Innocent fraud: Galbraith on how we arrived here

He3

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Could the fraudsters be innocent? It is natural to feel that our current crisis must be the result of criminal action. So we want to lock them up, yet we are frustrated in the knowledge that many barriers are in the way of that happening. Many ingredients of the crisis may well be the result of criminal behaviour. But what if our country has been - in the main - brought to its knees innocently? By a kind of fraud that is not a crime - an innocent fraud?

JK Galbraith coined this term in 2004 in his short book 'The Economics of Innocent Fraud'. By 2004 Galbraith had seen a lot. This is a flavour of what he wanted to pass on to us.



From the intro:

For some seventy years my working life has been concerned with economics, along with not infrequent departures to public and political service that had an economic aspect and one tour in journalism. During that time I have learned that to be right and useful, one must accept a continuing divergence between approved belief - what I have called elsewhere conventional wisdom - and the reality. And in the end, not surprisingly, it is the reality that counts. This small book is the result of many years of encountering, valuing and using theis distinction, and it is my conclusion that reality is more obscured by social or habitual preference and personal or group pecuniary advantage in economics and politics than in any other subject. Nothing has more captured my thought and what follows is a considered view of this difference.

A lesser point: central to my argument here is the dominant role in the modern ecomonic society of the corporation and of the passage of power in that entity from its owners, the stockholders, now mopre graciously called investors, to the management. Such is the dynamic of corporate life. Management must prevail.
...

As I was working on these pages, there came the great breakout in corporate power and theft with the unanticipated support of cooperative and corrupt accounting. Enron I had noticed as an example of my case; there were to be more in the headlines. Perhaps I should have been grateful; there are few times when an author can have such affirmation of what he or she has written. The corporate scandals, as they are now called, dominated the news because of exceptionally competent and detailed reporting.
...

Dealt with in this essay is how, out of the pecuniary and politicial pressures and fashions of the time, economics and larger economic and political systems cultivate their own version of truth. This last has no necessary relation to reality. No one is especially at fault; what it is convenient to believe is greatly preferred. This is something of which all who have studied economics, all who are now students and all who have some interest in economic and political life shoud be aware. It is what serves, or is not adverse to, influential economic political and social interest.

Most progenitors of what I here intend to identify as innocent fraud are not deliberately in its service. They are unaware of how their views are shaped, how they are had. No clear legal question is involved. Response comes not from violation of law but from personal and social belief. There is no serious sense of guilt; more likely, there is self-approval.

..

From JK Galbraith's The Economics of Innnocent Fraud, Penguin, 2004, -price all of £1.50 as one of the 70 books in the series to mark Pocket Penguins 70th anniversary.

...
If his analysis is right, these innocent fraudsters greatly outnumber those whom the criminal law will ever find guilty. They may even be looking at us in the mirror.
 
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sandar

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Galbraith should be remembered as a significant economist of the late twentieth century, he began as a a disciple of keynes, and managed to criticse the fglaws of neo-liberal economics, almost before the term was coined.
 

mollox

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Yes, the presumption of corruption among the bankers may make people feel better but, with a couple of exceptions, it's probably misguided.

The proof that it's poor judgement rather than corruption may be gleaned from the fact that some of the key players e.g. BOI's Brian Goggin & AIB's Eugene Sheehy, have suffered a very serious loss of personal wealth. Hardly the mark of a successful fraud.

http://www.politics.ie/economy/41023-spare-thought-poor-bankers.html

Galbraith was a fascinating guy - I recall seeing him present a tv series about 20 years ago.
It was full of learned wisdom delivered with a dry wit, and always recognised that when you put human beings into the equation you can never be quite certain what end result you're going to get.
 

He3

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Anyone in Department of Finance read Galbraith?
 
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Plus ca change

I'm finishing off Galbraiths 1929 Wall Street Crash book. It could well have been written yesterday and applied to current events. The parallels are astonishing.
 

He3

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I'm finishing off Galbraiths 1929 Wall Street Crash book. It could well have been written yesterday and applied to current events. The parallels are astonishing.
Next on the reading list so.
 

grapes of wrath

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economics and larger economic and political systems cultivate their own version of truth. This last has no necessary relation to reality. No one is espeicially at fault; what it is convenient to believe is greatly preferred. This is something of which all who have studied economics, all who are now students and all who have some interest in economic and political life shoud be aware. It is what serves, or is not adverse to, influential economic political and social interest.

Response comes not from violation of law but from personal and social belief. There is no serious sense of guilt; more likely, there is self-approval.

A very interesting offering. In my days as a lecturer I used to encourage students to always question the conventional wisdom. A good researcher should question those aspects of the conventional view that might not stand up to rigorous testing. One of the most valuable characteristics of a good researcher is that he/she has the academic intuition to identify the bits of the conventional beliefs that might be incorrect and then carry out the work that proves or disproves his/her hypothesis.

In investment terms those described as contrarians have often done very well. There goes the mob - it is time to go the opposite way. Warren Buffet never followed the mob in his very successful investments - although he has hit a sticky patch now.

A strongly held belief of the current conventional economic/political wisdom is that low income tax rates are critical for economic growth. I do not believe that this has been established at all (see my post Higher Taxes and Higher Growth are not Incompatible). People do not want to believe that the case for low taxes is simply not true.

Ulick McEvaddy called the Anglo 10 heroes on the radio last week. He seemed to believe it even though almost everyone else thinks that they are almost criminal or at least unprincipled opportunists. His views are probably shared by many others in his peer group - what I have called the K Club Charlie School of Economics, named in honour of Charlie McCreevy.

The notion that EVERYONE in the private sector has suffered a substantial drop in income is another misconception I suspect, but it is the interest of the majority to believe it. It may be true but the conventional wisdom becomes quickly established when it is in the interests of the majority, or of a particular influential subgroup to believe it.

Seanie Fitzpatrick was proclaiming that we were over regulated when he was driving a coach and four through what most people would consider ethical banking practices. Charlie McCreevy was proclaiming his belief in regulation with a light touch until last autumn - when it was crystal clear from at least a year previously from the US experience that lack of effective regulation was causing havoc in the banking system. I am not sure who originated the phrase - it is not true, it is not true, IT CANNOT BE TRUE :eek::eek::mad:which describes the reaction of many people when the conventional wisdom which favours their interests is challenged.
 

He3

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A very interesting offering. In my days as a lecturer I used to encourage students to always question the conventional wisdom. A good researcher should question those aspects of the conventional view that might not stand up to rigorous testing. One of the most valuable characteristics of a good researcher is that he/she has the academic intuition to identify the bits of the conventional beliefs that might be incorrect and then carry out the work that proves or disproves his/her hypothesis.

In investment terms those described as contrarians have often done very well. There goes the mob - it is time to go the opposite way. Warren Buffet never followed the mob in his very successful investments - although he has hit a sticky patch now.

A strongly held belief of the current conventional economic/political wisdom is that low income tax rates are critical for economic growth. I do not believe that this has been established at all (see my post Higher Taxes and Higher Growth are not Incompatible). People do not want to believe that the case for low taxes is simply not true.

Ulick McEvaddy called the Anglo 10 heroes on the radio last week. He seemed to believe it even though almost everyone else thinks that they are almost criminal or at least unprincipled opportunists. His views are probably shared by many others in his peer group - what I have called the K Club Charlie School of Economics, named in honour of Charlie McCreevy.

The notion that EVERYONE in the private sector has suffered a substantial drop in income is another misconception I suspect, but it is the interest of the majority to believe it. It may be true but the conventional wisdom becomes quickly established when it is in the interests of the majority, or of a particular influential subgroup to believe it.

Seanie Fitzpatrick was proclaiming that we were over regulated when he was driving a coach and four through what most people would consider ethical banking practices. Charlie McCreevy was proclaiming his belief in regulation with a light touch until last autumn - when it was crystal clear from at least a year previously from the US experience that lack of effective regulation was causing havoc in the banking system. I am not sure who originated the phrase - it is not true, it is not true, IT CANNOT BE TRUE :eek::eek::mad:which describes the reaction of many people when the conventional wisdom which favours their interests is challenged.
Light regulation might have had a place if there was true enforcement. The government decided instead to sell us as a No enforcement zone. Same approach is taken in environmental regulation of industry.

Apparently you could register a hedge fund here in two hours, according to Kevin Murphy, Tax consultant, on Prime Time. He says the documentation could not physically be read in two hours.

Government is not reason; it is not eloquent; it is force. Like fire, it is a dangerous servant and a fearful master. George Washington
 

grapes of wrath

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He3 stated: Light regulation might have had a place if there was true enforcement. The government decided instead to sell us as a No enforcement zone. Same approach is taken in environmental regulation of industry.
Apparently you could register a hedge fund here in two hours, according to Kevin Murphy, Tax consultant, on Prime Time. He says the documentation could not physically be read in two hours.

What Kevin Murphy said was very instructive and rather alarming. The standards and ethics followed by all in the IFSC has been a nagging concern for some time. We have sold out and followed a beggar my neighbour policy on corporation tax - and will have to hold on to it for the foreseeable future. In the IFSC that we are drawing in organisations with our low corporation tax rate, but also I suspect we are drawing in some rather dubious organisations and individuals with our light/lack of regulation. (As with many comments in the media it is hard to know how reliable and well-informed his comments were but I am inclined to believe him.)

About the only thing from which I get some satisfaction in the recent developments is that it is showing Charlie McCreevy up for the incompetent clown that he always was in relation to the major policy issues in Ireland and in the EU. Not only did he bequeath to us a disfunctional taxation system he did nothing to regulate the EU fianacial system - it now seems from straws in the wind that he may even be sidelined within the commission. I believe we have to name and shame all those who contributed to our current mess.
 

He3

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It is also fascinating to see how well Galbraith described the shift in control of the corporations from the nominal owners (shareholders) to management.

I wish he was around to do an analysis of our Health Service.
 

code twinkle

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Hes more or less right. No laws that we are aware of so far have been broken, which is why you aren't seeing prison terms. The problem is of course with the people that wrote and changed those laws, who should have known better.
I agree with him to an extent - we all consciously maxed out our credit cards and invested in houses we knew we couldn't afford, essentially stealing money yet believing that it was ok. But I do not believe Galbraith wrote his thesis in order to exculpate, say, the Enron executives. They did break laws and were sent to jail.

To say that no laws that we are aware of so far have been broken regarding the current Irish situtation could actually, if not entirely accurately, be seen as an example of Galbraith's 'conventional wisdom' - the idea is swirling around in societal discourse, yet is simultaneously fundamentally at odds with Reality.

Only yesterday Colm Keena wrote the following:

"The 2006 Investment Funds, Companies and Miscellaneous Provisions Act says that persons who co-operate “on the basis of an agreement, either express or tacit, either oral or written”, aimed at the acquisition of shares by one or more of them, can be considered a concert party.

A concert party, the members of which buy a shareholding equal to more than 15 per cent of a company, is obliged to make a disclosure to the Stock Exchange. No such disclosure was made last July when members of the Quinn family, and the 10 investors, bought 25 per cent of Anglo Irish Bank....It is difficult to see how such a manoeuvre could be carried out without all the buyers involved being party to an agreement. Somebody somewhere was organising the massive transaction. The amount involved may have been close to €1 billion.

In such an instance, therefore, there could be reason to argue that not alone would it not be unlawful to name the former shareholders, but rather that it was unlawful that they weren’t declared at the time."


He also explained that:

"Under section 60 of the Companies Act, a company cannot lend money for the purchase of its own shares. The Act exempts banks from the restriction if they have loaned money in the normal course of their business. There is little about the Anglo transaction that indicates it was normal business, even for Anglo Irish Bank.

As well as this breach of company law, the bank may have been involved in insider dealing and market abuse."


Laws have most certainly been broken.

Interesting as He3's OP is, it is worrying if the result of this 'talking point' is to assist in raising our tolerance for extreme wrong-doing and criminal actions at the highest levels of public life.

We will never root out criminal behavior in public life if we do not accept the Reality of its existence.
 

He3

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Laws have most certainly been broken.

Interesting as He3's OP is, it is worrying if the result of this 'talking point' is to assist in raising our tolerance for extreme wrong-doing and criminal actions at the highest levels of public life.

We will never root out criminal behavior in public life if we do not accept the Reality of its existence.
I agree entirely - and see this post for more laws that have been broken:

http://www.politics.ie/justice/45664-crippling-whitecollar-crimebusters-how-fianna-fail-did-2.html#post1453209

I posted that on a thread I started about how Bertie did his best to sabotage the effective development of the ODCE. On a second thread I tried to flush out info on whether the government had lifted a finger to assist the gardai in finding evidence of wrongdoing in Anglo. http://www.politics.ie/justice/47360-government-assisting-gardai-their-enquiries.html After that came the raid... :)

And at the risk of starting a persian carpet full of threads there is one more of relevance.

http://www.politics.ie/justice/44917-corporate-fraud-numbers-under-investigation.html

My wish is that we do both things: hit the criminals, and recognise that behaviour which stops short of criminal can be just as harmful. No excuses either way.
 

code twinkle

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Then by all means submit your concerns to the nearest Garda station and see if they will send a case to the DPP.
I believe the Govt are doing that on my behalf as we speak...
 

He3

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He3

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He3 said:
Light regulation might have had a place if there was true enforcement. The government decided instead to sell us as a No enforcement zone. Same approach is taken in environmental regulation of industry.

Apparently you could register a hedge fund here in two hours, according to Kevin Murphy, Tax consultant, on Prime Time. He says the documentation could not physically be read in two hours. .
What Kevin Murphy said was very instructive and rather alarming. The standards and ethics followed by all in the IFSC has been a nagging concern for some time. We have sold out and followed a beggar my neighbour policy on corporation tax - and will have to hold on to it for the foreseeable future. In the IFSC that we are drawing in organisations with our low corporation tax rate, but also I suspect we are drawing in some rather dubious organisations and individuals with our light/lack of regulation. (As with many comments in the media it is hard to know how reliable and well-informed his comments were but I am inclined to believe him.)
You are far from alone.
 


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