Criminal Causes of the Economic Recession

As my distinguished colleague Professor Steven Ramirez, commented a weeks ago, the Section on Socio-Economics held a two-day meeting on January 6-7, 2010, which was organized by Professor Robert Ashford of Syracuse University School of Law, to address "The Economic Recovery and the Obama Presidency" at this year's Association of American Law Schools annual meeting in New Orleans. Professor Ramirez, spoke on a panel entitled "Efficiency, Distribution and Growth." I had the opportunity to speak at the conference as well, on a panel entitled “Criminal Causes of the Economic Recession.” The panel was moderated by my fellow blogger Professor Regina Burch of Capital University School of Law.

My co-panelist on the panel were Professor William Black of University of Missouri School of Law, Associate Dean Ellen Podgor of Stetson University College of Law, and Associate Dean Timothy Canova of Chapman University School of Law, who was re-scheduled to speak on a subsequent panel because Dr. James Galbraith of the LBJ School Public Affairs, University of Texas at Austin, was unexpectedly called away. Professors Black and Podgor each brought a unique perspective to the white collar causes of the current financial crisis. Professor Black discussed "control fraud" economic analysis -- frauds in which the person that controls a seemingly legitimate entity uses it as a "weapon" to defraud. Professor Black explained why epidemics of control fraud occur, and how such epidemics contributed to the current financial bubbles and crises.

Professor Podgor discussed that perhaps current regulation is adequate, but regulators have moved away from enforcement of those regulations. Professor Podgor postulated that enforcement of current regulations would not only serve as a deterrent to potential corporate wrongdoers, but would be an effective means of neutralizing the conditions that create criminiogenic environments most likely to produce hyper inflated financial bubbles, and effective praxis that could improve existing regulation.

My presentation brought a provocative perspective to the panel, regarding the need to regulate hedge funds in this age of excessive greed, fraud, and regulator’s failure to act, decisively to protect the pubic. This excessive greed and regulator in-action paradigm is a financial cultural phenomenon that developed during the Gilded Age from approximately 1865-1901. It was an age that was characterize by extravagance and the exuberant display of excess that has become woven into the praxis of American financial infrastructure. It is a philosophy that rejects the principles of the founding fathers, Alexander Hamilton, in particular, who as the First Secretary of the U.S. Treasury (1789-1795) was charged with developing the American financial infrastructure. Hamilton recognized that the young American republic needed to develop robust markets to attract and create capital, but he also recognized that a strong central government was also necessary to appropriately regulate the markets. As Hamilton eloquently stated “[w]hy has government been instituted at all? Because the passions of man will not conform to the dictates of reason and justice without constraint.”

The regulation of market transactions, as well as market participants, is critical for the proper functioning of the American markets, and the global economy especially given the interconnectedness of the world economies. This theory is the thesis of my latest article that was published last month in the Fordham Journal of Corporate and Financial Law entitled “Hedge Fund Fraud and the Public Good.” It is available on the Social Science Research Network and here. I welcome your thoughts, and comments on the article and, more importantly, what you believe is the appropriate praxis for the appropriate functioning of the American and global markets.

Lydie Nadia Cabrera Pierre-Louis