When Fragile Become Friable: Endemic Control Fraud as a Cause of Economic Stagnation and Collapse
WHITE COLLAR CRIMES: A DEBATE, K. Naga Srivalli, ed., Hyderabad, India, The Icfai University Press, pp. 162-178, 2007
12 Pages Posted: 16 Jan 2010
Date Written: 2007
Individual “control frauds” cause greater losses than all other property crime combined. They are financial super-predators. Control frauds are crimes by the head of state or CEO that use the nation or company as a “weapon.” Waves of “control fraud” can cause economic collapses, discredit institutions vital to governance, and erode trust. Fraud’s defining element is deceit – the criminal creates and then betrays trust. Fraud erodes trust. Endemic control fraud causes institutions and trust to crumble and produces economic stagnation.
Economic theory about fraud is underdeveloped, economists are not taught about fraud mechanisms, and economists minimize the incidence and importance of fraud for reasons of self-interest, class and ideology. Economists’ understanding of fraud is so weak that its policies produce criminogenic environments that cause waves of control fraud. Thus the paradox: neo-classical economic triumphs produce tragedy. Perverse policies led to four recent crises: the deregulation of the savings & loan (S&L) industry produced the S&L debacle, “shock therapy” caused Russian economy to collapse, the “Washington consensus” produced a wave of control fraud in Latin America, and the desupervision of the U.S. economy in the 1980s and 1990s led to a wave of control fraud that contributed to the $9 trillion loss in U.S. stock market capitalization. Globalization transmits these crises through “contagion.”
The economics canon must incorporate criminological fraud theories. If it is bad criminology it is bad economics. If neo-classical economics predicts something that criminologists have falsified the economic theory is incorrect. Criminologists have found that neo-classical policies erode the institutions that constrain control fraud and make markets more efficient. These policies damage markets and aid the financial super-predators who harm markets and democracy.
Keywords: Corporate law, Financial crisis, Financial regulation, Banking, Banking regulation, Securities, Securities regulation, Control fraud, Fraud, Criminogenic Environment
JEL Classification: K14, K22, K23, K42, G18, G28, G38
Suggested Citation: Suggested Citation