When Fragile becomes Friable: Endemic Control Fraud as a Cause of Economic Stagnation and Collapse

[Baobab]

When Fragile becomes Friable: Endemic Control Fraud as a Cause of Economic Stagnation and Collapse

William K. Black
Executive Director, Institute for Fraud Prevention

Abstract:

"Individual “control frauds” cause greater losses than all other forms of property crime
combined. They are financial super-predators. Control frauds are crimes led by the head
of state or CEO that use the nation or company as a fraud vehicle. Waves of “control
fraud” can cause economic collapses, damage and discredit key institutions vital to good
political governance, and erode trust. The defining element of fraud is deceit – the
criminal creates and then betrays trust. Fraud, therefore, is the strongest acid to eat away
at trust. Endemic control fraud causes institutions and trust to become friable – to
crumble – and produce economic stagnation.

White-collar criminology emphasizes incentive structures. A criminogenic environment
is one that has strong positive incentives to engage in crime. While economists stress
incentive structures, economics ignores criminogenic environments. The weakness
comes from three sources. Economic theory about fraud is underdeveloped, core neo-
classical theories imply that major frauds are trivial, economists are not taught about
fraud and fraud mechanisms, and neo-classical economists minimize the incidence and
importance of fraud for reasons of self-interest, class and ideology.

Neo-classical economics’ understanding of fraud is so weak that its policy prescriptions,
if adopted wholly, produce strongly criminogenic environments that cause waves of
control fraud. Neo-classical policies simultaneously make control fraud easier and more
lucrative, dramatically reduce the risk of detection and prosecution by maximizing
“systems capacity” problems, and encourage crime by making it easier for fraudsters to
“neutralize” the social and psychological constraints against deceit and fraud. Thus the
paradox: neo-classical economic triumphs produce tragedy. Perverse policies led to four
recent crises: the deregulation and desupervsion of the savings & loan (S&L) industry
produced the 1980s crisis, “shock therapy” caused the collapse of the Russian economy,
the “Washington consensus” produced a wave of control fraud in Latin America, and the
desupervision of the U.S. economy in the 1980s and 1990s led to an epic wave of control
fraud that contributed materially to the $9 trillion loss in U.S. stock market
capitalization.’’ With globalization, these crises can transmit to other nations through
“contagion” or by causing key international investors to fail."

[cprise]

1. Regulatory Capture is one aspect of this

https://en.wikipedia.org/wiki/Regulatory_capture

[bemildred]

2. KnR for Mr. Black, who would make a fine Supreme Court Justice. nt