The "Three Essentials"

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          The "Three Essentials" listed on the placard are drawn from a review by Prof. William K. Black, former bank regulator and deputy director of the National Commission on Financial Institutions, Reform, Recovery, and Enforcement during the investigation of the Savings and Loan crisis in the 80s.

          The review is of a book by MSNBC economics commentator Dylan Ratigan, the title of which is Greedy Bastards, available at Barry Ritholtz's blog, The Big Picture, which is itself a great source for clear understanding of the kleptocratic nature of the financial sector/disease that the world currently faces.

In the book review, Black says:

Ratigan’s view on these points turns out to be similar to mine.  He argues that the issue is not greed, but perverse incentives.  When CEOs have incentives adverse to the public and their customers they tend to act on those incentives and harm the public and their customers.  This observation is one of those obvious but essential points so often overlooked.  A CEOs’ principal function is creating, monitoring, and adjusting the corporation’s incentive structures.  There is a massive business literature on this function and CEOs uniformly believe that incentive structures for officers and employees are critical in shaping their behavior.

Later, he makes the points that I feature in the placard:

Ratigan gets right two of the three essentials to understand why we suffer recurrent, intensifying financial crises.  First, cheating has become the dominant strategy in finance.  Second, cheating is dominant because finance CEOs create such intensely perverse incentives that fraud becomes endemic. 

Then a little further down:

Ratigan can add to the effectiveness of his explanation by adding a description of the third essential driving our perverse incentives.  Accounting control fraud, as criminologists, economists, and (competent) financial regulators recognize is a “sure thing”. 

It is at this point that Black references the article (which is available through JSTOR without charge, but only on a one-copy-per-reader basis) by UC Berkeley professors, George A. Akerlof (Nobel Prize for Economics, 2001) and Paul M. Romer, "Looting: The Economic Underworld of Bankruptcy for Profit".

This article makes clear that Black's brief summary is entirely accurate.

Thanks for your interest in these matters very important to the survival of our way of life.