Our reregulation in 1983-1987 was denounced by OMB, but as an independent regulatory agency we were not subject to OMB's views on "cost-benefit analysis." OMB was so enraged by our reregulation that it threatened to file a criminal referral against Chairman Gray for the "crime" of closing too many insolvent S&Ls! We do not have to guess what OMB would have done to our reregulation of the S&L industry had we been subject to OMB's "cost-benefit analysis" -- they would have destroyed the reregulation that saved the Nation from catastrophic harm.
Has OMB never read Akerlof & Romer (1993)?
George Akerlof and Paul Romer concluded their famous 1993 article ("Looting: The Economic Underworld of Bankruptcy for Profit") with this paragraph in order to emphasize their central finding.
"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).
Note three things that are very unusual about the paragraph. First, their language is blunt and stark -- deregulation was "bound to produce looting." Second, they are writing to their own profession -- economists. Third, they are praising the "regulators in the field" "who understood what was happening from the beginning." Akerlof was made a Nobel Laureate in 2001. In any scientific field, such a stark warning by a Laureate would (1) be acknowledged by any other scholar in the field who was purporting to provide a "Primer" on the subject and (2) would be followed by any other scholar in the field or (very rarely) explicitly contested through a tightly reasoned examination of the evidence. But OMB simply ignores Akerlof and Romer's article on looting and Akerlof's 1970 article (on "lemons") describing the Gresham's dynamic arising from 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." George Akerlof (1970).
The Primer also ignores effective financial regulators and white-collar criminologists, but its theoclassical authors have no knowledge about such matters.
The Primer Could Never Survive Competent Benefit-Cost Analysis
The Primer could never survive a competent benefit-cost analysis. Beneath a patina of faux neutrality lies a core that is sharply antagonistic to effective regulation. The OMB should, years ago, have revisited the decisions to increase the three "de's" from 1993-2008 and why OMB supported acts that were "bound to produce looting." OMB needed to revisit the dogmas cited in support of these acts of regulatory self-mutilation and examine why those dogmas proved so attractive to OMB and the agencies' lead anti-regulators. Instead, the Primer starts out with a presumption against regulation. The Primer treats regulation as inferior to "markets" rather than understanding that regulation -- the rule of law -- is essential to the creation of effective markets in which honest competitors will prevail (as Akerlof keeps explaining to them).
Even when regulation is essential, the Primer expresses a strong presumption against effective regulation and in favor of regulatory approaches we know will fail and prove criminogenic. During the lead up to the financial crisis this same anti-regulatory approach was used as the excuse to gut effective regulation. The Obama administration Primer describes itself as a guide to complying with OMB Circular A-4 (September 17, 2003).
The Circular was crafted to advance the Bush administration's efforts to destroy effective regulation. The date of the Circular demonstrates the depth of the anti-regulatory dogma that captured OMB. There is a huge literature on "regulatory capture," but it frequently ignores the central role of the OMB as the "vector" that spreads the anti-regulatory dogmas that maximize the three "de's." Within two years of the criminogenic environment, created by the intersection of the three "de's," the rise of modern executive and professional compensation, and the death of effective private market internal discipline with the removal of true partnerships with joint and several liability, that produced the accounting control fraud epidemic that defined the Enron-era frauds the OMB was actively trying to enshrine the three "de's" as the ideal policy.
OMB's response to the Enron-era frauds -- let's expand the three "de's" and make the financial world even more criminogenic -- explains why we suffer recurrent, intensifying financial crises. It is essential to keep in mind that by September 21, 2003 the next three epidemics of accounting control fraud that would produce our current crisis were already enormous. OMB was pushing to make things worse in response to unambiguous warnings of those frauds. The report of the Financial Crisis Inquiry Commission (FCIC) revealed that:
"From 2000 to 2007, a coalition of appraisal organizations " delivered to Washington officials a public petition; signed by 11,000 appraisers". [I]t charged that lenders were pressuring appraisers to place artificially high prices on properties [and] "blacklisting honest appraisers" and instead assigning business only to appraisers who would hit the desired price targets"( FCIC 2011: 18).
Note that the written warning was delivered a year before Enron's failure and roughly three years before OMB issued the Circular that was crafted to make the financial realm even more criminogenic. The appraisers' warning was the clearest signal OMB could hope to receive. It was totally credible. It identified the fraud as coming from the lenders. No honest lender would ever inflate an appraisal -- much less commit a felony of extorting an appraiser to inflate an appraisal. The practice is unambiguous proof that the lenders' controlling officers are leading an accounting control fraud. The warning is a superb example of how the fraudulent officers controlling the lenders deliberately generated a "Gresham's" dynamic to suborn professionals (appraisers) to aid and abet their frauds. Given the frequency of the appraisal fraud and the frequency of secondary market sales it was also unambiguous that the same controlling officers had to be making fraudulent "representations (reps) and warranties" to sell the fraudulently originated loans to the secondary market.
OMB, however, rather than leading an emergency, top priority effort to end the criminogenic environment producing the fraud epidemics did the opposite. Indeed, the situation is actually worse than FCIC indicates, for the rival appraisal organizations began their efforts to warn the federal government in 1998. It took the rivals two years to settle on a common strategy (the petition) and a common text for that petition. The banking regulatory agencies all employed appraisers and one of the tasks assigned those appraisers was to keep abreast of the key issues in appraisals, so the Clinton administration's anti-regulatory appointees knew no later than 1998 that an epidemic of appraisal fraud was growing.
The current financial crisis had its roots in the rapid expansion of the three "de's" that began in 1983 when the Clinton/Gore administration made "Reinventing Government" its leading domestic policy initiative once the health care initiative collapsed. This began to sow the seeds of the current crisis.
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