I changed the presentation I intended to make entirely in order to respond to Thursday’s famous Thursday keynote presenter, Dr. Hummler, the head of the oldest private bank in Swizerland. ... Dr. Hummler received his advanced economics training at one of the University of Chicago’s outposts, the University of Rochester. Even within the Chicago school, the UR economists have a reputation for the vigor of their antipathy for even democratic government. ... The reason his bank has customers is overwhelmingly the customers’ desire to evade taxes through means that are crimes in their home nations, but at most civil violations in Switzerland. ...
It is simple under Austrian views of the democratic state as the great danger to freedom to interpret anything, even fraud by the wealthy, that reduces the State’s tax revenues as desirable. ... Under Hummler’s view of property rights, the democratic State can function only because the non-wealthy lack the wealth and financial sophistication (or they lack the necessary immorality) to emulate the wealthy tax cheats by engaging in tax fraud with impunity. As that great Austrian school sage, Saint Leona Helmsley explained: “only little people pay taxes.” ... Re-branding the wealthiest tax cheats into freedom fighters represents a triumph of what criminologists refer to as “neutralization” of the moral restraints against fraud. Successful neutralization leads to increased crime. ...
Hummler’s keynote address contained his famous sausage metaphor. Collateralized debt obligations (CDOs) are made by slicing and dicing mortgages. It is easier to observe whether meat is rotten when it is whole. When it is sliced up into tiny pieces, mixed with lots of other meats, and placed in a somewhat opaque casing it is far harder to see or smell that it contains some rot. One only learns that the sausage is rotten after consuming it and getting sick. In the CDO context, Hummler says that the rot was U.S. subprime loans. ... Hummler recognizes that he has to explain why the sausage makers would put rotten meat in their sausages. His metaphor is heretical for a theoclassical economist of either the Chicago or Austrian school. He has reversed the core metaphor of the father of modern capitalism, Adam Smith. Smith’s most famous metaphor was that we could safely rely on the butcher (the maker of sausages) and the baker to give us high quality goods without rot not because the butcher and baker really cared about our health, but because they were driven by self-interest. ... Hummler is desecrating sacred ground by reversing Smith’s central argument in favor of capitalism. ... If I can get away with fraud, and if self-interest is my guide, then Hummler’s logic leads to a further great desecration of Smith’s metaphor – "Mankiw morality:" .... if you can get away with committing accounting control fraud, and fail to do so, you are not a moral CEO – you are "irrational." It is “irrational” not to breach your fiduciary duties by looting the firm’s creditors and shareholders in order to make yourself wealthy. ...
Hummler does not appear to understand how destructive of theoclassical and neoclassical economics’ defining metaphor it is to argue that Adam Smith’s dependable butcher is now routinely, and deliberately adding meat that he knows is rotten and will make the consumer deathly ill into sausage because he knows that he can deceive the consumer by disguising the filth in an opaque sausage casing. Hummler’s butcher is still acting out of greed, but he has discovered that defrauding and sickening or destroying his customer pays. In Hummler’s dystopian vision, the capitalist is a psychopath, and capitalism has become severely criminogenic.
The article goes on to discuss the underlying social dynamics of the financial collapse, and how the "rot" (liar loans*) became an integral part of the "sausages" (collateralized debt obligations).
*There are some more-or-less legitimate purposes for stated income loans, but most of the liar loans involved in the sub-prime crisis that sparked the broader financial crisis did not fulfill those purposes.
We're there or are there people out there who are under the impression that CEOs would/will act morally?
ReplyDeleteI think the reason the sausage maker is more than happy to include rotten meat is the simple fact that CEOs/boardmembers/owners are entirely immune to any personal loss no matter what their company does. If fines against companies, for instance, were levied not against the corporate entities but against the private individuals in control of them, companies would quickly begin acting more ethically for self-interested reasons. In the modern economic age those who command the behemoths of the economic world can make personal fortunes while bankrupting their companies and everyone touched by them. If you are playing this game in the banking sector you have the added cushion of knowing that you are “too big to fail”. The poor people, those poor enough to actually have to pay taxes, will ultimately foot the bill for the orgy of personal profit. It would be trivially easy to end this state of affairs. Make the individuals heading up these companies personally liable. Perhaps then the currently outrageously unjustified earning would be more warranted by increased personal risk.
One thing is certain. The amount of risk tolerance by these currently immune folk would dramatically drop. I think things are only likely to get worse though. Even following a global financial catastrophe and much talk about getting the “bonus culture” under control and so on, effectively nothing has changed. The message has never been louder or clearer. Do what ever you want, you will never be held accountable. Hardly surprising I suppose. The banks buy governments so it shouldn’t be surprising that government protect banks. Democracy in its current form is essentially the business of auctioning governments. Wouldn’t be too hard to change that either but who with any power to do so, wants to?