A most interesting analysis by William Black, which bears out what I’ve been saying on this blog many times. Interest rate manipulation set the stage for the financial scams, but the latter half of both the last bubble and previous ones were driven by specific types of fraud:

“The epidemic of accounting control fraud that drove the second phase of the S&L debacle (the first phase was caused by interest rate risk) was followed by an epidemic of accounting control fraud that produced the Enron era frauds. The FBI warned in September 2004 that there was an “epidemic” of mortgage fraud and predicted that it would cause a financial “crisis” if it were not contained.”

Compare this to my analysis in 2008:

“AIG was phonying its books long before the housing bubble, at least since Alan Greenspan began cranking out liquidity on the cheap at the end of the 1980s. That is, as soon as the junk-bond mania died and the stock market crashed, money was injected into the system by Maestro Greenspan through low interest rates. The tech bubble was inflated. Goldman Sachs was in the thick of it, sending a tidal wave of credit across the globe through new and complex derivatives and through electronic trading. MIPs, SPVs, SIVs. These off-book vehicles and other hedges (for Ghana’s Ashanti Gold, for AIG, for Enron, even for Fannie and Freddie) were developed before the real estate bubble,
some to skirt tax rules, others to make the books look better…”

What they also did was blind the companies who used them to the risks and losses they had on their books. Accounting rules and business practices that rewarded managers in the short-term exacerbated the problem. They encouraged shortsighted deal-making, quickie trading into hedge-funds, opaque off-book entities, and accounting swindles of all sorts. Now the bar tab has come due and our boon companions are making their excuses and exiting in a hurry. Guess who’s paying?”

Despite the casual tone, I actually waded through dozens of books and articles before reached that conclusion.

Of course Black would not agree with my prescription. Which would be to cut taxes to a straight-across-the board number – say 15%- and then tear up all the fancy footnotes and loopholes. They just feed a whole army of tax lawyers and creative accountants, hobble small businesses, and waste weeks of time for everyone else who has to read the fine print.

Black also seems to agree with another gripe I have. I too believe that conservative/pseudolibertarian apologists for fraud provide the environment and the justification for white-collar criminality, just as surely as cynical race-hustling provides the justification for at least some crime from the underclass.

“This is the second column in a series responding to Stephen Moore’s central assaults on regulation and the prosecution of the elite white-collar criminals who cause our recurrent, intensifying financial crises. Last week’s column addressed his claim in a recent Wall Street Journal column that all government employees, including the regulatory cops on the beat, are “takers” destroying America.This column addresses Moore’s even more vehement criticism of efforts to prosecute elite white-collar criminals in an earlier column decrying the Sarbanes-Oxley Act’s criminal provisions: “White-Collar Witch Hunt: Why do Republicans so easily accept Neobolshevism as a cost of doing business?” [American Spectator September 2005] This column illustrates one of the reasons why elite criminals are able to loot “their” banks with impunity – they have a lobby of exceptionally influential shills. Moore, for example, is the Wall Street Journal’s senior economics writer. Somehow, prominent conservatives have become “bleeding hearts” for the most wealthy, powerful, arrogant, and destructive white-collar criminals in the world. Criminology research has demonstrated the importance of “neutralization.” Criminals don’t like to think of themselves as criminals and their actions as criminal. They have to override their societal inhibitions on criminality to commit their crimes. When prominent individuals like Moore call their actions lawful and demonize the regulatory cops on the beat and the prosecutors it becomes more likely that CEOs will successfully neutralize their inhibitions and commit fraud. People like Moore have never studied white-collar crime, have no knowledge of white-collar criminology, do not understand control fraud, and do not understand sophisticated financial fraud mechanisms. They show no awareness of the economics literature on accounting control fraud, particularly George Akerlof & Paul Romer’s famous 1993 article – “Looting: the Economic Underworld of Bankruptcy for Profit.” People like Moore not only spur neutralization, they actively campaign to minimize the destructiveness of elite white-collar crime and to deny the regulators and the prosecutors the resources to prosecute the criminals.”