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on the economics and law(less) movement... and it's unbelievable:
"The dominant law and economics text on corporate law for years was by Easterbrook and Fischel. Judge Easterbrook is a colleague of Judge Posner on the 7th Circuit and Fischel was for a time Dean of the University of Chicago’s law school. They assert that “a rule against fraud is not an essential or even necessarily an important ingredient of securities markets” (1991: 283). Their book was written after Professor Fischel, as a consultant to three of the most notorious control frauds of the 1980s, tried out their theories in the real world – and found that they failed catastrophically. Fischel praised the worst frauds. Fischel & Easterbrook did not disclose to their readers that their theories were falsified in the real world. Note how extreme their claim was, the utter certainty of the claim, and the lack of any data supporting the claim – a claim they knew to be false. The taught students that, in the context of securities, we did not need:
Note the continuing damage that these three law and economics dogmas about “signaling” honesty had in the current crisis. Regulators continued to treat professionals as if they were “independent” and provided expert judgments on which regulators should rely. Basel II, for example, reduced capital requirements dramatically if the rating agencies gave a high rating to a toxic mortgage derivative. Economists, criminologists, and reality had long falsified the claim but theoclassical law and economics never challenges its foundational dogmas"
http://www.nakedcapitalism.com/2010/...aw-an-ass.html
"The dominant law and economics text on corporate law for years was by Easterbrook and Fischel. Judge Easterbrook is a colleague of Judge Posner on the 7th Circuit and Fischel was for a time Dean of the University of Chicago’s law school. They assert that “a rule against fraud is not an essential or even necessarily an important ingredient of securities markets” (1991: 283). Their book was written after Professor Fischel, as a consultant to three of the most notorious control frauds of the 1980s, tried out their theories in the real world – and found that they failed catastrophically. Fischel praised the worst frauds. Fischel & Easterbrook did not disclose to their readers that their theories were falsified in the real world. Note how extreme their claim was, the utter certainty of the claim, and the lack of any data supporting the claim – a claim they knew to be false. The taught students that, in the context of securities, we did not need:
1. Any laws against securities fraud
2. The FBI and the Department of Justice
3. The SEC
4. Any rules against fraud
5. Any ability to bring civil suits
Fraud is impossible because securities markets are “efficient” and act as if they were guided by an “invisible hand.” Markets cannot be efficient if there is accounting control fraud, so we know (on the basis of circular reasoning) that securities fraud cannot exist. Indeed, when Easterbrook and Fischel try to explain why the securities markets automatically exclude frauds their faith-based logic becomes even more humorous. They claim that honest securities issuers send one or more of three “signals” of honesty to guide investors to purchase their securities – and that only honest firms can send any of these three signals.2. The FBI and the Department of Justice
3. The SEC
4. Any rules against fraud
5. Any ability to bring civil suits
1. Hire a top tier audit firm
2. Have their CEO own a substantial amount of stock in the company
3. Cause their firm to have extreme leverage
In reality, accounting control frauds “mimic” each of these signals and each signal aids their frauds. Easterbrook and Fischel’s ideas are not merely wholly ineffective against accounting control fraud – they are outright criminogenic. That is why Fischel praised the real world accounting frauds when he was a consultant. Each of the three massive accounting control frauds that Fischel praised sent each of these three signals – and they sent them years before Easterbrook and Fischel wrote their book and made claims they had seen repeatedly falsified by Fischel’s fraudulent clients without warning their readers.2. Have their CEO own a substantial amount of stock in the company
3. Cause their firm to have extreme leverage
Note the continuing damage that these three law and economics dogmas about “signaling” honesty had in the current crisis. Regulators continued to treat professionals as if they were “independent” and provided expert judgments on which regulators should rely. Basel II, for example, reduced capital requirements dramatically if the rating agencies gave a high rating to a toxic mortgage derivative. Economists, criminologists, and reality had long falsified the claim but theoclassical law and economics never challenges its foundational dogmas"
http://www.nakedcapitalism.com/2010/...aw-an-ass.html
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