STOCK MARKET WATCH -- Wednesday, 18 April 2012

[Demeter]

8. Romney’s Lead Economist Urges Policies that will Cause the Next Financial Crisis

ROMNEY WANTS TO HIRE LARRY, TIM AND BENNY?

http://www.nakedcapitalism.com/2012/04/romneys-lead-economist-urges-policies-that-will-cause-the-next-financial-crisis.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+NakedCapitalism+%28naked+capitalism%29

Presidential nominees of either U.S. party can secure economic advice from any economist in the world. This makes it all the more amazing and sad that they choose economists with track records of disastrous policy advice. Bill Clinton chose Robert Rubin, George W. Bush chose Gregory Mankiw, Obama chose Lawrence Summers, and Mitt Romney chose Mankiw. Rubin and Summers led the Clinton administration’s efforts to gut financial regulation. Mankiw led the efforts under Bush. Collectively, these efforts created the criminogenic environment that produced endemic financial fraud (“green slime”).

Mankiw Morality

I have often emphasized the importance of George Akerlof and Paul Romer’s 1993 article (“Looting: the Economic Underworld of Bankruptcy for Profit”) to understand the economics of why we suffer epidemics of accounting control fraud and recurrent, intensifying financial crises. Mankiw was the “discussant” when they formally presented their paper. I was also present at their invitation. Mankiw was unconcerned about looting. It was my first introduction to Mankiw morality: “it would be irrational for savings and loans [CEOs] not to loot.” I was appalled, but my outrage at Mankiw paled when I observed that the members of the audience, professional economists, were not even made visibly uncomfortable by such a depraved response to elite fraud. CEOs owe fiduciary duties to the shareholders. Mankiw’s response to the findings that CEOs were looting their shareholders was to praise the rationality of the fraudulent CEOs (if you don’t loot you aren’t moral – you’re insane). One cannot compete with theoclassical economists’ unintentional self-parody.

Mankiw Still Loves the Regulatory Race to the Bottom that Breeds Endemic Green Slime

Mankiw wrote a column in the New York Times praising competition among governments.

I start with a historical note that falsifies Mankiw’s claim that competition among governments is desirable. Mankiw makes an historical argument for his claim that competition among governments is desirable and notes that the “founding fathers were no fools.” In an odd way, we can thank our immensely successful Constitution to the demonstrated disaster produced by governmental competition engendered by the Articles of Confederation. The States competed vigorously – to aid their merchants at the expense of “foreign” States (their neighboring States). They competed to impose more destructive internal tariffs (and other trade barriers) so aggressively that they crippled commerce. This is one of the principal defects that led the committee appointed to reform the Articles to instead junk them and adopt our Constitution. The Constitution created a nation instead of a confederation. The interstate commerce and supremacy clauses were key provisions of the new Constitution because the framers knew that competition among the States and the new federal government could threaten our nation’s survival.

In the context of public finance and financial regulation Mankiw’s praise for such competition demonstrates that he has learned nothing useful from our recurrent crises. This column discusses why competition among governments in financial regulation leads to the criminogenic financial deregulation that produces the epidemics of green slime that drive our financial crises. I have recently explained, in the context of opposing the JOBS Act, why the “regulatory race to the bottom” is an oxymoron designed by regular morons...

AND BILL GOES ON...DELIGHTFULLY