Austerity measures imposed on already depressed economies have not been very helpful. Anyone with pedestrian knowledge of economics would have predicted that austerity measures imposed during a recessionary period would do more harm than good.
The IMF, which has been party to policy absurdities in the eurozone, now armed with the benefit of hindsight, admits to the damage that their nonsensical austerity measures have caused, more especially to the Greek economy. Former IMF managing director Dominique Strauss-Kahn when interviewed by Richard Quest on CNN also admitted to the unimaginative approach by the IMF, the European Commission and the European Central Bank and its failures. Forcing Greece to cut government spending when the economy was in recession was not only stupid but dangerous. Unemployment in Greece has since skyrocketed from a low of 8.5% in 2008 to an eye-popping 26.9% in 2013. Consumer spending, which is a critical component in the engine of economic growth, failed to grow due to lack of stimulus.
The one-size-fits-all policy approach to the eurozone under the dictatorship of Angela Merkel will not assist with economic recovery and will continue to negatively impact on the global economy. A policy shift is necessary to respond to the global economic realities. The global economic outlook has been slashed. Major economies have recorded declining growth rates. Emerging economies, which have been driving global economic recovery, are also under severe strain while still posting positive growth rates.
Japan has struggled for many years to fondle its economy back to decent growth. Its economy has been plagued by protracted periods of deflation, which are exacerbated by lower than desired consumer spending. The stimulus package of about $600 billion has had minimal inflationary effect to reach the target of 2% by 2015. Instead the Bank of Japan has cut the inflationary outlook, in spite of pumping liquidity into the market. The significant increase in government spending does not seem have the desired effect on the $5 trillion economy.
China, which has grown at mouth-watering rate for a consistent period, is also experiencing a slowdown. Some instructive lessons could be drawn from how Beijing has managed its economy over a period of three decades and how it continues to respond to changing circumstances with appropriate policy. The manner in which China manages its economy has offended some like the US, which accused Beijing of manipulating the exchange rate. The Chinese economy had been export-led for a number of years and low exchange rates served a meaningful purpose. There has been a policy shift in that there is an attempt to focus on consumption-led growth going forward. Low exchange rates, which the US has been whining about for a number of years, are of no significant consequence in the long-run. Consumer spending in China is about 40% of total GDP, compared to 70% in the US.
Policy-makers ordinarily see consumption as an opportunity for long-term growth and have responded accordingly with a stimulus package of about $600 billion. The results of policy intervention in China are evidenced by rising demand in luxury goods. Consumer spending on luxury products has been on steroids. The obvious question raised is the sustainability of these policy measures and potential bubbles created in the system, which may return later to cause heartache. But one thing remains, China appears to be demonstrating practical approaches to its own economic situation.
There are numerous global economic forums, like the G20, the World Economic Forum and so on, where global leaders converge on a regular basis to discuss problems confronting the world and how best to respond to them. These forums have become nothing more than talk-shops that do not generate any meaningful outcomes. There seems to be a greater need by world leaders to be seen to be doing something about global problems when in practical terms only narrow national interests take priority. The amount of hot-air emitted during these global forums could be the biggest contributor to global warming. The people are not doing enough to hold their leaders accountable and keep them honest.
Until the people begin to forcefully demand that leaders commit themselves to promotion of common welfare, they will keep getting the leaders they deserve. When leadership fails, it becomes the responsibility of the people to transform society and their conditions into what they should be. The act of transformation in the vacuum of leadership should begin with the overthrow of purposeless government, in the knowledge that revolutions are merely a means to an end but not an end itself. A successful revolution must equally transform the general thinking of society and strengthen their resolve in the pursuit of what is just and equitable. According to Che Guevara: “The revolution is not an apple that falls when it is ripe. You have to make it drop.” This persistent deterioration in the general welfare of society should be enough to agitate people to rebel against their thieving governments and punish crooked politicians. The people must rise!
No. These days, many speak of Europe as if it has already faded into irrelevance. In the words of American pundit Fareed Zakaria, “it may well turn out that the most consequential trend of the next decade will be the economic decline of Europe.” According to Singaporean scholar Kishore Mahbubani, Europe “does not get how irrelevant it is becoming to the rest of the world.” Not a day went by on the 2012 U.S. campaign trail, it seemed, without Republican challenger Mitt Romney warning that President Barack Obama was — gasp — turning the United States into a “European social welfare state.”
With its anemic growth, ongoing eurocrisis, and the complexity of its decision-making, Europe is admittedly a fat target right now. And the stunning rise of countries like Brazil and China in recent years has led many to believe that the Old World is destined for the proverbial ash heap. But the declinists would do well to remember a few stubborn facts. Not only does the European Union remain the largest single economy in the world, but it also has the world’s second-highest defense budget after the United States, with more than 66,000 troops deployed around the world and some 57,000 diplomats (India has roughly 600). The EU’s GDP per capita in purchasing-power terms is still nearly four times that of China, three times Brazil’s, and nearly nine times India’s. If this is decline, it sure beats living in a rising power.
Power, of course, depends not just on these resources but on the ability to convert them to produce outcomes. Here too Europe delivers: Indeed, no other power apart from the United States has had such an impact on the world in the last 20 years. Since the end of the Cold War, the EU has peacefully expanded to include 15 new member states and has transformed much of its neighborhood by reducing ethnic conflicts, exporting the rule of law, and developing economies from the Baltic to the Balkans. Compare that with China, whose rise is creating fear and provoking resistance across Asia. At a global level, many of the rules and institutions that keep markets open and regulate world trade, limit carbon emissions, and prosecute human rights abusers were created by the European Union. Who was behind the World Trade Organization and the International Criminal Court? Not the United States or China. It’s Europe that has led the way toward a future run by committees and statesmen, not soldiers and strongmen.
Yes, the EU now faces an existential crisis. Even as it struggles, however, it is still contributing more than other powers to solving both regional conflicts and global problems. When the Arab revolutions erupted in 2011, the supposedly bankrupt EU pledged more money to support democracy in Egypt and Tunisia than the United States did. When Libya’s Muammar al-Qaddafi was about to carry out a massacre in Benghazi in March 2011, it was France and Britain that led from the front. This year, France acted to prevent a takeover of southern Mali by jihadists and drug smugglers. Europeans may not have done enough to stop the conflict in Syria, but they have done as much as anyone else in this tragic story.
In one sense, it is true that Europe is in inexorable decline. For four centuries, Europe was the dominant force in international relations. It was home to the Renaissance and the Enlightenment. It industrialized first and colonized much of the world. As a result, until the 20th century, all the world’s great powers were European. It was inevitable — and desirable — that other players would gradually narrow the gap in wealth and power over time. Since World War II, that catch-up process has accelerated. But Europeans benefit from this: Through their economic interdependence with rising powers, including those in Asia, Europeans have continued to increase their GDP and improve their quality of life. In other words, like the United States — and unlike, for example, Russia on the continent’s eastern frontier — Europe is in relative though not absolute decline.
The EU is an entirely unprecedented phenomenon in world affairs: a project of political, economic, and above all legal integration among 27 countries with a long history of fighting each other. What has emerged is neither an intergovernmental organization nor a superstate, but a new model that pools resources and sovereignty with a continent-sized market and common legislation and budgets to address transnational threats from organized crime to climate change. Most importantly, the EU has revolutionized the way its members think about security, replacing the old traditions of balance-of-power politics and noninterference in internal affairs with a new model under which security for all is guaranteed by working together. This experiment is now at a pivotal moment, and it faces serious, complex challenges — some related to its unique character and some that other major powers, particularly Japan and the United States, also face. But the EU’s problems are not quite the stuff of doomsday scenarios.
“The Eurozone Is an Economic Basket Case.”
Only part of it. Many describe the eurozone, the 17 countries that share the euro as a common currency, as an economic disaster. As a whole, however, it has lower debt and a more competitive economy than many other parts of the world. For example, the International Monetary Fund projects that the eurozone’s combined 2013 government deficit as a share of GDP will be 2.6 percent — roughly a third of that of the United States. Gross government debt as a percentage of GDP is around the same as in the United States and much lower than that in Japan.
Nor is Europe as a whole uncompetitive. In fact, according to the latest edition of the World Economic Forum’s Global Competitiveness Index, three eurozone countries (Finland, the Netherlands, and Germany) and another two EU member states (Britain and Sweden) are among the world’s 10 most competitive economies. China ranks 29th. The eurozone accounts for 15.6 percent of the world’s exports, well above 8.3 percent for the United States and 4.6 percent for Japan. And unlike the United States, its current trade account is roughly in balance with the rest of the world.
These figures show that, in spite of the tragically counterproductive policies imposed on Europe’s debtor countries and despite whatever happens to the euro, the European economy is fundamentally sound. European companies are among the most successful exporters anywhere. Airbus competes with Boeing; Volkswagen is the world’s third largest automaker and is forecast to extend its lead in sales over Toyota and General Motors in the next five years; and European luxury brands (many from crisis-wracked Italy) are coveted all over the world. Europe has a highly skilled workforce, with universities second only to America’s, well-developed systems of vocational training, empowered women in the workforce, and excellent infrastructure. Europe’s economic model is not unsustainable simply because its GDP growth has slowed of late.
The real difference between the eurozone and the United States or Japan is that it has internal imbalances but is not a country, and that it has a common currency but no common treasury. Financial markets therefore look at the worst data for individual countries — say, Greece or Italy — rather than aggregate figures. Due to uncertainty about whether the eurozone’s creditor countries will stand by its debtors, spreads — that is, the difference in bond yields between countries with different credit ratings — have increased since the crisis began. Creditor countries such as Germany have the resources to bail out the debtors, but by insisting on austerity measures, they are trapping debtor countries like Spain in a debt-deflation spiral. Nobody knows whether the eurozone will be able to overcome these challenges, but the pundits who confidently predicted a “Grexit” or a complete breakup of the single currency have been proved wrong thus far. Above all, the eurocrisis is a political problem rather than an economic one.
“Europeans Are from Venus.”
Hardly. In 2002, American author Robert Kagan famously wrote, “Americans are from Mars and Europeans are from Venus.” More recently, Robert Gates, then U.S. defense secretary, warned in 2010 of the “demilitarization” of Europe. But not only are European militaries among the world’s strongest — these assessments also overlook one of the great achievements of human civilization: A continent that gave us the most destructive conflicts in history has now basically agreed to give up war on its own turf. Besides, within Europe there are huge differences in attitudes toward the uses and abuses of hard power. Hawkish countries such as Poland and Britain are closer to the United States than they are to dovish Germany, and many continue to foresee a world where a strong military is an indispensable component of security. And unlike rising powers such as China that proclaim the principle of noninterference, Europeans are still prepared to use force to intervene abroad. Ask the people of the Malian city of Gao, which had been occupied for nearly a year by hard-line Islamists until French troops ejected them, whether they see Europeans as timid pacifists.
At the same time, Americans have changed much in the decade since Kagan said they are from Mars. As the United States draws down from the wars in Afghanistan and Iraq and focuses on “nation-building at home,” it looks increasingly Venusian. In fact, attitudes toward military intervention are converging on both sides of the Atlantic. According to the most recent edition of Transatlantic Trends, a regular survey by the German Marshall Fund, only 49 percent of Americans think that the intervention in Libya was the right thing to do, compared with 48 percent of Europeans. Almost as many Americans (68 percent) as Europeans (75 percent) now want to withdraw troops from Afghanistan.
Many American critics of Europe point to the continent’s low levels of military spending. But it only looks low next to the United States — by far the world’s biggest spender. In fact, Europeans collectively accounted for about 20 percent of the world’s military spending in 2011, compared with 8 percent for China, 4 percent for Russia, and less than 3 percent for India, according to the Stockholm International Peace Research Institute. It is true that, against the background of the crisis, many EU member states are now making dramatic cuts in military spending, including, most worryingly, France. Britain and Germany, however, have so far made only modest cuts, and Poland and Sweden are actually increasing military spending. Moreover, the crisis is accelerating much-needed pooling and sharing of capabilities, such as air policing and satellite navigation. As for those Martians in Washington, the U.S. Congress is cutting military spending by $487 billion over the next 10 years and by $43 billion this year alone — and the supposedly warlike American people seem content with butter’s triumph over guns.
“Europe Has a Democratic Deficit.”
No, but it has a legitimacy problem. Skeptics have claimed for years that Europe has a “democratic deficit” because the European Commission, which runs the EU, is unelected or because the European Parliament, which approves and amends legislation, has insufficient powers. But European Commission members are appointed by directly elected national governments, and European Parliament members are elected directly by voters. In general, EU-level decisions are made jointly by democratically elected national governments and the European Parliament. Compared with other states or even an ideal democracy, the EU has more checks and balances and requires bigger majorities to pass legislation. If Obama thinks it’s tough assembling 60 votes to get a bill through the Senate, he should try putting together a two-thirds majority of Europe’s governments and then getting it ratified by the European Parliament. The European Union is plenty democratic.
The eurozone does, however, have a more fundamental legitimacy problem due to the way it was constructed. Although decisions are made by democratically elected leaders, the EU is a fundamentally technocratic project based on the “Monnet method,” named for French diplomat Jean Monnet, one of the founding fathers of an integrated Europe. Monnet rejected grand plans and instead sought to “build Europe” step by step through “concrete achievements.” This incremental strategy — first a coal and steel community, then a single market, and finally a single currency — took ever more areas out of the political sphere. But the more successful this project became, the more it restricted the powers of national governments and the more it fueled a populist backlash.
To solve the current crisis, member states and EU institutions are now taking new areas of economic policymaking out of the political sphere. Led by Germany, eurozone countries have signed up to a “fiscal compact” that commits them to austerity indefinitely. There is a real danger that this approach will lead to democracy without real choices: Citizens will be able to change governments but not policies. In protest, voters in Italy and Greece are turning to radical parties such as Alexis Tsipras’s Syriza party in Greece and Beppe Grillo’s Five Star Movement in Italy. These parties, however, could become part of the solution by forcing member states to revisit the strict austerity programs and go further in mutualizing debt across Europe — which they must ultimately do. So yes, European politics have a legitimacy problem; the solution is more likely to come from policy change rather than, say, giving yet more power to the European Parliament. Never mind what the skeptics say — it already has plenty.
“Europe Is About to Fall off a Demographic Cliff.”
So is nearly everybody else. The EU does have a serious demographic problem. Unlike the United States — whose population is projected to increase to 400 million by 2050 — the EU’s population is projected to increase from 504 million now to 525 million in 2035, but thereafter to decline gradually to 517 million in 2060, according to Europe’s official statistical office. The problem is particularly acute in Germany, today the EU’s largest member state, which has one of the world’s lowest birth rates. Under current projections, its population could fall from 82 million to 65 million by 2060.
Europe’s population is also aging. This year, the EU’s working-age population will start falling from 308 million and is projected to drop to 265 million in 2060. That’s expected to increase the old-age dependency ratio (the number of over-65s as a proportion of the total working-age population) from 28 percent in 2010 to 58 percent in 2060. Such figures can lead to absurd predictions of civilizational extinction. As one Guardian pundit put it, “With each generation reproducing only half its number, this looks like the start of a continent-wide collapse in numbers. Some predict wipeout by 2100.”
Demographic woes are not, however, something unique to Europe. In fact, nearly all the world’s major powers are aging — and some more dramatically than Europe. China is projected to go from a population with a median age of 35 to 43 by 2030, and Japan will go from 45 to 52. Germany will go from 44 to 49. But Britain will go from 40 to just 42 — a rate of aging comparable to that of the United States, one of the powers with the best demographic prospects.
So sure, demography will be a major headache for Europe. But the continent’s most imperiled countries have much that’s hopeful to learn from elsewhere in Europe. France and Sweden, for example, have reversed their falling birth rates by promoting maternity (and paternity) rights and child-care facilities. In the short term, the politics may be complicated, but immigration offers the possibility of mitigating both the aging and shrinking of Europe’s population — so-called decline aside, there is no shortage of young people who want to come to Europe. In the medium term, member states could also increase the retirement age — another heavy political lift but one that many are now facing. In the long term, smart family-friendly policies such as child payments, tax credits, and state-supported day care could encourage Europeans to have more children. But arguably, Europe is already ahead of the rest of the world in developing solutions to the problem of an aging society. The graying Chinese should take note.
“Europe Is Irrelevant in Asia.”
No. It is often said — most often and loudly by Singapore’s Mahbubani — that though the EU may remain relevant in its neighborhood, it is irrelevant in Asia, the region that will matter most in the 21st century. Last November, then-Secretary of State Hillary Clinton proclaimed that the U.S. “pivot” to Asia was “not a pivot away from Europe” and said the United States wants Europe to “engage more in Asia along with us.”
But Europe is already there. It is China’s biggest trading partner, India’s second-biggest, the Association of Southeast Asian Nations (ASEAN)’s second-biggest, Japan’s third-biggest, and Indonesia’s fourth-biggest. It has negotiated free trade areas with Singapore and South Korea and has begun separate talks with ASEAN, India, Japan, Malaysia, Thailand, and Vietnam. These economic relationships are already forming the basis for close political relationships in Asia. Germany even holds a regular government-to-government consultation — in effect a joint cabinet meeting — with China. If the United States can claim to be a Pacific power, Europe is already a Pacific economy and is starting to flex its political muscles there too.
Europe played a key role in imposing sanctions against Burma — and in lifting them after the military junta began to reform. Europe helped resolve conflicts in Aceh, Indonesia, and is mediating in Mindanao in the Philippines. While Europe may not have a 7th Fleet in Japan, some member states already play a role in security in Asia: The British have military facilities in Brunei, Nepal, and Diego Garcia, and the French have a naval base in Tahiti. And those kinds of ties are growing. For example, Japanese Prime Minister Shinzo Abe, who is trying to diversify Japan’s security relationships, has said he wants to join the Five Power Defense Arrangements, a security treaty that includes Britain. European Union member states also supply advanced weaponry such as fighter jets and frigates to democratic countries like India and Indonesia. That’s hardly irrelevance.
“Europe Will Fall Apart.”
Too soon to say. The danger of European disintegration is real. The most benign scenario is the emergence of a three-tier Europe consisting of a eurozone core, “pre-ins” such as Poland that are committed to joining the euro, and “opt-outs” such as Britain that have no intention of joining the single currency. In a more malign scenario, some eurozone countries such as Cyprus or Greece will be forced to leave the single currency, and some EU member states such as Britain may leave the EU completely — with huge implications for the EU’s resources and its image in the world. It would be a tragedy if an attempt to save the eurozone led to a breakup of the European Union.
But Europeans are aware of this danger, and there is political will to prevent it. Germany does not want Greece to leave the single currency, not least due to a fear of contagion. A British withdrawal is possible but unlikely and in any case some way off: Prime Minister David Cameron would have to win an overall majority in the next election, and British citizens would have to vote to leave in a referendum. In short, it’s premature to predict an EU breakup.
This is not to say it will never happen. The ending of the long story of Europe remains very much unwritten. It is not a simple choice between greater integration and disintegration. The key will be whether Europe can save the euro without splitting the European Union. Simply by its creation, the EU is already an unprecedented phenomenon in the history of international relations — and a much more perfect union than the declinists will admit. If its member states can pool their resources, they will find their rightful place alongside Washington and Beijing in shaping the world in the 21st century. As columnist Charles Krauthammer famously said in relation to America, “Decline is a choice.” It is for Europe too.
Buried several hundred pages into a new World Economic Forum report on global tourism, past the sections on air travel infrastructure and physician density (by which they mean the number of physicians per capita, not the mass-per-cubic-meter of individual doctors), are some very interesting numbers. The WEF has compiled survey data from 140 countries estimating the attitude of each countries’ population toward foreign visitors.
The results, mapped out above, seem significant beyond just tourism. Red countries are less welcoming to foreign visitors, according to the data; blue countries are more welcoming. Click the map (or here) to enlarge the image.
The WEF gathered the data from late 2011 through late 2012 by asking respondents, “How welcome are foreign visitors in your country?” The WEF explains that the survey results are meant to help “measure the extent to which a country and society are open to tourism and foreign visitors.”
According to the data, the top three most welcoming countries for foreigners are, in order: Iceland, New Zealand and Morocco. Other high-ranking countries include the rich and peaceful of the Western world (Ireland, Canada, Austria), a few tourist havens (Thailand, United Arab Emirates), and, for some reason, big parts of West Africa.
The three countries least welcoming to foreigners are, in order: Bolivia, Venezuela and Russia. Other poorly ranked countries include the more troubled states of the greater Middle East (Iran, Pakistan, Saudi Arabia), Eastern Europe and two East Asian states I was very surprised to see so near the bottom: China and South Korea.
Part of what makes these data so interesting is that there is no easy “grand unifying theory” that I can see, no single variable that explains the outcomes. It’s not wealth or GDP per capita: that would not explain why South Korea ranks so low, or the variance among rich Western states. It’s certainly not the number of foreign visitors: the mid-ranking United States and low-ranked China have some of the world’s highest rates of foreign tourism.
If anything, maybe what’s interesting about this map is the degree to which it seems to cut against common American perceptions of the world. Although there are definitely some Middle Eastern states in the red here, the region actually scores pretty well. Tourism-friendly Morocco is no surprise, but you might not have expected to see Yemen ranked above Sweden and Belgium.
Western Europe is generally friendly toward foreigners but, perhaps because of the touchy politics around immigration there, ranks alongside much of sub-Saharan Africa. The United States, the land of the Statue of Liberty and “give us your tired, your poor, your huddled masses yearning to breathe free,” ranks 102nd out of 140 countries, well below much of the Middle East.
One thing I’m struck by, in trying to puzzle out this map, is the apparent correlation between unfriendliness to foreigners and nationalism. That would maybe help to explain the low ratings for China and South Korea (although there are other possible factors here, including race) and for Russia. It might also help to explain why the United States, Germany and Japan — three countries with strongly nationalist histories — rank below other wealthy nations.
The nationalism theory makes a bit more sense when we look region-to-region. In Latin America, for example, a region generally friendly to foreigners, three countries stand out: Bolivia, Ecuador and Venezuela. All three have governments that could be fairly described as nationalistic. It also makes some sense in the Middle East, where Saudi Arabia and Iran rank poorly among countries that generally court foreign tourism.
But there are reasons to think my theory might be wrong: it doesn’t explain why Denmark, a rich Western European country, is so much redder than its neighbors, for example; nor does it explain the variation in southern Africa.
We know that leading up to the Great Financial Crisis Goldman Sachs used Accounting Control Fraud to make big profits for itself and its executives. Unfortunately, the fraud has been overlooked by both the White House and the Department of Justice in the interests of the banks’ not failing. It does not seem to matter that millions of ordinary people have lost their pensions and savings because of this banks’ actions.
Here’s another reminder of what accounting control fraud looks like:
Goldman Sachs: Doing “God’s Work” by inflicting the Wages of Sin Globally
The central point that I want to stress as a white-collar criminologist and effective financial regulator is that Goldman Sachs is not a singular “rotten apple” in a healthy bushel of banks. Goldman Sachs is the norm for systemically dangerous institutions (SDIs) (the so-called “too big to fail” banks). Impunity from the laws, crony capitalism that degrades democracy, and massive national subsidies produce exceptionally criminogenic environments. Those environments are so perverse that they produce epidemics of “control fraud.” Control fraud occurs when the persons who control a seemingly legitimate entity use it as a “weapon” to defraud. In finance, accounting is the “weapon of choice.” It is important to remember, however, that other forms of control fraud maim and kill thousands.
Large, individual accounting control frauds cause greater financial losses than all other forms of property crime – combined. Accounting control frauds are weapons of mass financial destruction. One of the crippling flaws of the World Economic Forum (WEF) is ignoring private sector control frauds. Control fraud makes a mockery of “stakeholder” theory. Accounting control fraud, for example, aims its stake at the heart of its stakeholders. The principal intended victims are the shareholders and the creditors (which includes the workers). Other forms of control fraud primarily target the customers. If the WEF wishes to effectively protect stakeholders it is imperative that they undertake a sea change and make the detection, prevention, and sanctioning of control fraud one of their central priorities. WEF does the opposite, it wishes away fraud with propaganda because the alternative is to admit that many of its dominant participants are the central problem – they are degrading the state of the world. In 2012, in response to endemic, elite financial frauds, the WEF declared the following without citation or reasoning in its 2012 report on “Rethinking Financial Innovation.”
6.1.1 Consumer Disservice
Malfeasance and outright fraud [in finance] are extraordinarily damaging but also, fortunately, extremely rare.
This passage Report demonstrates that WEF was unable to escape its dogmas and conduct a fundamental rethinking of what caused the crisis. In a criminogenic environment fraud is common, not “rare.” That is an empirical fact if one has competent investigators. The national commission to investigate the savings and loan debacle found that control fraud was “invariably” present “at the typical large failure.” We obtained over 1000 felony convictions in cases designated as “major” by the Justice Department. The (2001) Nobel Laureate in Economics, George Akerlof and Paul Romer published their classic article in 1993 entitled “Looting: the Economic Underworld of Bankruptcy for Profit” explaining accounting control fraud. Akerlof and Romer emphasized five points:
They had supplied the missing economic theory of control fraud, so economists no longer had an excuse for ignoring such frauds
The regulators in the field recognized that deregulation was “bound” to create widespread fraud because it created a criminogenic environment in which fraud paid
Accounting control fraud was a “sure thing” – if lenders followed the fraud “recipe” three results were certain: (a) the bank would promptly report record (albeit fictional) profits, (b) the controlling officers would promptly be made wealthy by modern executive compensation, and (c) the bank would suffer catastrophic losses
If many banks in the same area followed the same strategy the result would hyper-inflate a bubble and delay loss recognition because bad loans could be refinanced, and
Now that we had an economic theory confirming that the field regulators had gotten it right from the beginning the economists could prevent future fraud epidemics if they supported the regulators rather than pushing deregulation
The accounting control fraud recipe for a lender has four “ingredients”:
Grow like crazy by
Making really crappy loans at a premium yield, while
Employing extreme leverage, and
Providing only trivial reserves for the inevitable, massive loan losses
Akerlof had identified another control fraud variant – anti-purchaser fraud – in his seminal article on markets for “lemons.” He identified a critical principle in that article – the “Gresham’s” dynamic. Akerlof explained that if a seller gained a competitive advantage over his honest competitors through fraud market forces would become perverse and “bad ethics would drive good ethics from the marketplace.”
WEF has been acting for decades to make banking criminogenic. They have pushed the three “de’s” – deregulation, desupervision, and de facto decriminalization. They have favored executive compensation systems. They have pushed for ease of entry. And they have spread the myth that fraud by corporate elites is “rare.” WEF has optimized the intensely criminogenic environments that produce recurrent, intensifying fraud epidemics, bubbles, and financial crises.
WEF’s complacency about accounting control fraud has led to its embarrassing failures in finance. It’s “competitiveness” scales and “financial market development” scales have praised the most criminogenic financial systems – Iceland, Ireland, the UK, the U.S., and Spain – even as the largest banks in those Nations were (in reality) destroyed along with the much of the national economy. Similarly, the WEF’s “global risks” series has proven unable to identify the major financial risks until the hurricane has roared through the system. The central problems are the same – the WEF “stakeholder” premise and the WEF’s domination by powerful corporations is an elaborate propaganda apparatus that assumes away the reality of how CEOs running control frauds use compensation (and the power to hire, promote, and fire) and political power to deliberately create the perverse incentives that produce widespread fraud. The irony is that the WEF’s dogmas have encouraged elite frauds to drive stakes through the stakeholders.
How is it that a bank like Goldman Sachs, whose reputation leaves much to be desired, would be hired by a country, whose financial reputation is dubious at best, to create PR for that country’s investments? You could say they are both cut from the same cloth, or that each recognizes the other’s faults.
Note that the fee Goldman is being paid by the Russian government is almost the same amount as Goldman’s payment for fraud to the SEC in 2010. ” This is a case of, “I’ll polish your image if you will polish mine.”
Goldman Sachs to improve Russia’s image for $500,000
When Haitian President Michel Martelly visited the Dominican Republic last month, he was awarded the country’s highest honor for a foreign head of state, in large part for his efforts to lure reconstruction investment to Haiti after its catastrophic 2010 earthquake, which killed more than 200,000 people. In an interview in Santo Domingo, the Dominican capital, Martelly told TIME he’s “tried to change the perception [the world] has of Haiti as a place where nothing works,” and he listed his accomplishments so far, including $450 million in tourism investment. “Haiti is a land of opportunity,” the boisterous former carnival singer said. “Because Haiti is still a virgin.”
But a few days later, accusations of less than virgin behavior were swirling around both Martelly and one of the Dominican Republic’s most prominent politicos. In a March 31 national television broadcast, Dominican investigative reporter Nuria Piera alleged that Dominican Senator Félix Bautista — who owns or controls construction companies that in the past year have received Haitian government contracts worth more than $200 million — paid Martelly a total of almost $2.6 million during Martelly’s presidential campaign and after his landslide victory in Haiti’s 2011 election. The charge, based on spreadsheets of bank records Piera displayed on the air, was serious enough to prompt Dominican federal prosecutors to declare Bautista under investigation. Both the Senator and Martelly, whose office calls the allegation “a media lynching,” deny it.
(PHOTOS: After Quake, Carnival Returns to Haiti)
The Bautista controversy, fairly or not, is a jolting reminder of Martelly’s mixed record — and the governmental dysfunction still plaguing Haiti during its recovery — as he approaches his first year in office next month. The construction contracts in question, including one to rebuild Haiti’s legislative palace, were awarded in 2010. But late last year they became the targets of an audit by Martelly’s then Prime Minister, Garry Conille — who in February resigned largely because of pressure from members of Haiti’s parliament and Martelly’s government, who resented the scrutiny. The exit of Conille, a trusted technocrat whose appointment was backed by the U.S. and the international community, set back Haiti’s recovery efforts and highlighted the acrimonious relationship between Martelly and Parliament.
Piera’s corruption investigation suggests that Bautista, a leader of the ruling party of Dominican President Leonel Fernández, made the payments to Martelly, who was a heavy favorite to win Haiti’s March 2011 presidential vote, in order to keep winning contracts under the new Haitian government. In a joint declaration on Thursday, April 12, both Fernández’s and Martelly’s administrations called the journalist’s charges part of a vague “plot” by opponents to discredit Martelly and aid the Dominican opposition in that nation’s May presidential election.
(MORE: Quake-Ravaged Haiti Still Without a Government)
Either way, the controversy has forced Martelly off message yet again. When he met with TIME last month, he seemed to have put the Conille resignation flap behind him — his new Prime Minister choice, longtime friend and business associate Laurent Lamothe, has been approved by the Senate — and talked confidently of new investment ventures that he hoped were a signal that “Haiti is open for business.” He emphasized the positive reception he’d gotten at the World Economic Forum gathering in Davos, Switzerland, in January, when Irish billionaire Denis O’Brien, head of cellphone powerhouse Digicel, as well as the chairmen of Marriott, Heineken and Nestle, all spoke “about what an opportunity Haiti is,” he said.
Digicel and Marriott, in fact, have since joined forces to build a $45 million, 173-room hotel in Port-au-Prince, and last month an arm of the World Bank Group pledged a $10 million fund to spur small- and medium-size businesses. The “Invest in Haiti” forum that Martelly hosted last November drew a thousand capitalists from industries like tourism, infrastructure, agriculture and textiles and resulted in $200 million in contracts. The Haitian government itself is poised to spend up to $700 million, meaning the western hemisphere’s poorest nation could see at least $1.25 billion invested inside its borders in the coming months. “Once we invest that,” Martelly told TIME, “you attract other investors and companies and they feel like things are moving. You’ll have more of that coming.”
Tomorrow:- O’Brian and Digicel Never far from Controversy – Haiti, Digicel National Fund for Education smells fishy