Steven A. Ramirez is Professor of Law and Director, Business & Corporate Governance Law Center at Loyola University Chicago. He has private practice and federal financial regulatory experience. His ambitious aim is to explain our financial crises, crony capitalism, and surging, racialized inequality, and to advance a solution. He proposes “an economic rule of law” to “prevent the subversion of capitalism arising from excessive concentration of wealth” (p. 18).
Ramirez argues that subprime lenders caused the crisis and targeted minorities who would have qualified for lower cost conventional loans. His one word explanation for the lenders' actions: “recklessness” (p. 13). Lenders made too many loans at too low a price to borrowers who could not afford to repay. Crises occur because those with dominant economic power erode the rule of law that once held even financial elites accountable (p. 6). The solution is to restore the economic rule of law that opens opportunities for the maximum number of people while preventing the elites from rigging the system. Ramirez's defining metaphor is baseball before Jackie Robinson broke the color barrier: “too much talent is missing” (p. 18).
Ramirez's central contribution is providing a detailed description of the nature and an explanation of the importance of the erosion of the economic rule of law that defined the American system after the New Deal. He traces, for example, how the evisceration of the corporate fiduciary “duty of care” led Delaware to lead the “race to the bottom” by eliminating even the pretense of a duty of care. Ramirez explains why he believes this action was so harmful.
The author demonstrates the complexity of many law professors who have substantial practice experience. He plainly knows a great deal about the financial sector and is very positive about the potential of markets to continue to bring great development. He is also aware of the reality of life for the poor, minorities, and smaller businesses, and argues that the erosion of the economic rule of law is allowing the powerful to game the system not simply to gain wealth and political power but also to foreclose opportunities for others who lack similar wealth and power. The author demonstrates that ideological labels are often poor fits for real scholars.
Economists and criminologists agree with Ramirez's thesis that crony capitalists “subvert[t]” capitalism to rig the system. George Akerlof and Paul Romer explained how crony bankers would rig the system.”
“[M]any economists still seem not to understand that a combination of circumstances in the 1980s made it very easy to loot a financial institution with little risk of prosecution. Why abuse the system to pursue a gamble that might pay off when you can exploit a sure thing with little risk of prosecution?” (Reference Akerlof and RomerAkerlof & Romer 1993: 4–5).
Akerlof and Romer recognized that what criminologists call “accounting control fraud” produced a “sure thing” for the bankster (great wealth) by causing vast losses to the bank. Banksters optimize looting by ruining their loan underwriting and internal controls in order to make vast numbers of terrible loans, which no honest lender would do. Akerlof and Romer hammered this point home (referencing my work).
“[S]omeone who is gambling that his thrift might actually make a profit would never operate the way many thrifts did, with total disregard for even the most basic principles of lending: maintaining reasonable documentation about loans, protecting against external fraud and abuse, [and] verifying information on loan applications. …”
Akerlof and Romer foreshadowed this crisis. By 2006, half of “subprime” was also “liar's” loans. Liar's loans are made without “maintaining reasonable documentation” and “verifying information on loan applications.” By 2006, roughly 40 percent of all mortgage loans made that year were liar's loans (the comparable figure for the UK was 45 percent). The mortgage industry's antifraud experts reported in early 2006 that 90 percent of liar's loans were fraudulent, which means that over 2 million fraudulent mortgage loans were made in 2006 (then fraudulently sold). Reckless bankers go broke. Banksters become wealthy by causing the bank to make bad loans because accounting control fraud is a sure thing.
The baseball metaphors I recommend that Ramirez add are the steroid and blacklist eras. Steroids produce a “Gresham's” dynamics akin to control fraud—cheaters prosper so cheating spreads. Baseball owners blacklisted players who became “free agents,” while banksters blacklisted honest appraisers. Ramirez' thesis is correct and his proposed reforms are all the more necessary to stop the control frauds.
