. financial fraud schemes it began in Orange County, California. Our examiners promptly identified the loan product as inherently fraudulent. Home loans made without prudent underwriting produce severe “adverse selection” which causes a “negative expected value” from making such loans. Despite being in the sixth year of continual mobilization against control frauds in one of the epicenters of such frauds, Patriarca recognized the danger posed by allowing a new accounting fraud epidemic to take root. He broke out a team and we began successfully to drive liar’s loans out of the S&L industry beginning in 1991.

“The S&L crisis, however, was also caused by misunderstanding. Neither the public nor economists foresaw that the regulations of the 1980s were 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 & Romer 1993: 60).”

In sum, once Pratt, the economist, relinquished control of the agency, the S&L regulators, in circumstances in which it seemed objectively impossible to succeed, acted so successful that a raging epidemic of accounting control fraud was checked before it could cause even a mild recession. Gray’s key supervisory hires outlasted his term of office and prevented an incipient epidemic of what we now call fraudulent “liar’s” loans from causing even a half billion in losses. There was no crisis and no recession arising from liar’s loans in this era.

Tirole knows about the “C’s” of loan underwriting – they’re in his book on corporate finance. Because he has not read, or failed to understand, the relevant literature on the S&L debacle he not only proved that hindsight about that debacle suffered from galloping myopia rather than being 20:20. Effective loan underwriting had to be eviscerated for the epidemics of loan fraud to rage as they were when he wrote and published his book on corporate finance in early 2006. Tirole failed to recognize or understand the criminogenic environments that produced the three epidemics of home lending fraud that were evident at the time he wrote his book. There is no evidence that he understands those three fraud epidemics even today. He exemplifies the tragedy and staggering opportunity costs of economics and economists.

Previous Post

U.S. Stocks Battle Global Slowdown

Next Post

11 October 2014 Unemployment Claims Rolling Average Drops to Levels Not Seen Since June 2000

Related Posts

Why Is The SEC Suing Binance?
Business

Why Is The SEC Suing Binance?

by John Wanguba
June 6, 2023
Bitcoin Has Been ‘Killed’ 474 Times But Its Still Alive And Kicking
Economics

Bitcoin Has Been ‘Killed’ 474 Times But Its Still Alive And Kicking

by John Wanguba
June 5, 2023
Japanese Regulators Issue Stern Warning To OpenAI For Data Collection
Business

Japanese Regulators Issue Stern Warning To OpenAI For Data Collection

by John Wanguba
June 5, 2023
What Are BRC-30 Tokens?
Econ Intersect News

What Are BRC-30 Tokens?

by John Wanguba
June 2, 2023
XRP Explosive Boom Results In Record-Breaking Address Activity
Economics

XRP’s Explosive Boom Results In Record-Breaking Address Activity

by John Wanguba
June 1, 2023
Next Post

11 October 2014 Unemployment Claims Rolling Average Drops to Levels Not Seen Since June 2000

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Browse by Category

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized

Browse by Tags

adoption altcoins bank banking banks Binance Bitcoin Bitcoin adoption Bitcoin market blockchain BTC business China crypto crypto adoption cryptocurrency crypto exchange crypto market crypto regulation decentralized finance DeFi Elon Musk ETH Ethereum Europe Federal Reserve finance FTX inflation investment market analysis Metaverse NFT nonfungible tokens oil market price analysis recession regulation Russia stock market technology Tesla the UK the US Twitter

Archives

  • June 2023
  • May 2023
  • April 2023
  • March 2023
  • February 2023
  • January 2023
  • December 2022
  • November 2022
  • October 2022
  • September 2022
  • August 2022
  • July 2022
  • June 2022
  • May 2022
  • April 2022
  • March 2022
  • February 2022
  • January 2022
  • December 2021
  • November 2021
  • October 2021
  • September 2021
  • August 2021
  • July 2021
  • June 2021
  • May 2021
  • April 2021
  • March 2021
  • February 2021
  • January 2021
  • December 2020
  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • October 2018
  • September 2018
  • August 2018
  • July 2018
  • June 2018
  • May 2018
  • April 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • October 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • May 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • July 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • May 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • June 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • November 2013
  • October 2013
  • September 2013
  • August 2013
  • July 2013
  • June 2013
  • May 2013
  • April 2013
  • March 2013
  • February 2013
  • January 2013
  • December 2012
  • November 2012
  • October 2012
  • September 2012
  • August 2012
  • July 2012
  • June 2012
  • May 2012
  • April 2012
  • March 2012
  • February 2012
  • January 2012
  • December 2011
  • November 2011
  • October 2011
  • September 2011
  • August 2011
  • July 2011
  • June 2011
  • May 2011
  • April 2011
  • March 2011
  • February 2011
  • January 2011
  • December 2010
  • August 2010
  • August 2009

Categories

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized
Global Economic Intersection

After nearly 11 years of 24/7/365 operation, Global Economic Intersection co-founders Steven Hansen and John Lounsbury are retiring. The new owner, a global media company in London, is in the process of completing the set-up of Global Economic Intersection files in their system and publishing platform. The official website ownership transfer took place on 24 August.

Categories

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized

Recent Posts

  • Why Is The SEC Suing Binance?
  • Bitcoin Has Been ‘Killed’ 474 Times But Its Still Alive And Kicking
  • Japanese Regulators Issue Stern Warning To OpenAI For Data Collection

© Copyright 2021 EconIntersect - Economic news, analysis and opinion.

No Result
View All Result
  • Home
  • Contact Us
  • Bitcoin Robot
    • Bitcoin Profit
    • Bitcoin Code
    • Quantum AI
    • eKrona Cryptocurrency
    • Bitcoin Up
    • Bitcoin Prime
    • Yuan Pay Group
    • Immediate Profit
    • BitIQ
    • Bitcoin Loophole
    • Crypto Boom
    • Bitcoin Era
    • Bitcoin Treasure
    • Bitcoin Lucro
    • Bitcoin System
    • Oil Profit
    • The News Spy
    • British Bitcoin Profit
    • Bitcoin Trader
  • Bitcoin Reddit

© Copyright 2021 EconIntersect - Economic news, analysis and opinion.

en English
ar Arabicbg Bulgarianda Danishnl Dutchen Englishfi Finnishfr Frenchde Germanel Greekit Italianja Japaneselv Latvianno Norwegianpl Polishpt Portuguesero Romanianes Spanishsv Swedish