By William K. Black

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.

Mankiw read these words 19 years ago, but he has never understood what Akerlof and Romer were saying, even though they ended their article with this paragraph in order to emphasize their key policy message.

“Neither the public nor economists foresaw that [S&L deregulation was] 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” (George Akerlof & Paul Romer.1993: 60).

Competition among governments in the financial deregulation context leads to a “race to the bottom” that produces devastating financial deregulation.  The resultant financial deregulation is “bound to produce looting.”  An economist should have no difficulty understanding this point, for classical economists stressed hundreds of years ago that the government’s central function is to prevent crime of force and fraud.  Even Ayn Rand called for the government to prevent fraud.  Because, as Akerlof and Romer stressed, accounting fraud produces a “sure thing” creditors do not exercise effective “private market discipline” against such frauds.  Instead, they rush to fund the frauds’ rapid growth.

Worse, as executive and professional compensation has become far larger and more perverse, creditors and purchasers can grow wealthy by adopting a “don’t ask; don’t tell” policy designed to ignore even endemic fraud.  Charles Calomiris, who is as culpable as any economists for spreading financial deregulatory dogma globally, suggests that the perpetrators may have deliberately created “plausible deniability.”

“asset managers were placing someone else’s money at risk, and earning huge salaries, bonuses and management fees for being willing to pretend that these were reasonable investments. [T]hey may have reasoned that other competi[tors] were behaving similarly, and that they would be able to blame the collapse (when it inevitably came) on an unexpected shock.”

“Who knew?”

In combination, deregulation and perverse compensation are so criminogenic that they can produce green slime in such massive amounts that slime dominates massive aspects of finance.

Mankiw tries to dress up the question of whether governments should compete as a philosophical dispute about the proper role of government.  That is incorrect in the financial regulatory context.  The regulators have to serve as the “cops on the beat” – and economics has emphasized for centuries the essential need for the government to provide such a rule of law and limit fraud and violence.

We know objectively that Mankiw, Bush, and Romney do not actually favor competition in financial regulation – for none of them opposed the OCC and OTS’ scorched earth campaign to preempt state efforts to regulate predatory lending and seek to reduce mortgage fraud.  The states attempted to offer a competitive alternative to Mankiw, Greenspan, Bernake, and Bush’s indifference to fraud by elites.  That competition could have led to vastly better outcomes for the citizens of the States that wished to be most vigorous against fraud and the nation.  Mankiw was Chairman of Bush’s Council of Economic Advisors during the worst excesses of the federal agencies efforts to prevent the states from regulating entities (e.g., bank holding company affiliates not subject to federal regulation) that spread the green slime through the financial system.  He did not oppose preemption.  Mankiw and his political patrons do not favor competition in financial regulation – they favor regulation so weak that it will be ineffective.  They hate financial regulations that are successful because such regulations challenge their world view that denigrates democratic government and government regulators.

Romney’s choice of Mankiw, one of the leading architects of and apologists for the crisis, as his leading economic advisor would be a superb issue for Obama to use in his reelection campaign but for one tiny problem.  The Obama administration’s policies on financial regulation are created by the likes of Rubin, Summers, Geithner, and Bernanke.  They differ only on the margins from Mankiw.  The entire crew of leading economists for the last three Presidents and Romney has proven catastrophically wrong about financial regulation.  The remarkable thing is that they do not drop their dogmas even after they engineer multiple crises over the course of three decades.  We will soon experience the 30th anniversary of the Garn-St Germain Act of 1982, which set off a renewed “competition in laxity” among the States (principally California and Texas; whose S&Ls, collectively, caused roughly two-thirds of all S&L losses) and produced the criminogenic environment that led to the second phase of the S&L debacle.

There are economists and scholars from other fields that have track records of success as financial regulators.  Note to Obama and Romney:  there is no rule requiring you to choose as your leading advisors the purveyors of green slime and crisis.  A significant number of Mankiw’s students walked out of his class to protest his presentation of failed dogma in the guise of economics.  It is time for all of us as citizens to walk out on politicians who choose ethical and economics failures like Mankiw and Geithner as their advisors.

Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.

Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives.

Follow him on Twitter:   @WilliamKBlack

Category: Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

36 Responses to “Romney’s Lead Economist Urges Policies that will Cause the Next Financial Crisis”

  1. Frilton Miedman says:

    Why does a man who makes $21 million a year fight tooth and nail, putting his reputation on the line, his personal life in the limelight for a job that pays $400K?

    A) He has a patriotic sense of duty.

    B) He stands to gain a lot more than we realize.

  2. DSS10 says:

    A neovodoo sock puppet who insults both basic human integrity and intelligence. I bet he wasn’t breast fed and was feberized As an infant.

  3. flocktard says:

    More telling still is Romney’s appointment of Glenn Hubbard, who thinks the axis of the American economy revolves around how low marginal rates can go. Another architect of the crisis during the Bush years, he is arrogant and unapologetic about his government “service.” His appearance in the crisis documentary “Inside Job” is absolutely chilling.

  4. philipat says:

    President Ron Paul. Treasury Secretary Bill Black. I must wake up now!!

  5. illyia says:

    Barry, Thank you for posting this excellent article by Bill Black.
    And, I quite agree with flock re Hubbard in “Inside Job”.

  6. Bob A says:

    beam me up scotty

  7. Dow says:

    I want to ban all of them from ever setting foot near Washington DC again. But I know that’s not how the world really works. You can’t vote them out – they just come back as lobbyists. You can’t prevent them from being lobbyists – they just get themselves appointed to prominent positions.

    Vampire squids, each and every one of them.

  8. Iamthe50percent says:

    @Frilton Miedman

    C) He craves power.

    D) He craves the attention and adulation of the masses. i.e. Fame

    These two are intoxicants more deadly than cocaine and heroin.

  9. Bill Wilson says:

    Do “economic advisers” get appointed for their economic advice, or do they get appointed to please the candidate’s most important supporters, and to help the candidate raise money.

  10. Sunny129 says:

    INSIDE JOB didn’t wake up the American sheeple nor bring the issues for discussion into the main stream. Corporatocracy made sure that it got ignored.

    Business as usual continues!

  11. louis says:

    Cool, I like bubbles. The real America would of failed and rebuilt itself. We live in the matrix

  12. theexpertisin says:

    The upcoming Presidential election campaign will be the nastiest in our history.

    May the most prolific liar be defeated.

  13. Dr. Goose says:

    The enablers of fraudulent crises,
    Reluctant to give up their vices,
    Periodically line up
    For pols who will sign up
    To learn what their fiscal advice is.

  14. Francois says:

    I ain’t Henry VI but I’ll play Francois I here: “The first thing we do, let’s kill all the economists

    (Well…almost all of them) :-D

  15. 4whatitsworth says:

    Hmm, smells like political selection.. I searched my new computer for “just the facts mam” and found this.

  16. [...] – If US presidents can talk to any economist, why these ones? [...]

  17. JoeMilkedACow says:

    Economists can’t agree and do not conduct empiracal analysis. How did they get so much power? Wouldn’t financiers be more practical and do a better job? Oh, yes, there is still the “protect my cash” mentality.

  18. ConscienceofaConservative says:

    There’s a bigger issue here that you touched upon but could have expanded upon further. That while we get new candidates for President, the teams and ideas get recycled, so we get a Greg Mankiw with every Republican and a Larry Summers with every Democrat. I can’t help but notice how many ex Clinton people are serving in the Obama administration at all levels, I suspect we would see something similar to some degree if Romney comes in. To a large extent in an election we’re faced with the old Republican policies or the old Democratic ones.

  19. alexanderdelarge says:

    William K. Black , J.D., Ph.D. is Associate Professor of Law and Economics at the University of Missouri-Kansas City. Bill Black has testified before the Senate Agricultural Committee on the regulation of financial derivatives and House Governance Committee on the regulation of executive compensation.

    He was interviewed by Bill Moyers on PBS, which went viral. He gave an invited lecture at UCLA’s Hammer Institute which, when the video was posted on the web, drew so many “hits” that it crashed the UCLA server.

    * * *He appeared extensively in Michael Moore’s most recent documentary: “Capitalism: A Love Story.” He was featured in the Obama campaign release discussing Senator McCain’s role in the “Keating Five.” * * *

    (Bill took the notes of that meeting that led to the Senate Ethics investigation of the Keating Five. His testimony was highly critical of all five Senators’ actions.) He is a frequent guest on local, national, and international television and radio and is quoted as an expert by the national and international print media nearly every week. He was the subject of featured interviews in Newsweek, Barron’s, and Village Voice.

  20. Taliesyn says:

    The only upside here would be first Romney would have to win.
    The only other , theoretically , would be the scrutiny of Senate Confirmation Hearing who m, one would hope , would bring out all of this accumulated economic debacle baggage and confront the Mankiw’s with all of the results from their Bush-Wah. How Larry Summers was even suggested, let alone confirmed , remains an affront to any possible cleaning up of the economic mess left by one party rule of both houses of Congress & the White House.
    I can still hear the cries from the Reagan 80′s of “Let the market go” and we did , again , and hit afriggin’ wall….

  21. morning_star says:

    From Richard Cohen, a great article in the Washington Post titled “Mitt Romney, a man of falsehoods”.
    “Among the attributes I most envy in a public man (or woman) is the ability to lie. If that ability is coupled with no sense of humor, you have the sort of man who can be a successful football coach, a CEO or, when you come right down to it, a presidential candidate. Such a man is Mitt Romney.”

    Please place this in your reading queue.

  22. Greg0658 says:

    my 4th in this hour .. gotta go make something* for the good ole usa

    but yesterday during the POTUS oil trading malaise speech – I just had to go get a fav (no link just its name)
    Sufjan Stevens – Seven Swans
    “if you run he will chase you”

    I know potus is stuck playing by the rules – everyone knows
    best wishes – it sucks to be you

    * riiighhhtttt

  23. b_thunder says:

    “Ideology” as it’s practiced today is nothing short of a brain disease.
    It makes people who used to be able to think logically into delusional sociopaths who already started 2 wars, almost bankrupted the country, and about to resume at accelerated pace?

  24. Andrew L says:

    Not important, but I thought I’d note that this quote of the day isn’t right: “Having a little inflation is like being a little pregnant–inflation feeds on itself and quickly passes the “little” mark. —Dian Cohen”

    That’s just not right. 3% inflation, for example, does not feed on itself. Inflation is caused by supply constraints being outweighed by demand.

    Inflation does feed on itself if the central bank starts financing unlimited fiscal deficits, but that’s very, very rare. Or it feeds on itself if there’s union bargaining which drive up costs. But that’s not where we are.

    Sorry, just thought I’d mention that.

  25. VennData says:

    You’re assuming that Glass–Steagall was important. Since no other nation in the world has it, how can it be important. it isn’t. Allowing banks into trading isn’t bad per se, what is bad is allowing them to borrow 40 or 50 to one to do it. If you can’t borrow to trade. all you lose is all of your capital.

    Glass-Steagall removal, so we can be like the rest f the world is only a problem to the GOP media machine trying to deflect blame from Bush and the total control the GOP had to Congress where they legislated the financial crisis to happen in the “Ownership Society.”

  26. AtlasRocked says:

    Good post, BR. We need one of our parties to get this right.

    Write Romney today. It’s not too late to influence him.

    I wrote, I’m urging him to select Bill Black as either chief economist or DoJ leader.

    We have to start prosecuting the crooks and stop the madness that the 1% is the problem. Crime is the problem, not class.

    And we need to return America to adherance to **WRITTEN** not “living document” law. The whole value of a Constitution that protects individual and property rights is it’s rigidity. A flexible, “living” law is not a law at all, it’s a sham. This applies to fiscal laws as well – enforce them as written and put some of these crooks in jail.

    And restore mark-to-market.

  27. Greg0658 says:

    Andy – “if there’s union bargaining which drive up costs” .. play along union guys – just be a little starved today and all will be better tomorrow – you’ll see – trust us
    AR – really – ancient man knew it all .. surely you gest

  28. jbay says:

    When will they hire Becker and Posner I ask you?!?! When!!!! ~ ?

  29. AtlasRocked says:

    “To a large extent in an election we’re faced with the old Republican policies or the old Democratic ones.” – brilliant, ConscienceofaConservative .

    If we don’t have adherance to written law, we have no hope at all. The Democratic party is strongly attached to the idea of “living document” law – finding justices to work around written law instead of amending it. As a result, all legislation – be it conservative or liberal – is worthless, we’re essentially one justice away from a politburo based gov’t while they are in power, doomed to a socialist end game of voting ourselves into poverty and letting “liberal-friendly” industrialists get away with more and more crime. Make no mistake about this looming pain: Ending the crime will end the perceived “goodness” that is called socialism. Constraining gov’t and industry to existing, available tax revenue will take the luster off of how well socialism is perceived to be working. As we watch all the G20 nations flounder under massive debt/citizen, it’s pretty easy to redefine socialism right now:

    Socialism is a political fraud scheme to create the illusion of immediate societal health by creating massive debt for the next generation to pay.

    Sensible people with clear ideas of how legislators words are to be considered golden, the judiciary can only interpret and not create law, and an executive branch that is a police and enforcement function, are critical to returning to good health. Only the libertarian/conservative/republican factions are close to that – and we all know they need some forceful and bold citizens to speak out, influence our malevolent, fellow liberal policy citizens, and make sure the government returns to rule of law, putting fiscal crooks in jail, and ending the sham that middle class gov’t benefits programs are healthy for a country – every country trying democratic socialism is fiscally dying right now. Plato observed and wrote about the same failure: unrestrained Democracy, we are seeing now, over 2400 years ago. We have to try being a constitutional republic again.

  30. 873450 says:

    @AtlasRocked Says:
    Write Romney today. It’s not too late to influence him.


    Romney gets influenced every time his eyes blink. After sucking up to a gun nut whacko celebrity, Ted Nugent, for his endorsement, Romney can’t disavow the gun nut celebrity’s public endorsement wherein he “rhetorically” urged a room full of cheering gun nuts to “target Obama” and “chop his head off” on election day or “take him out” if he is re-elected. The USSS opened an investigation of Nugent. Romney’s response? – (paraphrasing) “Supporters of both candidates should be civil.”

  31. AHodge says:

    black is right of course,
    the la la academics have no idea all it takes for a good– free price discovery– market
    they have no idea what proper good market friendly corporate governance takes
    they actually get paid to promote having feral Hobbsean predators in charge, they are “free”
    free to loot you and me
    our system including tax deductions for “academic support” pays for this overwhelming mudslide of “Economists” who have academically exterminated those capable of thought
    did Black just think up “green slime”? I like it

  32. lburgler says:

    Barry–it’s as old as time.

    I know you’re a gambling man,
    And love is a losing hand.

    People have yet to build systems in which the virtuous win, and the vicious lose.

    Which is why the lie needs to be told: virtue is its own reward.

    And it would be, if it were.

  33. Frilton Miedman says:

    VennData Says:
    April 18th, 2012 at 9:45 am
    “You’re assuming that Glass–Steagall was important.”

    Though I agree extreme leveraging, and the GOP played a major role, Glass-Steagall’s removal was the “permission slip” for the whole thing from the get-go.

    The detail you’re underestimating is the separation between investment banking and commercial banking, it’s no coincidence that within 8 years of removing the law intended to prevent a recurrence of the Great Depression led to a Great Recession.

    The law that disallowed banks from securitizing insurance/loans they originate, is the only reason the banks were able to package liar loans, lie about their ratings to the public, short them or related securities/sectors affected behind closed doors without disclosure, and screw the vast majority of the American public…..actually, they screwed global economies world-wide.

    I’ll agree the GOP has taken the whole “free market” concept overboard, failing to delineate aristocratic/plutocratic tyranny from individual liberty, but Glass-Steagall was the permission slip for it all to happen, the CFMA also played a major role.

  34. RonSmithfan says:

    First of all, who can predict at this point just who Gov. Romney will actually appoint, and submit for appointment approval, to fill the various positions that have influence on economic policy. Secondly, I would much rather place my confidence in an executive such as Romney, versus what we have experienced with Obama over the past term, and, heaven forbid, what would come next once he has the ‘flexibility’ of a lame duck president.

  35. [...] Romney’s Lead Economist Urges Policies that will Cause the Next Financial Crisis [...]