For centuries, this society has been especially receptive to economic innovation and the strategies of wealth-seeking that so often accompany it. Openness to new technologies and new ways of doing business exacerbates information gaps between sellers and buyers. Those gaps, along with the enthusiasm that comes with new products and investment vehicles, create opportunities for fraudulent promoters and the bait-and-switch brigade.

As the journalist Edward Smith noted in the 1920s: “Every social change, every new invention brings to life a fresh manner of separating the sucker and his money. It may be and usually is only a disguised evolution of an older swindle, but it is new to the victim and therefore effective.”

That said, the last few decades—the period since 1980—have seen a dramatic increase in the scale and breadth of American business fraud. Of course, Americans in earlier eras encountered fraudulent investment scandals, like the market manipulations at the Re brokerage firm (which came to light in the early 1960s), or the misrepresentations made by the National Student Marketing Corporation (in the early 1970s). There also were egregious consumer frauds, such as the abusive mode of selling home heating systems by the Holland Furnace Company. But the worst of these episodes took place within medium-sized corporations, or on the fringes of the economy.

Today, fraud has become big business. In the last four decades, fraud cases running into the billions of dollars have become commonplace. So have allegations of marketing duplicity or false accounting against many of the largest corporations operating in the United States. Massive government contracting frauds roiled the defense industry in the 1980s and the healthcare industry the following decade. Consumer frauds have steadily targeted older Americans, first through telemarketing and now via the web.

During the late 1990s and early 2000s, accounting scandals rocked a series of major corporations, including Enron, WorldCom, and Sunbeam. Over the past decade, pyramid schemes such as those run by Bernard Madoff and Allen Stanford have bilked tens of thousands of investors. And in the run-up to the global financial crisis of 2008, the provision of marketing information throughout the entire chain of the American mortgage system became shot through with duplicity, with falsehoods embraced by appraisers, mortgage brokers, third-party loan assessors, underwriters, and distributors of derivatives.

This era of gargantuan fraud scandals is still with us. Even after the reality check of the most recent financial crisis, major fraud scandals keep happening: LIBOR rate-fixing; creation of myriad unauthorized accounts at a major nationwide bank, Wells Fargo; and another alleged billion-dollar pyramid scheme, Platinum Partners.

What accounts for this dramatic growth in the magnitude of corporate deception? The post-1980 preference for deregulation has played a big role. Cuts to enforcement budgets have been a common theme in explanations of fraud episodes. So has the disinclination among policy-makers to impose regulatory constraints on newly emerging markets such as financial derivatives.

A key premise among supporters of deregulation is that the reputational incentives created by markets will serve to check the rankest frauds. Corporations won’t go down the path of duplicity, this way of thinking presumes, because the long-term consequences of lost business can be so devastating. Unfortunately, the behavior of scores of corporations over the past few decades belies this comforting narrative. Companies have so decisively bought into the use of short-term incentives to structure compensation for employees and executives that it’s often hard for them to think much past the next quarter’s financial results.

After the 2008 financial crisis, American policy-makers placed a premium on containing marketplace duplicity. Most importantly, Congress created the Consumer Financial Protection Bureau (CFPB), with major duties: improving the flow of financial information to consumers, monitoring the operation of consumer credit markets, and bringing enforcement actions against businesses that engaged in unfair, deceptive, or abusive tactics. The CFPB has worked hard to simplify financial disclosures to consumers, and has clawed back almost $12 billion through a series of settlements with financial firms accused of wrongdoing. But in this same period, Congress also loosened disclosure requirements for many start-ups, a deregulatory move that has raised concerns about new opportunities for fraudulent promotion of new companies.

We now have an administration in Washington that trashes regulation of all sorts and appoints vehement opponents of regulation to run federal agencies. It’s not hard to imagine that enforcement budgets for consumer and investor protection will once again take a big hit, and that federal regulators will adopt a more forgiving posture toward dodgy marketing tactics.

Such policies are their own kind of sucker’s bet. If the Trump Administration implements them, the long history of American business fraud suggests that we can look forward to more headlines about major corporations that have cooked their books or cheated their customers. When scandals of this sort accumulate, they have consequences beyond short-term economic losses. Indeed, they undermine the social trust that underpins our country, and healthy capitalism itself.

The post Why Suckering Americans Is a Booming Business appeared first on Zócalo Public Square.

This is the downside of regulations, enacted after the Great Recession, that made banks safer than ever. Unfortunately, those same regulations also caused banks to focus on mortgages and publicly traded loans, rather than lending to growing private companies. This dislocation may explain why the economic recovery since 2007 has been the most tepid in the past 50 years.

Middle market companies in the U.S., defined as companies with between $10 million and $100 million in revenues, account for 24.6 percent of all U.S. jobs and almost $6 trillion in total revenues. These 351,148 companies have been left behind by requirements that banks hold larger reserves against potential losses. This effectively penalizes banks for providing customized loans to private companies which must be retained on their books, and encourages banks to engage in activities that can be bundled up and sold to investors. Banks today will also lend to companies owned by private equity firms, because they are deemed to be less “risky” since they are under the control of professional investors, who have become huge players in buying control of middle market companies.

So when you operate a firm independently or family-owned and without a major financial sponsor such as a private equity firm, you fall under the category of “non-sponsored.” If you’re “non-sponsored,” banks won’t lend you enough to grow to seize the emerging opportunities in the economy.

The result: while large corporate behemoths like General Motors and Apple are sitting on piles of cash and still raising more with cheap debt, their suppliers and partners—smaller private companies that make car seats or manufacture iPhone accessories—don’t have financing for working capital or capital expenditures to keep up with growth.

Banks are required by regulators to hold a minimum amount of cash in reserve and they can lend the rest to borrowers. Under Basel III rules adopted by the Federal Reserve, banks are required to hold at least 8 percent of cash against the simplified measures of risk in their loan portfolios as determined by the regulations. Prior to Basel III, the minimum was 2 percent. The result? A giant chunk of money that could be going to borrowers is now sitting idle, in bank reserves. In 2011, bank reserves zoomed to $2.6 trillion, from just $55 billion in 2008, according to the Federal Reserve.

It gets worse. For loans to small and medium-sized businesses, banks must hold up to five times more in cash reserves than for rated public debt to larger companies. If a bank makes a loan to a small business, it must hold the equivalent amount of cash in reserve in case the business defaults. In contrast, if a bank provides a commercial mortgage or a large company loan, it only needs to hold 20 percent of the value it lends. That is because those loans can be packaged and sold by the bank in large bundles to the public markets, (For those of you who have read or watched The Big Short, this process is called securitization). And for the biggest banks, which account for 95 percent of the industry, Basel III requires those institutions to maintain double the ratio of cash reserves to their total potential losses.

As a result, banks avoid unrated and highly customized middle market loans that can’t be bundled up and securitized. Instead, they now focus heavily on the syndicated loan and public bond market, where the loans range from $100 million to $1 billion. Bank lending peaked in 2000 at $500 billion in quarterly volume and remains below that level today.

In contrast, corporate bond issuance has grown from $2 trillion quarterly in 2000 to $4.5 trillion quarterly this year. Banks prefer to take lower returns from potentially risky bonds and syndicated loans because they don’t have to maintain the same level of reserves to cover potential losses. Banks can buy five times as many of these readily available bonds and syndicated loans with lower operating costs than is required to maintain a national network of loan underwriters and the required reserves.

These realities have made the local community bank an endangered creature; the number of banks in the U.S. fell from 15,000 to 5,000 over the past 30 years. The shrinking number of institutions has been driven by consolidating branch networks, community bank failures, and by the rise of non-bank finance companies specializing in consumer mortgages, once the bread-and-butter for local banks. Adding to the problem is the Dodd-Frank legislation. Named after its co-sponsors, Senator Chris Dodd and Congressman Barney Frank, the act aimed to curb the financial risk that led to the meltdown in 2008, but it has had multiple unintended consequences, among them additional costs and compliance pressures on community banks, forcing them to engage in further consolidation.

Finally, there’s the Volcker Rule, which is nested inside of Dodd-Frank. First put forth by former United States Federal Reserve Chairman Paul Volcker, the rule clamps down on banks’ ability to make speculative investments by prohibiting them from engaging in proprietary trading activity.

This rule led to the dismantling of large proprietary trading desks at major banks, which engaged in both private equity and private debt activity. That means fewer avenues of financing for mid-sized firms.

That’s why I left a career in private equity, where there is an overabundance of capital and talent chasing a handful of big ideas and too many small ones. Instead, I started a firm, Lateral Investment Management, that addresses the growth capital needs of growing and independent companies that have no private equity sponsor.

The company is built on the belief that there is a huge opportunity to partner with great owner-operated private companies that want to stay independent. Opportunities abound for growth amid upheaval in the healthcare industry, the rebirth of domestically oriented manufacturing firms, and pressing needs for infrastructure upgrades. For investors, non-bank lending to the most successful middle market companies may be the most compelling investment opportunity available today.

While the stock market continues at all time highs, the U.S. economy sputters along and struggles from the bottom up. There’s no question that the U.S. banking system is much safer than it was in 2007, but the price tag of the solutions cobbled together by the Bush and Obama administrations, Congress, and the Fed may have been more expensive than we can afford. The American ideal of the successful and thriving independent proprietor business—which has traditionally been an important engine of growth for the U.S. economy—is at risk.

The post Why Your Bank Wants No Part of Your Business appeared first on Zócalo Public Square.

Uber last month hired David Plouffe, President Obama’s former campaign manager and White House adviser, to direct its “campaign” against “Big Taxi” and local transportation regulators across the country. At the same time, conservative Republicans like Senator Marco Rubio and anti-tax crusader Grover Norquist championed Uber even though it is the darling of harried urbanites in Democratic enclaves like San Francisco and New York City.

The Republican Party is embracing Uber’s popularity in such hostile jurisdictions with a plaintive “See, this is what we have been complaining about all along” pitch, complete with a “petition in support of innovative companies like Uber.” Republicans understandably salivate at the sight of liberals, for once, railing against government overreach–excessive licensing requirements, taxes, and safety regulations–threatening a service they love. Is it too much of a stretch to hope that these ride-share fans might rise up to oppose similar government-imposed obstacles facing plenty of other American businesses–power utilities, financial companies, industrial manufacturers, and other “companies like Uber”?

Good luck with that. The big regulatory clashes of the Internet era–the various iterations of net neutrality, the Microsoft antitrust case, the disputes over taxing online commerce, the Napster music download battles, the recent Aereo TV Supreme Court case, and the current fight over how to regulate Uber, Airbnb, and other “sharing economy” firms–haven’t produced new thinking or conceptual breakthroughs for how to regulate other areas of the economy.

Instead, these “new economy” fights have deepened the dysfunction of our very old political system. These disputes have typically involved definitional squabbles: Is Uber merely another limo company? Was Aereo’s TV streaming service more akin to your old VCR or a rogue cable company? Disrupting technologies also render obsolete existing regulatory approaches that then become difficult to dismantle or update. And so Internet-era fights stand out for their brazen hypocrisy, cynicism, and intellectual inconsistency.

Take Uber. It’s hard to imagine Republicans cheering the company on if, instead of stealing market share from local union-controlled monopolies, it was stealing market share from a handful of large, publicly traded national taxi companies that had invested heavily in their infrastructure while satisfying regulations the new entrant was trying to avoid.

That alternative scenario is pretty much how things stand in the telecom sector, where Republicans have generally defended the prerogatives of incumbent players against regulators and new competitors preaching “net neutrality” (the principle that owners of the Internet’s pipes or airwaves cannot make separate deals with content providers on price or speed depending on their traffic volume or other considerations, but must treat everyone equally). When it comes to the long-running net neutrality battles at the FCC and in the courts, the GOP has been far more sympathetic to what economists call the “stranded costs” and property rights of established incumbents who built their businesses the old-fashioned way.

But conservatives aren’t alone in their hypocrisy, or semantic creativity, when it comes to Uber. Liberal Uber lovers, instead of addressing cities’ burdensome transport regulations head-on, are more comfortable arguing that the company doesn’t belong in the same category as those old yellow taxis and limo companies. Uber, you see, is a technology company!

This sort of semantic nonsense has been a staple of all Internet regulatory fights–and, on the business side, of the hype used to try to justify stratospheric valuations for dot-coms during the Internet bubble early on. For a long time Internet enthusiasts felt it was OK to “share” copyrighted music and films online widely, since it was somehow different than old school piracy. And if you think Tesla shouldn’t be forced to sell their cars through third-party dealers, arguing that it’s a tech company that shouldn’t be subject to the old rules is far easier than seeking to take on the anachronistic and anti-consumer laws hurting all car companies. Better to create a loophole or carve-out for the new players than to bother modernizing the entire system.

For years, online retailers like Amazon benefited from the dubious notion that taxing online sales would stifle the development of the Internet, and that online retailers, because they are primarily tech companies, shouldn’t be subject to those pesky burdens imposed on brick-and-mortar retailers. I am a huge fan of Amazon, but it is unfair to its competitors in the physical world (not to mention to state revenues) for my purchase of shoes on the site to be treated as some mystical high-tech event that is not, contrary to all appearances, a retail transaction.

The “sharing economy” moniker, as applied to the likes of Uber and Airbnb, is itself a brilliant but disingenuous fiction. What exactly am I “sharing” in an Uber transaction? As far as I can tell, the company owners are “sharing” with me a driver it has hired so long as I pay a certain amount of money to get from Point A to Point B. The service is good and prompt, but I am not sure what is being “shared” that my community’s yellow cab service doesn’t also “share” with me. Similarly, calling Airbnb part of the “sharing economy” seduces us into thinking it’s so different from everything that has come before it. But isn’t the underlying transaction involved–me paying you $100 to rent a room for the night–basically the same one I engage in if I book a hotel room on Expedia?

So let’s get real. The transformation of numerous industries by nimble players leveraging formidable information technologies on behalf of consumers is to be celebrated, but not to the point of pretending that things that are aren’t, or that aren’t are. There’s plenty of that already taking place in our traditional politics.

The post Why Liberals and Conservatives Agree on Uber appeared first on Zócalo Public Square.