THE 1993 ARTICLE BY AKERLOF AND ROMER THAT FORESAW THE FINANCIAL CRISIS.

THE 1993 ARTICLE BY AKERLOF AND ROMER THAT FORESAW THE FINANCIAL CRISIS. I made a mistake in posting. Yesterday’s post was out of order—it should have followed this one, which was going to introduce the article by George Akerlof and Paul Romer and highlight what is startling about it.The article by William K. Black that I linked to on May 17 had called my attention to the article. What is amazing is that the article was published in 1993 and yet it foresaw much of what happened with the toxic securities of the current financial crisis. Black summarizes their paper thus: “Akerlof and Romer explained how bank CEOs can use accounting fraud to create a “sure thing” in the form of record short- term income, generated by making low-quality loans at a premium yield while making only minimal reserve allowances for losses. While it lasts, this fictional income allows the chief executive officer to loot the bank, which then fails, and walk away wealthy.” The title of the Akerlof and Romer article was: “Looting: the Economic Underworld of Bankruptcy for Profit.”