July 20, 2020   |   by admin

I discuss three passages from George Akerlof and Paul Romer’s ) and Paul Romer explained in their famous article (“Looting: The. I have often written and spoken of my frustration that economists refuse to read George Akerlof and Paul Romer’s classic article (“Looting. Looting: The Economic Underworld of Bankruptcy for Profit. Our theoretical analysis shows that an economic underground can come to life if.

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The media ballyhooed the book as if it were an amazing revelation of a fact of surpassing importance. The industry demonized the book and Lewis. DOJ immediately announced it had begun a criminal investigation and the SEC it looying multiple investigations pending. Whether the industry or Lewis is correct about HFT practices which he asserts are lawful is unimportant for some purposes.

Finance Refuses to Take Akerlof and Romer Seriously about Looting

Similarly, the reaction of these three groups to the finding by multiple investigations that 16 of the largest banks in the world committed crimes by setting LIBOR rates through frauds and cartels the largest cartel, by several orders of magnitude, in history was less than a yawn, as I described in prior articles. This installment, however, focuses on detecting loan origination fraud. Two of the three fraud epidemics that drove the financial crisis were in originations. The third fraud epidemic was prompted by the twin loan origination fraud epidemics.

I begin by describing briefly the three accounting control fraud epidemics. By — a decade before the world recognized the crisis — the honest real estate appraisers were already organizing an effort to warn the U. Bythe rival appraiser groups had agreed on, and put on line, a joint petition that they delivered to the relevant federal regulators. Bya repeat survey, found that percentage rose to 90 percent. 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 and Romer expressly endorsed our analysis summarized above in the second bullet point, citing my work in footnote 5 of their paper.

This strategy has many colorful descriptions: Using an analogy with pooting pricing, economists developed a nice theoretical analysis of such excessive risk-takings strategies. The problem with this explanation for events of the s is that someone who is gambling that his thrift might actually make a romeg would never operate the way many thrifts did, with total disregard for even the most basic principles of lending: I quoted this lengthy kaerlof because while it was written over 20 years ago it is so akerlo and directly applicable to the current crisis that if you understand the passage you will understand the current lootinng.


We have a more sophisticated understanding of accounting control fraud today than we did inbut successful analysis of loan origination fraud arises from understanding three key concepts. It all starts with understanding underwriting and why honest lenders try to do it superbly and why the officers controlling fraudulent akerpof deliberately do it so pathetically.

The second concept that needs to lootng understood is the critical role of underwriting documentation. The third concept that must be understood is why lpoting firms treasure effective internal and external controls and why and how lootong controlling officers suborn such controls, turning them into valuable fraud allies.

Economists should have little difficulty understanding these three concepts, but they have a primitive tribal taboo about fraud by business elites. The first two sentences of the quoted passage could lootiny been written today instead of Neoclassical and theoclassical economists continue to ignore Akerlof and Romer and competent regulators and white-collar criminologists. They did so in the italicized portion and in this passage. Once this is clear, it becomes obvious that high-risk strategies that would pay off only xkerlof some states of the world were only for the timid.

The italicized portion of the quotation should be read with care for it is so obviously the definitive explanation of our current lootin as we read the passage today over decades after it was written.

Akerlof and Romer explained the loan underwriting practices that make it clear that the officers controlling the lender are committing accounting fraud.

Akerlof-Romer | Unlearning Economics

Akerlof and Romer are among the rare economists to think closely about why the officers controlling a fraudulent lender would embrace terrible loan documentation and making loans largely to borrowers who were far less likely to repay. There is no fraud exorcist and a lender cannot sell a fraudulently originated loan by informing the buyer that the loan is fraudulent.

That means that there had to be an epidemic of fraudulent mortgage sales to the secondary market. FCIC found that there were an extraordinary proportion of fraudulent reps and warranties in secondary market sales — 46 percent FCIC Because there is no fraud exorcist these frauds propagated throughout the secondary markets.

Like toxic heavy metals, the concentration of these fraudulent loans tended to increase as one went up the financial food chain producing CDOs that were so toxic that they took down the global economy. How many elite CEOs were prosecuted for leading the three most destructive financial fraud epidemics in history? But that understates how little DOJ has done. No elite CEO who became exceptionally wealthy by leading these fraud epidemics has had the wealth they gained through the frauds clawed back.


DOJ has not convicted, clawed back, or even forced the resignation of any non -elite CEO for leading these any of these three frauds. One CEO, Lee Farkas, of a mortgage bank was convicted, but not for fraudulently originating and selling mortgages.

He was prosecuted solely because he tried to defraud TARP which was created after the crisis. We have expertise about fraud. He virtually never identifies even obvious frauds. The frauds we document are vastly more damaging than the abuses Lewis identifies. And many of us have been warning about HFT for years.

Lewis roer a vibrant writer of great talent. He has never claimed any anti-fraud expertise. The first thing that struck me was their framing of the root of the problem as being government guaranteed debt.

My first thought was that anti-government types lootjng see that, ignore everything else and conclude the problem is government, rmer fraud. The link I followed to get to the paper http: The paper shows that the savings and loan crisis was the rsult not of unregulated markets, but of overregulated ones or, at least, poorly regulated ones. After reading the paper, one is left with the impression that the policy mistakes that happened here are probably not isolated, and that the only good solution is to get the government out of this kind akerpof business altogether.

For me this sheds a little light on how work and ideas that should have helped prevent the next crisis got swept under the rug. Subscribe in a reader. Dedicated to modern money theory MMT and policies to promote financial stability and the attainment of full employment. Appraisal Fraud by the Lenders By — a decade before the world recognized the crisis — lootign honest real estate appraisers were already organizing an effort to warn the U. Black b forcefully makes this point. The Epidemic of Fraudulent Mortgage Sales There is no fraud exorcist and a lender cannot sell a fraudulently originated loan by informing the buyer that the loan is fraudulent.

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