Last October, I saw a cartoon by Mike Peters in which a teacher asks a student to create a sentence that uses the verb “sacks,” as in looting and pillaging. The student replies, “Goldman Sachs.”
Sure enough, last week the Securities and Exchange Commission accused the Gucci-loafer guys at Goldman Sachs of engaging in what amounts to white-collar looting, The New York Time’s Paul Krugman writes in his most recent op-ed.
I’m using the term looting in the sense defined by the economists George Akerlof and Paul Romer in a 1993 paper titled “Looting: The Economic Underworld of Bankruptcy for Profit,” Mr. Krugman writes. That paper, written in the aftermath of the savings-and-loan crisis of the Reagan years, argued that many of the losses in that crisis were the result of deliberate fraud.
Was the same true of the current financial crisis?
Most discussion of the role of fraud in the crisis has focused on two forms of deception: predatory lending and misrepresentation of risks. Clearly, some borrowers were lured into taking out complex, expensive loans they didn’t understand — a process facilitated by Bush-era federal regulators, who failed to curb abusive lending and prevented states from taking action on their own.