Why the ‘Experts’ Failed to See How Financial Fraud Collapsed the Economy

The following is an extract from the text of a James K. Galbraith’s written statement to members of the Senate Judiciary Committee delivered this May. The expanded version can be found here.

Galbraith to senators: "I write to you from a disgraced profession. Economic theory … failed miserably to understand the forces behind the financial crisis."

Latter-day financial economics…necessarily treats stocks, bonds, options, derivatives and so forth as securities whose properties can be accepted largely at face value, and quantified in terms of return and risk. That quantification permits the calculation of price, using standard formulae. But everything in the formulae depends on the instruments being as they are represented to be. For if they are not, then what formula could possibly apply?

Bank robberyHow about this for a great quote from the criminologist-economist William K. Black of the University of Missouri-Kansas City. He is the US’s leading systematic analyst of the relationship between financial crime and financial crisis. Black points out that accounting fraud is a sure thing when you can control the institution engaging in it:


"the best way to rob a bank is to own one."

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