The Race to the Bottom Produces Regulators who are Invertebrates & Epidemics of Fraud

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    By William K. Black 9/03/12

    I examine how highly conservative newspapers are covering the interplay of widespread “control frauds” by the world’s most elite banks, the carefully structured de-evolution of financial regulators through descent from the subphylum Vertebrata into the phyla of the invertebrates, and the global failure to prosecute the elite frauds that drove the ongoing financial crisis. The three factors are interrelated. Vigilant financial regulators serving as the vital “regulatory cops on the beat” are essential to the successful prosecution of large numbers of elite financial frauds. By ensuring that the top regulators are anti-regulators who believe that it is essential to “win” the regulatory race to the bottom, the finance industry creates a dynamic that acts internationally and nationally to maximize the three “de’s” (deregulation, desupervision, and de facto decriminalization).

    The Republican members of the Financial Crisis Inquiry Commission (FCIC) failed to understand that the dynamic of the race to the bottom can simultaneously push a large group of nations to undertake contemporaneously an extreme embrace of the three “de’s.”

    “The majority says the crisis was avoidable if only the United States had adopted across-the-board more restrictive regulations, in conjunction with more aggressive regulators and supervisors. This conclusion by the majority largely ignores the global nature of the crisis. For example:

    • A credit bubble appeared in both the United States and Europe. This tells us that our primary explanation for the credit bubble should focus on factors common to both regions (FCIC Report 2010: 414).”

    The FCIC minority failed to understand that Europe and the U.S. were the leaders in the competition in regulatory laxity. The three de’s created a criminogenic environment favoring hyper-inflated bubbles in many nations during the same general time period.

    The race to the bottom creates an environment that places de-evolutionary pressure to select as financial regulatory leaders those individuals who have most completely discarded their spines. Similarly, the three de’s created an intensely criminogenic environment in finance in many nations. Those environments produce fraud epidemics and multiple “Gresham’s dynamics” that turn market forces perverse. When cheaters gain a competitive advantage, bad ethics drives good ethics out of the markets. Only vigorous regulators can prevent the Gresham’s dynamic, so honest banks are placed at a crushing economic disadvantage when there is a regulatory race to the bottom.

    read more The race to the bottom produces regulators who are invertebrates and fraud epidemics - New Economic Perspectives
     

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