Sunday, August 15, 2010

The Austrian School of Corporate Crime

Review of The Mystery of Banking by Murray Rothbard

This book by “Mystery Murray” – the most prominent American exponent of the Austrian School of economics -- is a true model of ingeniously argued and highly refined right-wing horse-shit. Pardon me for being so gauche as to criticize this book on the basis of reviews, instead of actually reading it. However I can smell the dogmatism a mile off, when “a surge in bank failures, central banks around the globe bailing out failed commercial and investment banks, double-digit inflation rates in many parts of the world and hyperinflation …” is attributed to technical banking issues and excessive government intervention.

It totally ignores the notorious fact that the financial crisis was largely caused by fraud, i.e. criminal activity on the part of bankers and other Wall Street crooks. I concede that The Mystery of Banking was published many years before the Republicans managed to wreck the economy in the 2008 crisis. But contemporary Austrian authors persist in ignoring financial fraud. Hence it is reasonable to attribute the same obtuseness to Rothbard.

The financial crisis was not caused by any intrinsically economic event, but rather by a breakdown of law and order, euphemistically known as “deregulation”. I cite from a letter written by the noted economist James K. Galbraith to the US Congress in May 2010:

“Economists have soft- pedaled the role of fraud in every crisis they examined, including the Savings & Loan debacle, the Russian transition, the Asian meltdown and the bubble. They continue to do so now.”

“[I]s it possible for mortgage originators, ratings agencies, underwriters, insurers and supervising agencies NOT to have known that the system of housing finance had become infested with fraud? Every statistical indicator of fraudulent practice – growth and profitability – suggests otherwise. Every examination of the record so far suggests otherwise. The very language in use: ‘liars' loans,’ ‘ninja loans,’ ‘neutron loans,’ and ‘toxic waste,’ tells you that people knew. I have also heard the expression, ‘IBG,YBG;’ the meaning of that bit of code was: ‘I'll be gone, you'll be gone.’”

“In this situation, let me suggest, the country faces an existential threat. Either the legal system must do its work. Or the market system cannot be restored. There must be a thorough, transparent, effective, radical cleaning of the financial sector and also of those public officials who failed the public trust. The financiers must be made to feel, in their bones, the power of the law. And the public, which lives by the law, must see very clearly and unambiguously that this is the case.”[1]

More evidence that the financial crisis was caused by fraud is provided by the Financial Times, which in July 2010 interviewed Guan Jianzhong, chairman of Dagong Global Credit Rating, a privately owned Chinese rating agency. Mr. Guan stated, “The financial crisis was caused because rating agencies didn’t properly disclose risk and this brought the entire US financial system to the verge of collapse, causing huge damage to the US and its strategic interests.”

The Financial Times notes: “… [W]estern regulators … have heavily criticised the big three agencies for handing top ratings to mortgage-linked securities that turned toxic when the US housing market collapsed in 2007.”

Mr. Guan went on to say: “The western rating agencies are politicised and highly ideological and they do not adhere to objective standards.” The Financial Times adds that Mr. Guan ”specifically criticised the practice of “rating shopping” by companies who offer their business to the agency that provides the most favourable rating.”[2]

Rothbard’s ideological blinkers prevent him from noticing fraud. This is characteristic for the Austrian School of Economics. I have searched in vain in the works of Hayek and von Mises for any mention of business crime.

Such consistent neglect of business crime is a clear indication that the sort of economics practiced by these worthies serves primarily as an apologetic discourse intended to protect the interests of the business class come hell or high water and regardless of the facts. Moreover this obsessive avoidance of the subject of fraud serves as the principal justification for their crackpot opposition to government regulation of business.

After 30 years of deregulation, largely justified by reference to the Austrian School’s convenient doctrines – which, by the way, are largely unsupported by any logical argument -- the GOP finally managed to demolish all the safeguards that the New Deal had prudently put in place to prevent a recurrence of the massive fraudulent speculation that triggered the 1929 Wall Street crash. The inevitable result was that the entire US financial sector started systematically breaking the law, culminating in the financial catastrophe we are now experiencing.[3]

In a nutshell, libertarians and Austrians are nothing but enablers and justifiers of criminal activity by the wealthy. Their specious theories should be judged, not from the standpoint of economics, but from that of criminology.[4]

[1] James K. Galbraith: Why the 'experts' failed to see how financial fraud collapsed the economy,
[2] China Calls Our Bluff: The US is Insolvent and Faces Bankruptcy as a Pure Debtor Nation, by Washington's Blog,
[3] The insouciant recklessness of the Republicans’ deregulating frenzy is briefly recounted in Joseph Stiglitz’ article 5 Disastrous Decisions that Got Us into this Economic Mess, of December 2008. On the same subject:
[4] I will expand on this subject in a forthcoming article entitled Slouching towards Catastrophe; A Brief History of GOP Economic Lunacy

1 comment:

  1. Points well taken, mi Amigo! Logical, informative, well documented & precise.
    P.S. Like your comment: "The right-wing US press gives off that unmistakable stench of propaganda that I recall so clearly from when I was living in Communist East Germany." Isn't it interesting when right-wingers imply that Obama threatens a return of Hitler's tactics, when it's just the opposite?!