Ever since an epic financial crisis hit the United States in 2008, mainstream economists, most of whom utterly failed to foresee the oncoming train wreck, have been scrambling to introduce a financial sector dimension to their models. It was a conventional approach that detached the study of financial stability from macroeconomic variables, the narrative goes, that prevented the experts from seeing the build-up of an unsustainable housing bubble that, when it crashed, took down the economy down with it.
from Global Investing:
Who is next? After the Madoff and Satyam scandals, rattled investors are looking anxiously over their shoulders for the next big financial fraud. It is generally assumed that the downturn will expose more wrongdoings - but that doesn't mean people become more dishonest when the economy is sick. In fact, quite the opposite, according to John Kenneth Galbraith's definitive 1954 work "The Great Crash, 1929." When it comes to embezzlement, it's all a question of how visible the "bezzle" is, he argues. Galbraith's 200-page history of the world's biggest boom-and-bust has stormed back into the bestseller lists in recent months, giving modern-day readers a glimpse of how speculative markets became divorced from reality 80 years ago and the hazards this created. His words are as relevant as ever: At any given time there exists an inventory of undiscovered embezzlement in - or more precisely not in - the country's businesses and banks. This inventory - it should perhaps be called the bezzle - amounts at any moment to many millions of dollars. It also varies in size with the business cycle. In good times people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression all this is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks. (Reuters photo: Disgraced financier Bernard Madoff is escorted by police as he departs U.S. Federal Court after a hearing in New York, January 5, 2009)