Fraud in Economics and Regulation

So if you go back, classical economics understood

fraud, and, uh, all said that, uh, one of

the, the key things that a government has to do,

provide a rule of law and a

police force and an anti-fraud. Ayn Rand,

Von Mises, Von Hayek-

Mm

... said that you had to deal with fraud.

Along comes, uh, neoclassical economics, standard assumption,

information is perfect, cost-free.

We can't have fraud-

Mm

... in those circumstances. You...

So it would be, to ask an economist, neoclassical economist, about

fraud is, would be equivalent to asking a zoologist,

uh, uh,

to tell you about unicorns.

Mm-hmm.

Right?

Yeah.

It can't exist. It's a fictional beast, uh, and such.

Law and economics was even worse when it came along, what we call

neoclassical economics, where it's a pure religion.

So the famous thing that now a generation of lawyers has been

taught in America, um, from this treatise that I'm about

to quote from, it says, "A rule against fraud

is not necessary or even particularly important."

Which is, I think, the comment that was made to Brooksley Born

when she went after,

uh, uh, uh, the, the, tried to go after the, the, the,

some of the banks in,

in, in-

And by Alan Greenspan-

Yeah, yeah

... in their very first, uh, meeting, uh, where he said that you and I

are clearly gonna disagree, which she thought was a,

a fairly strange line to

someone you've just met, and he said, "You probably think that fraud is a basis

for regulation."

And, and you know, so she got that look you get

when you're trapped in an elevator

with a crazy person. Type of thing.

Unfortunately, all the world was trapped with a crazy person who

was in charge of the levers at the Federal Reserve, and he

proved to completely ignore fraud, and if

he hadn't, there wouldn't have been a financial

crisis.

Do you think that might change under Janet Yellen, especially given that her

husband is, uh, George Akerlof?

Well, uh, uh, we've just had a talk that, uh,

explained that, uh, what things that Joe Stiglitz had been saying for

20 years, uh, have not been incorporated by neoclassical

economics. And the perfect, uh, example of something

akin to that, of course, is someone who got the Nobel, uh,

laureate in the same

year for similar work, and that's George Akerlof,

um, and, uh, Janet Yellen's spouse.

Uh, and Akerlof explained how this looting

occurred, how this fraud mechanism occurred, and the

response of the person who was the leading

economics textbook writer in America now, uh, in the world actually,

N. Gregory Mankiw, was, and I quote, "It would be

irrational for savings and loan executives not to loot."