Greenspan's Laissez Fairy Tale: How Flawed Economic Theories Fail to Account for Financial Fraudster

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http://www.alternet.org/economy/153756/greenspan%27s_laissez_fairy_tale%3A_how_flawed_economic_theories_fail_to_account_for_financial_fraudsters/


We continue to witness remarkable developments in the intersection of the related fields of economics, finance, ethics, law, and regulation. Each of these five fields ignores a sixth related field – white-collar criminology. The six fields share a renewed interest in trust.

he key questions are why we trust (some) others, when that trust is well-placed, and when that trust is harmful. Only white-collar criminologists study and write extensively about the last question. The primary answer that the five fields give to the first question is reputation. The five fields almost invariably see reputation as positive and singular. This is dangerously naïve. Criminals often find it desirable to develop multiple, complex reputations and the best way for many CEOs to develop a sterling reputation is to lead a control fraud. Those are subjects for future columns.

This column focuses on theoclassical economics' use of reputation as “trump” to overcome what would otherwise be fatal flaws in their theories and policies. Frank Easterbrook and Daniel Fischel, the leading theoclassical “law and economics” theorists in corporate law, use reputation in this manner to explain why senior corporate officers' conflicts of interest pose no material problem. The most dangerous believer in the trump, however, was Alan Greenspan. His standard commencement speech while Fed Chairman was an ode to reputation as the characteristic that made possible trust and free markets. I've drawn on excerpts from one example: his May 15, 2005 talk at Wharton. I find Greenspan's odes to reputation as the antidote to fraud to be historically inaccurate and internally inconsistent in their logic. Here, I ignore his factual errors and focus on his logical consistency.

“The principles governing business behavior are an essential support to voluntary exchange, the defining characteristic of free markets. Voluntary exchange, in turn, implies trust in the word of those with whom we do business.

Trust as the necessary condition for commerce was particularly evident in freewheeling nineteenth-century America, where reputation became a valued asset. Throughout much of that century, laissez-faire reigned in the United States as elsewhere, and caveat emptor was the prevailing prescription for guarding against wide-open trading practices. In such an environment, a reputation for honest dealing, which many feared was in short supply, was particularly valued. Even those inclined to be less than scrupulous in their personal dealings had to adhere to a more ethical standard in their market transactions, or they risked being driven out of business.'

[Tansy_Gold]

1. You find great stuff!

Criminology, of course, being a specialized branch of sociology, this essay is saying something I've been saying for a long time -- it's not about the numbers, it's about the PEOPLE, and you need to bring in the people sciences -- psychology & sociology -- to understand this.

And as I read through Black's essay, the spectre of Ayn Rand coalesced. Her sociopathy was chillingly apparent.

Greenspan is evil. Not just wrong -- evil.

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2. and 'sensible' people know this

but they keep propping up these jerks.