Tuesday, January 5, 2010

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


  1. I am not surprised. Hedge funds are for the wealthy not the average investor.

  2. While I believe it is important for there to be a free market in which companies can and do act in their own self interest, I also believe that government's role in regulating the markets is as vital to market success as the companies themselves. Companies are to be held accountable for their actions and the roles they play within countries today, I still believe that it is imperative for the government to work with other nations to collectively create uniform policies which will force these trans-national companies to adhere to basic trading principles and ethical standards.
    These caompanies ctors are similar to individuals in that The need for rules to be in place is imperative to a health market. The heavy deregulation and lassiez faire atmosphere America has had for the better part of the last decade has only made the argument for government involvement in the market even stronger.

  3. I completely agree with you Chim. It is more than important for there to be a free competitive market in order for there to be market success. There must be economic efficiency in order for there to actually be market success. The government should be involved to the extent that these companies produce market failure instead of market success. In my opinion to combat any deceptive trade practice, unfair completion, or fraud by companies, the government has enacted laws such as Antitrust laws and Unfair and Deceptive Trade Laws to protect the market from companies. Just seeing these lawsuits in a firm daily makes me realize how imperative it is that the government regulates the market through enacting laws.

    Tiffany Mack

  4. If we want to know where the money that used to be in the economy went look at the hedge funds.