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An important piece of MMT-adjacent work that should get more attention is Bill Black's work on "control fraud," so here's a short thread on that.
Control Fraud is when managers loot a company for profit, taking actions that generate record short-run profits then collapse. /1
Control Fraud is when managers loot a company for profit, taking actions that generate record short-run profits then collapse. /1
In the financial sector the formula for control fraud goes:
1) Grow like crazy, by
2) making trash loans/investments at a high interest yield, while
3) employing maximum leverage, and
4) setting aside little or no reserves for losses. /2
1) Grow like crazy, by
2) making trash loans/investments at a high interest yield, while
3) employing maximum leverage, and
4) setting aside little or no reserves for losses. /2
Operating with high leverage, high yields, and no loss reserves is guaranteed to generate record short-run profits, which will result in bonuses and stock price appreciation, enriching top executives. They will then later collapse and destroy the company. /3
In particular, to make loans at the highest yield means making loans to the worst borrowers, ones that you know can't repay. How do you hide that you knowingly made fraudulent loans? Simple: don't document that they couldn't repay! Or forge paperwork saying they could. /4
Control frauds are especially insidious for many reasons.
First, they pervert nearby professions. CFs depend on accounting fraud which means they have to pervert auditing firms to hide their fraud. To make the largest loans possible, they also need appraisers who will report /5
First, they pervert nearby professions. CFs depend on accounting fraud which means they have to pervert auditing firms to hide their fraud. To make the largest loans possible, they also need appraisers who will report /5
inflated property values. There are a variety of ways to quietly accomplish this, and what results is a "Gresham's dynamic" in which bad ethics drive good ethics out of the market in adjacent professions. /6
Second, because they are reporting record growth prior to collapse they are politically difficult to investigate: Why are we investigating the most profitable firms in the industry?? Pols conclude that such investigations are witch hunts or anti-capitalist. CFs thrive on this. /7
In fact CFs depend on such manipulations of image. The CEOs and executives engaged in fraud need to be seen as geniuses and honest businessmen, rather than viewed skeptically as potential crooks. Even earnest regulators have been fooled by these appearances. /8
The implications go macro too. Waves of control fraud have been responsible for intensifying financial bubbles, as frauds deliberately lend to inflate asset prices to engage in Ponzi schemes. The result is waste and destruction of physical capital too, as in the /9
commercial real estate disaster of the 1980s. In that fraud scheme, lenders would recruit unqualified and fraudulent developers to take large loans to begin construction projects that didn't meet quality standards and would never be finished. /10
If we don't take control fraud theory seriously, we are bound to fall victim to waves of control fraud yet again, as our policies create "criminogenic environments." We must remember that the same structures that make our economy dynamic also create opportunities for fraud. /Fine
P.S. interested in learning more about control fraud? Here's a presentation by Bill Black:
And here's a paper: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1590447
