Financial Analysis of USA, Inc.

[porter]

http://images.businessweek.com/mz/11...ekerusainc.pdf

[c1ue]

Re: Financial Analysis of USA, Inc.

Still reading through, but I really hope the Mary Meeker in this report isn't the same Mary Meeker of "Epic Fail" Internet 1.0 pandering fame.

Secondly in the first 75 pages, the presentation could have been liberated directly from a Koch Brothers' hit campaign: everything is due to Medicare and Social Security.

Defense does finally get mentioned around page 70, but is termed "low" compared to 1948-2000 spending. No mention whatsoever of why it is necessary to spend as much as the 'Cold War' era. Equally no mention of the role of health care and retirement benefits in Defense spending, or of Defense's huge percentage of 'off budget' spending.

[dcarrigg]

Re: Financial Analysis of USA, Inc.

Still reading through, but I really hope the Mary Meeker in this report isn't the same Mary Meeker of "Epic Fail" Internet 1.0 pandering fame.

Secondly in the first 75 pages, the presentation could have been liberated directly from a Koch Brothers' hit campaign: everything is due to Medicare and Social Security.

Defense does finally get mentioned around page 70, but is termed "low" compared to 1948-2000 spending. No mention whatsoever of why it is necessary to spend as much as the 'Cold War' era. Equally no mention of the role of health care and retirement benefits in Defense spending, or of Defense's huge percentage of 'off budget' spending.

C1ue, I generally agree with you, but this time it comes from a massive venture firm that plays the field with political contributions, but is very heavily in the Dem camp.

This is the same Meeker who's advice to buy and hold AOL did everyone so well. (by the way, that doctorate's honorary). Hell, "You've got mail!" was even a movie. How can't the stock go up ad infinitum? Oh, and working so closely with Morgan Stanley, it's no wonder this report loves socializing risk.

To sum it up:
1) US is a corporation
2) Funds that go to banks/insurance are assets
3) Funds that go to individuals are liabilities
4) Assets = good; liabilities = bad
5) The only solution is to screw the middle class

For a (slightly) more detailed rebuke:

Firstly, I resent the USA Inc. comparison. For reasons why see all other threads on this site going back years. Nations are not corporations, nor should they be. Period.

Secondly, even though it points to entitlement spending as the biggest problem, the wage base is only mentioned in a footnote - even then with only round numbers preceded by a tilde.

Thirdly, in her version of the world, either taxes have to go up on everyone or benefits have to be decreased. It's presented as if congress has no power to legislate whatsoever. It reminds me of Steve Forbes and those little unblinking eyes staring calmly through the television repeating "flat tax" as if he were the Aflac bird. Americans didn't buy that garbage then, and I still think they won't now.

Really, slides 21 and 210 are all one has to read.

Outsource .gov functions? Check. Raise retirement age and reduce benefits? Check. Remove regulations? Check. Remove the big middle class tax subsidies (children, mortgage etc)? Check. Don't mention large subsidies mainly used by the very wealthy? Check. Calculates social security excluding trust fund interest income? Check.

Sets up a balance sheet? Check. Money to banks counted as 'assets' on the balance sheet? Check. Money to retirees who paid in all their lives counted as liabilities on balance sheet? Check.

She has the nerve to call this "Mathematical." It's not even mathamagical. It's simply ideological (like almost all policy).

Really, any report like this should present and compare a range of options rather than a prescription. It quotes the CBO, but if the CBO ever put out anything this partial, there'd be hell to pay.

The real question is, why would a VC firm hire her away from Morgan Stanley at the end of November, take this work with her, then have her put this together and get it out for Feb.? What's the angle here? What do they gain? There has been some talk of KP lobbying for online gambling, but how does that align with this report? There are the direct money grabs, but that's industry standard in the big leagues. I'm not sure what point this serves other than to provide additional cover for working towards some sort of budget "compromise."

Keep in mind that it is you who will be "compromised."

Either way, this "non-partisan" report is certainly anti-middle class. Maybe they should have called it "bi-partisan?"

My vote?

[LargoWinch]

Re: Financial Analysis of USA, Inc.

C1ue, I generally agree with you, but this time it comes from a massive venture firm that plays the field with political contributions, but is very heavily in the Dem camp.

This is the same Meeker who's advice to buy and hold AOL did everyone so well. (by the way, that doctorate's honorary). Hell, "You've got mail!" was even a movie. How can't the stock go up ad infinitum? Oh, and working so closely with Morgan Stanley, it's no wonder this report loves socializing risk.

To sum it up:
1) US is a corporation
2) Funds that go to banks/insurance are assets
3) Funds that go to individuals are liabilities
4) Assets = good; liabilities = bad
5) The only solution is to screw the middle class

For a (slightly) more detailed rebuke:

Firstly, I resent the USA Inc. comparison. For reasons why see all other threads on this site going back years. Nations are not corporations, nor should they be. Period.

Secondly, even though it points to entitlement spending as the biggest problem, the wage base is only mentioned in a footnote - even then with only round numbers preceded by a tilde.

Thirdly, in her version of the world, either taxes have to go up on everyone or benefits have to be decreased. It's presented as if congress has no power to legislate whatsoever. It reminds me of Steve Forbes and those little unblinking eyes staring calmly through the television repeating "flat tax" as if he were the Aflac bird. Americans didn't buy that garbage then, and I still think they won't now.

Really, slides 21 and 210 are all one has to read.

Outsource .gov functions? Check. Raise retirement age and reduce benefits? Check. Remove regulations? Check. Remove the big middle class tax subsidies (children, mortgage etc)? Check. Don't mention large subsidies mainly used by the very wealthy? Check. Calculates social security excluding trust fund interest income? Check.

Sets up a balance sheet? Check. Money to banks counted as 'assets' on the balance sheet? Check. Money to retirees who paid in all their lives counted as liabilities on balance sheet? Check.

She has the nerve to call this "Mathematical." It's not even mathamagical. It's simply ideological (like almost all policy).

Really, any report like this should present and compare a range of options rather than a prescription. It quotes the CBO, but if the CBO ever put out anything this partial, there'd be hell to pay.

The real question is, why would a VC firm hire her away from Morgan Stanley at the end of November, take this work with her, then have her put this together and get it out for Feb.? What's the angle here? What do they gain? There has been some talk of KP lobbying for online gambling, but how does that align with this report? There are the direct money grabs, but that's industry standard in the big leagues. I'm not sure what point this serves other than to provide additional cover for working towards some sort of budget "compromise."

Keep in mind that it is you who will be "compromised."

Either way, this "non-partisan" report is certainly anti-middle class. Maybe they should have called it "bi-partisan?"

My vote?

Excellent post dcarrigg.

[c1ue]

Re: Financial Analysis of USA, Inc.

C1ue, I generally agree with you, but this time it comes from a massive venture firm that plays the field with political contributions, but is very heavily in the Dem camp.

Yes, indeed, it does seem that Dr. Michael Hudson has been and continues to be correct: that the rentiers are now focused on attacking entitlements. And Republican/Democrat is irrelevant.

[dcarrigg]

Re: Financial Analysis of USA, Inc.

C1ue, I generally agree with you, but this time it comes from a massive venture firm that plays the field with political contributions, but is very heavily in the Dem camp.
...
The real question is, why would a VC firm hire her away from Morgan Stanley at the end of November, take this work with her, then have her put this together and get it out for Feb.? What's the angle here? What do they gain? There has been some talk of KP lobbying for online gambling, but how does that align with this report? There are the direct money grabs, but that's industry standard in the big leagues. I'm not sure what point this serves other than to provide additional cover for working towards some sort of budget "compromise."

Keep in mind that it is you who will be "compromised."

Either way, this "non-partisan" report is certainly anti-middle class. Maybe they should have called it "bi-partisan?"

Now, who wants to bet that this report will be somehow tied up with the new Obama deficit reduction proposal - at least as a talking point? It's still on Kleiner Perkins' front page. Obama comes up with the announcement on Wednesday. Social Security, Medicare, and Medicaid are on the chopping block - just like slide 21. Perhaps he will propose to go back to pre-Bush era tax rates (certainly no more than that), but in the end he'll 'give it up' for some nonsensical 'trade-off' with 'unreasonable' Republicans.

My guess is that we will see a Democrat-lead 'reluctant' charge for the least progressive tax structure in a century with a moderate reduction in benefits for some entitlement programs, an increase in retirement age for youth toady, the end of a few 'pseudo-entitlement' discretionary spending programs (non-defense), proposed cuts in the few defense programs that Gates doesn't find necessary, and another compulsory give-away to finance and insurance for setting it all up.

Let us see how much middle class hide they propose to cleave.

The bipartisan pom-poms are out for "Gini point five five by 2025!"

[BigBagel]

Re: Financial Analysis of USA, Inc.

http://www.kpcb.com/team/index.php?Mary%20Meeker

Mary Meeker bio.

[chr5648]

Re: Financial Analysis of USA, Inc.

Nations are not corporations, nor should they be. Period.

What are nations then? Are they a group of people? What constitutes being part of that group?

Seems to me like the brand (America) and the product (democracy) have been selling pretty well? /s

Now, who wants to bet that this report will be somehow tied up with the new Obama deficit reduction proposal - at least as a talking point? It's still on Kleiner Perkins' front page. Obama comes up with the announcement on Wednesday. Social Security, Medicare, and Medicaid are on the chopping block - just like slide 21. Perhaps he will propose to go back to pre-Bush era tax rates (certainly no more than that), but in the end he'll 'give it up' for some nonsensical 'trade-off' with 'unreasonable' Republicans.

If you ever take a finance 101 class in college or go through a textbook on finance, you will see that the most basic concept of finance is to be able to price a cash flow in period 1 and then price that cash in/outflow value in period 1+t. Its as simple as that, this can also be construed in terms of inflows in one period and outflows in another, etc. This is what happens on wall street and in banks, derivatives, swaps, options, etc. are part of this system. If you abstract all these entitlement programs enough, you will see that they too are nothing more than the pricing of a cash flow in one period and then the outflow in another along with inflows from future generations. There is very little evidence that over the longterm cash flows can be priced correctly, wall street constantly screws up.

To think that the government would be able to price a cash flow in one period to another is crazy. Its not even in their interest to do it correctly. The system was never intrinsically going to work, entitlement programs do no pass the test of mathematical logic. A lot of hope and the futures of many peoples retirements are hinging on SS, a system that had no scientific or empirical evidence of working.

It was destined for failure from the beginning, why cry about it now?

[dcarrigg]

Re: Financial Analysis of USA, Inc.

I will not delete what I have written, but I did want to be more civil.

chr5648, I am not mad at you for what you wrote. I am damn mad at the discourse coming out of Washington these days. I am damn mad that there is bipartisan support for pulling the plug on equality of opportunity. This is not your fault.

What you do not realize or internalize, at least from what I gather in your post, is that legislation controls the inputs and outputs of the system.

You describe, in terms of a finance course, what would happen if legislators did not control the money supply, the inputs to social security, and the benefits that we get.

Eliminate the wage base, and your cash flow problem is eliminated too. You are analyzing a situation from within the rules. The rules do not apply to the rulemakers. Rules are neither static nor sedentary in a popular government. My work has taught me clearly that those who control the rules of the game cannot lose. Many have not had that same experience, and work long and hard maximizing profit within an existing rulescheme. It is a useful skill, but it does not apply to government. When people try to apply it to government, I take offense. I mean you no disrespect.

What are nations then? [if not corporations] Are they a group of people? What constitutes being part of that group?

Here's an easy one. "A nation is a grouping of people who share real or imagined common history, culture, language or ethnic origin, often possessing or seeking its own government." A nation may issue its own currency. A nation ruled by laws may legislate into existence money, property, people, or time.

A nation's goal is not profit, but the settling of governance of a people.

This holds true no matter what you learned in Finance 101.

Seems to me like the brand (America) and the product (democracy) have been selling pretty well? /s

It is not a product, but a philosophy. It is not a brand, but a gun. It is not selling, but credit.

One can couch government in terms of a corporation, but a nation does have a responsibility to provide for the safety and wellbeing of itself and its own. A corporation has no such responsibility besides those which are mandated by a government.

If you ever take a finance 101 class in college or go through a textbook on finance, you will see that the most basic concept of finance is to be able to price a cash flow in period 1 and then price that cash in/outflow value in period 1+t. Its as simple as that, this can also be construed in terms of inflows in one period and outflows in another, etc.

Nice math. I have a magic 8-ball. Is there any scientific or empirical evidence of finance 101 working? Keep in mind that merchants made money and governments and social programs existed millennia before Finance 101. Government creates the currency with which you gamble. Sources point to no. Is the whole system destined for failure from the beginning then? There's an interesting question - but well beyond the scope of this thread.

This is what happens on wall street and in banks, derivatives, swaps, options, etc. are part of this system. If you abstract all these entitlement programs enough, you will see that they too are nothing more than the pricing of a cash flow in one period and then the outflow in another along with inflows from future generations. There is very little evidence that over the longterm cash flows can be priced correctly, wall street constantly screws up.

If you abstract all of these concepts enough you will find that fermion interactions in a complex dynamic system are the root cause of thought formation. If the Romans couldn't price cash flows, they'd never be able to import enough grain from north Africa to feed the eastern empire. Also, wall street constantly screws up. In the long run we're all dead. So what? We should give up everything to the plutocrats now?

To think that the government would be able to price a cash flow in one period to another is crazy. Its not even in their interest to do it correctly. The system was never intrinsically going to work, entitlement programs do no pass the test of mathematical logic. A lot of hope and the futures of many peoples retirements are hinging on SS, a system that had no scientific or empirical evidence of working.

It was destined for failure from the beginning, why cry about it now?

You show me the hard science behind any essentially contested concept and I'll show you a sophomore student of philosophy that will make you cry. This is social science, bub, and all Laffer Curves and cash flow models in the world won't change the fact that people don't like to see old-folk out on the street. You cry about abstract (and fundamentally incorrect) mathematical principles in a finance textbook. I'll cry about people. We'll see who's funeral is better attended.

[chr5648]

Re: Financial Analysis of USA, Inc.

Nice math. I have a magic 8-ball. Is there any scientific or empirical evidence of finance 101 working? Keep in mind that merchants made money and governments and social programs existed millennia before Finance 101. Government creates the currency with which you gamble. Sources point to no. Is the whole system destined for failure from the beginning then? There's an interesting question - but well beyond the scope of this thread.

You pretty much summed up my whole point there, wall street pricing cash flows has failed miserably and so has government, its not just the US but, a whole bunch of western governments and all over the world have failed, just as a whole bunch of banks have failed. The same 'mistakes' keep getting repeated over and over but, the only 'mistake' is believing it was a 'mistake'.

Its also those same old people your gonna cry about that get screwed over in country after country and generation after generation. History is repeating itself. You mention it is beyond the scope of this thread. Lets find a thread to discuss this.

[dcarrigg]

Re: Financial Analysis of USA, Inc.

C1ue, I generally agree with you, but this time it comes from a massive venture firm that plays the field with political contributions, but is very heavily in the Dem camp.

This is the same Meeker who's advice to buy and hold AOL did everyone so well. (by the way, that doctorate's honorary). Hell, "You've got mail!" was even a movie. How can't the stock go up ad infinitum? Oh, and working so closely with Morgan Stanley, it's no wonder this report loves socializing risk.
...
The real question is, why would a VC firm hire her away from Morgan Stanley at the end of November, take this work with her, then have her put this together and get it out for Feb.? What's the angle here? What do they gain? There has been some talk of KP lobbying for online gambling, but how does that align with this report? There are the direct money grabs, but that's industry standard in the big leagues. I'm not sure what point this serves other than to provide additional cover for working towards some sort of budget "compromise."

Keep in mind that it is you who will be "compromised."

Either way, this "non-partisan" report is certainly anti-middle class. Maybe they should have called it "bi-partisan?"

My vote?

Just a follow up. Kleiner Perkins bought up 15% of Lending Club and threw Meeker on the board.

They also just put John Mack on the board a couple of months back. (Former Morgan Stanley CEO)

And then I read this. And this. And this.

And now I'm wondering.

Could you really get a P2P lending bubble going? How big could you get it? Unlimited subprime credit with outrageous originations fees that one can get with the click of a button...it's a familiar concept.

Now we could really make money off of it if only we could keep it unregulated and dice it up into derivatives...oh wait...you know that trick...erm...this time it's different.

Yeah, see, this time it's P2P, and we've got a billion dollar portfolio, and we're partnered with Kleiner Perkins and Morgan Stanley, and this isn't about mortgages so there's additional liquidity....blah blah blah.

Oh. Crap.

This just might work.

Lending Club adds Mary Meeker to board, gets $15M from Kleiner Perkins

By Ki Mae Heussner Jun. 6, 2012, 7:28am PT 1 Comment



Lending Club is bulking up on big-name board members. In an announcement today, the peer-to-peer financing platform said it was adding Kleiner Perkins Caufield & Byers investment partner and former Morgan Stanley analyst, Mary Meeker to its board of directors. The announcement comes about two months after it named Morgan Stanley Chairman Emeritus and former CEO John Mack to its board.

Lending Club also said that it had taken a $15 million equity investment from Kleiner Perkins, as well as a $2.5 million investment from Mack, bringing Lending Club’s total funding to $100 million and its total in unrestricted cash to more than $45 million.

The new funding will not be put to any specific purpose, said Lending Club CEO Renaud Laplanche, but he added that he looks forward to his new partners’ feedback on the business model and strategy. One of the most highly-respected voices in the tech world (who has been called the ‘queen of the net’), Meeker’s blend of financial and tech know-how will no doubt be an asset to the company going forward. And Kleiner Perkins’ influence and track record with top companies like Amazon, Google and Twitter will help the company as it grows, Laplanche said.

“The firm and [Meeker] are going to be very helpful to Lending Club in the next few years,” Laplanche said.

Since its founding in 2006, the platform, which targets high-credit-quality borrowers, has originated more than $650 million in cumulative loans and is adding more than $135 million each quarter in new loans. By November or December, Laplanche said the company expects its portfolio to surpass $1 billion in total loans.

Noting how macro-economic trends impact the marketplace, he said that credit quality has improved as the economy has slowly recovered over the past couple of years. Job creation hasn’t picked up as much as they’d like to see but the pace of job loss – a main reason people default on loans – has declined.

He said the company is growing at 10 percent a month but its biggest challenge is to encourage sustainable and predictable growth for both supply and demand.
“We’re a marketplace,” he said. “It’s really important that we grow both sides at the same rate.”

[lakedaemonian]

Re: Financial Analysis of USA, Inc.

I've wondered for a few years now if/when we would see the likes of P2P lending/microfinance like Kiva.org or something like it would take off in the US....I'm pretty sure Prosper.com has had a couple fits and starts...possibly regulatory related? Not sure....

But when you look at how pawn shops have remained relevant like gold over the centuries...maybe the many to many P2P pawn shop model might be an area of growth or considerable growth:

https://www.borro.com/pawn-shop

I'm guessing the entrenched FIRE interests will either decide to OWN that space if it's worth their time and trouble........or just burn it to the ground with their influence.

[lakedaemonian]

Re: Financial Analysis of USA, Inc.

Oh I forgot to mention....I reckon Meeker and Blodget are a pair of tossers.....FIRE economy Goebbels or Baghdad Bobs.

One thing I was thinking with the FIRE economy effectively "slumming it" with P2P, many to many lending......

Some friends spending time in the Middle East mentioned rumors of the Saudi royal family muscling in on smaller and smaller businesses.......whereas before they were all able to be fat and happy shaking down their cut on intentionally overpriced defense projects and prestige big money civil contracts with bribes and jobs.....the explosion in their numbers in recent decades combined with less fat on the bone to steal.....they've reportedly been targeting smaller businesses for their "taste".

I wonder if this is the FIRE economy equivalent?

Too many FIRE feeders having to look at smaller and smaller opportunities to exploit.........indicator maybe?

I reckon social lending has some real opportunity....but would it ever be able to scale up and compete with the FIRE economy NATURALLY?

And if it can't scale naturally, I wonder how it could ever possibly scale if/when the deck is stacked against it?

[dcarrigg]

Re: Financial Analysis of USA, Inc.

I reckon social lending has some real opportunity....but would it ever be able to scale up and compete with the FIRE economy NATURALLY?

And if it can't scale naturally, I wonder how it could ever possibly scale if/when the deck is stacked against it?

If you define naturally as unregulated, I think so.

Let's say you're Prosper or Lending Club. You make it super easy for people with no/bad credit to get loans. I mean super easy. Like click a button on your iPhone and forget it for a while.

About the loan. The longer term the better. 3 year minimum terms are already standard. Add in a huge pre-payment penalty too. How close to 30 years can we get? Could we 'crowdsource' a mortgage? (the answer is yes in fact, but will .gov let it happen is the real question).

Then you need to get the borrowers. The more instantaneous the money arrives, the better. Get them on impulse buys. Get them while intoxicated. But make it easy and get them.

So you need lenders to "pre-approve" loans to individuals who fit certain profiles. Otherwise, you can't hawk loans on impulse buys. But that's easy. Just give them credit ratings. Lending club already gives loans a letter grade from A to F. It doesn't have to mean anything. Just make them feel good.

Then, you take a fat origination fee and loan servicing fee.

The loans are actually owned by random other suckers trying to beat the abysmal savings rates. Charge them a point to let them lend through your website too.

Meanwhile, the best part is, you don't have to own the loan or sell it to anyone!

With a subprime mortgage, you have to originate it, then get rid of it, because you know it's junk. Here, you get to skip that step. You already have a fence for your subprime loan. And the interest percentages can be much higher. And if the whole thing blows up, "consumers" have nobody to blame but themselves. Meanwhile you make money on them coming and going.

Plus, I imagine you could allow larger investors to buy 'pools' of these loans overnight.

Especially if the loans can be structured with terms that have low initial monthly payments over long periods of time.

I'm not sure how big it can get. And the more I think about it, the less sure I am. Until tonight, I would have never thought it could get too big. But I'm pretty sure that the less it is regulated (yes Prosper did run into the SEC the once), the bigger it can get.

Can it get 1,000x bigger over 10 years so it has a $1T portfolio? I could imagine that. It sounds particularly realistic if the lobbying machine gears up full-tilt.

Will that just happen? Will certain FIRE interests preemptively buy off Washington now? Will we see CDOs on P2P loan bundles? How big do you think it can scale?

I really don't know.

But now I'm pretty sure we're going to find out.

[don]

Re: Financial Analysis of USA, Inc.

Bill Black on how deregulation - through legislation, non-enforcement and gutted funding - creates a criminogenic environment where only the crooks survive . . .

If you wanted to reproduce the conditions that led to the Great Recession in 2007, the easiest way would be the plan unveiled last week by House Republicans: gut the regulators who are supposed to keep the worst business practices in check.
At a time when the economy is still reeling from the downturn, House Republicans released a spending bill that would severely cut the budget of the Commodity Futures Trading Commission, which would keep it from regulating potentially toxic swaps and other derivatives. It refused to give the Securities and Exchange Commission the extra money it needs to carry out the Dodd-Frank financial reform bill.
And the bill would cripple the Internal Revenue Service, limiting its ability to detect tax avoidance, particularly by businesses and the wealthy. (The I.R.S. cut, designed to impede the agency’s role in health care reform, will inevitably increase the deficit.)
With 710 employees, the C.F.T.C. staff is barely big enough for its current responsibilities, let alone its new mission under Dodd-Frank to oversee the huge over-the-counter swaps market. Its budget is $205 million, which President Obama proposed increasing to $308 million for 2013 to deal with swaps. The House Appropriations Committee has proposed slashing next year’s budget to $180 million.
The agency’s chairman, Gary Gensler, said: “The result of the House bill is to effectively put the interests of Wall Street ahead of those of the American public, by significantly underfunding the agency Congress tasked to oversee derivatives — the same complex financial instruments that helped contribute to the most significant economic downturn since the Great Depression.”
As Mr. Gensler pointed out, the market in swaps, at $300 trillion, is eight times larger than the futures market his agency has been regulating, and yet the House wants to cut the agency’s budget significantly. The House committee chairman, Harold Rogers, said the agency should return to its “core duties,” a statement that brazenly ignores a new set of duties Congress put on the books. (June 9, 2012, The New York Times)

In this essay I make four brief points. First, the House Republicans’ proposals would produce the most criminogenic environment in the world that risks an even larger financial crisis and outright depression. This isn’t simply the lesson of the current crisis. George Akerlof and Paul Romer explained the point in 1993 in their classic article (“Looting: the Economic Underworld of Bankruptcy for Profit”). They made this paragraph their conclusion in order to emphasize the 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” (Akerlof & Romer1993: 60).

Akerlof was made a Nobel Laureate in economics in 2001.

Second, the losers from creating a criminogenic environment that encourages looting are not “merely” the public – the losers include honest businesses. When cheaters gain a competitive market, competition becomes perverse and firms controlled by the least ethical CEOs can drive their honest competitors from the marketplace. Akerlof made this point explicitly in his even more famous 1970 article on markets for “lemons” where he wrote about the economics of anti-purchaser control frauds. He called it a “Gresham’s” dynamic.

“[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.”

Modern executive compensation causes accounting control fraud to produce a powerful Gresham’s dynamic. CFOs rightly fears that their tenure may be measured in months if they do not mimic their rivals’ use of accounting control fraud to produce what Akerlof and Romer aptly termed a “sure thing” of record reported income that, in turn, produces enormous executive compensation.

Classic economists stressed the essential role of government – providing a rule of law and preventing and punishing criminal acts, including fraud. Ayn Rand stressed that government had a duty to prevent fraud. The essence of crony capitalism is the ability to commit fraud with impunity. The Tea Party opposes crony capitalism and the House Republicans quake in fear of upsetting the Tea Party and being challenged in the Republican primary.

We have deregulated, desupervised, and de facto decriminalized finance in the U.S. and Europe to an unprecedented extent in the last 30 years and the results have been uniformly catastrophic. Governor Romney states that he intends to repeal the entire Dodd-Frank Act and recreate the criminogenic environment that caused the financial crisis and the Great Recession.

We have four dogs that have failed to bark. Conservatives have long claimed to be the party of law and order – where are they. The data are in – the Bush and Obama administrations have been soft on elite white-collar crime (by their largest campaign donors). Libertarians and Tea Party supporters who hate crony capitalism – rise up and demand an end to the elites who grow wealthy by committing fraud with impunity and cost millions of Americans and Europeans their jobs.

And where are President Obama and Attorney General Holder on this issue? The editorial quotes only regulators. The President and the Attorney General should be taking the lead and denouncing the deliberate recreation of a criminogenic environment. Here is the central fact that Holder and Obama have never grasped – effective investigations and prosecutions of epidemics of elite financial frauds are only possible where the regulators and the SEC do the heavy lifting. The regulators will only do the heavy lifting if their leaders understand control fraud and make its detection, termination, sanctioning, and prosecution their top priorities. Bush and Obama have overwhelmingly appointed failed, anti-regulators like James Gilleran, John Reich, John Dugan, Timothy Geithner, Alan Greenspan, Ben Bernanke, Harvey Pitt, and Susan Schapiro. They have also appointed attorney generals who have all been weak on elite financial fraud.

The epidemic of accounting control fraud by financial institutions that drove the Great Recession was the largest and most costly example of white-collar crime in history. But all we have heard from Obama and Holder is minimization of the role of fraud in the crisis and the same abject failure as the Bush administration to prosecute the elite frauds that drove the crisis. The minimization of fraud comes from the death of criminal referrals by the regulatory agencies. Neither the banking regulatory agencies nor the FBI has conducted what would have been considered in our era a serious investigation of an elite financial institution. When it comes to elite frauds; if you don’t look you don’t find. Having falsely claimed that there were only trivial violations of the law, the Obama administration has emasculated its ability to go credibly to the public and warn that the House Republicans are about to recreate the criminogenic environment that produces our recurrent, intensifying financial crises. Holder and Obama cannot credibly claim that the House Republicans are about to allow our financial elites to again grow wealthy through fraud because Holder and Obama are continuing Mukasey and Bush’s policy of granting de facto immunity to the elite criminals who caused the crisis.

Prominent Republican writers have recently urged their Party to destroy crony capitalism. Instead, their representatives are trying to entrench it. Prominent progressives have been urging Obama to destroy crony capitalism. Instead, he has entrenched it by taking his financial advice from Robert Rubin, Lawrence Summers, Geithner, and Bernanke. Neither party is willing to take on their leading source of political contributions. We need a party, an attorney general, and a slew of regulators who will make it their mission to end crony capitalism in America. Europe needs the same thing.

http://neweconomicperspectives.org/2...vironment.html