Yes, Brooks has recirculated the concept that a handful of "philosopher kings" are all that stands between us and moral ruin (plus endemic financial fraud and recurrent crises). Regulators, of course, are not eligible to be part of this elect.
"[I]f market-rigging is defeated, it won't be by government regulators. It will be through a market innovation in which a good exchange replaces bad exchanges, designed by those who fundamentally understood the old system."
As I have warned repeatedly, anyone who uses military metaphors that assert that fraud can be "defeated" in any field for eternity is sure to be peddling snake oil. But my question is why Brooks thinks he can get away with simply asserting as if it were a fact that regulators are incapable of curiosity and never have a "jolt of pure satisfaction?" Why does he think academics aren't even worthy of his back-of-the-hand dismissal of regulators? Why does he think elite white-collar financial frauds aren't curious and don't get a "jolt of satisfaction" when they figure out how to suborn an employee and turn the "market innovation" that "defeated" "market-rigging" into an optimal means of "market rigging" that thrives on the philosopher kings' complacency.
We Know Why the CEOs Leading Control Frauds Fear Regulators and Prosecutors
There's no mystery why Charles Keating ordered his thug to make his "Highest Priority" the effort to "GET BLACK " KILL HIM DEAD" (all caps in original). He viewed us as the regulatory cops on the beat that could stop his fraud schemes, recover any remaining proceeds, and imprison him. There's also no question but that Keating viewed us as having vastly too much curiosity, dedication, and competence and too little greed for his liking. Theoclassical economists have mounted an unholy war to discredit and intimidate regulation and regulators -- and to replace them with anti-regulators -- for over a century, as Nomi Klein documents in All The Presidents' Bankers.
In the recent crisis, Clinton and Bush appointed anti-regulators who created a self-fulfilling prophecy of "regulatory failure." It would be absurd to infer from such a planned failure that regulation must fail. If you had let me appoint Charles Keating to run any corporation in the world the result would have been a catastrophic failure -- that does not mean that private ownership must fail. Clinton and Bush ran financial regulation by appointing the equivalents of Vidkun Quisling as our anti-regulatory leaders.
The mystery is why progressives, moderates, and conservatives have given up on regulation and regulators. Classical economists -- and Ayn Rand, von Mises, and von Hayek -- agreed that the government should prohibit and prosecute fraud. The consequences for honest business people of failing to prevent widespread fraud are often disastrous because it can create a "Gresham's" dynamic in which bad ethics drives good ethics from the markets and professions. Our paramount job as financial regulators is to seek to detect and sanction elite control frauds so that we prevent such a Gresham's dynamic by preventing cheaters from gaining a competitive advantage. George Akerlof explained the dynamic in his classic 1970 article on markets for "lemons" (often an example of an anti-purchaser control fraud).
"[D]ishonest dealings tend to drive honest dealings out of the market. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence" (Akerlof 1970).
Non-economists have observed the Gresham's dynamic long before Akerlof's article.
"The Lilliputians look upon fraud as a greater crime than theft. For, they allege, care and vigilance, with a very common understanding, can protect a man's goods from thieves, but honesty hath no fence against superior cunning. . . where fraud is permitted or connived at, or hath no law to punish it, the honest dealer is always undone, and the knave gets the advantage" (Swift, J., Gulliver's Travels).
In future columns in this series I will provide examples of frauds becoming ubiquitous. Recall that I demonstrated in the first piece in this series that SEC investigators found that the CEOs and/or CFOs were involved in over 90% of the securities fraud cases in which the SEC took and enforcement action. Competent regulatory "cops on the beat" who root out control frauds are not simply helpful to honest businesses -- they are essential to their ability to survive and prosper.
The widespread view that regulation is hopeless because regulators are sure to fail to stand up to the banks or hopelessly late to understand changes in banks is false. George Akerlof and Paul Romer researched that claim in the course of preparing their 1993 article entitled "Looting: The Economic Underworld of Bankruptcy for Profit." They concluded:
"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).
With the advantage of hindsight from the scale of the current crisis we can finally begin to appreciate the many trillions of dollars saved because of the periods of effective financial regulation, supervision, enforcement, and criminal prosecutions that contained the S&L debacle. Effective S&L reregulation began Bank Board Chairman Edwin Gray during the Reagan administration (much to its horror) in late 1983. That was one year after the bipartisan passage of the Garn-St Germain Act of 1982 that triggered the state v. federal regulatory "race to the bottom" that made the industry so criminogenic. The first act of effective reregulation in the current crisis began to become enforceable in 2009 -- 16 years after the Clinton/Gore administration's anti-regulatory assault under the guise of "Reinventing Government" began in 1983. The S&L debacle cost under $150 billion. The current crisis in America caused over $11 trillion in losses in household wealth, over $20 trillion in lost production, and over 10 million jobs. Effective financial regulation costs very little and its benefits are extraordinary.
Successful regulation is not limited to efforts to prevent, identify, and sanction financial frauds. Many forms of control fraud or non-fraudulent business practices maim and kill. Safety and anti-pollution regulation anti-smoking campaigns have saved the lives of hundreds of thousands of people.
The Folly of Defeatism
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