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.

Twenty-four thousand acres. More than 4,000 homes were in the burn area. Yet not a single home, including ours, was lost to the fire.

I’ve often heard that regulation is “strangling the economy” and “limiting individual choice.” Texas Governor Rick Perry has visited California seeking to lure businesses to his state by promising a more permissive regulatory environment.

My home is still standing: I credit Big Government.

The National Association of Home Builders (NAHB) estimates that the average impact of regulations on the cost of a single-family home in California is $32,000. This includes costs associated with where and how one can build a residence. The NAHB sees these costs as a burden.

But what about the benefits of those regulatory costs?

Homes in our area are required to have fire-retardant roofs and fire-retardant siding. Our subdivision is required to have roads with sufficient width to allow the passage of wide-bodied emergency vehicles. Every few hundred yards in a California development you will find a fire hydrant. All of these precautions, and many others, adds to the cost of a California home. But when an inevitable wildfire threatens, my home remains standing.

CAL FIRE is a California State agency that helps to organize the response to such fires; the cost of doing this is more than $1 billion per year. At the height of the blaze, nearly 2,000 firefighters from dozens of areas throughout California and several other states were engaged in the battle. We are responsible for salaries, training, facilities, and buying equipment for these fire companies—and we are on the hook for their costs of retirement. They are among the public employees about whom small-government conservatives complain.

In April this year, Americans were horrified when a fertilizer plant in West, Texas caught fire, triggering a massive explosion that killed 14 (mostly volunteer first responders), injured 200, obliterated 50 homes, and destroyed the West Texas Intermediate School located next to the plant. Rick Perry’s critics quickly seized on the disaster as an example of how a laissez-faire approach to government regulation results in disaster, a criticism he angrily denied.

But my concern is less about the lack of regulation of the plant—and more about why, once the plant was established, a school was built next door and homes were located within the blast area.

“In Texas, counties have almost no regulatory authority,” Kelly Haragan, director of the Environmental Law Clinic at the University of Texas told NPR. “And we kind of don’t like land use [policies] in Texas. So we’ve ended up where facilities are very close to people.”

California also allows permits development in vulnerable areas, of course—but with reasonable precautions in the event of disaster.

This doesn’t mean we turned everything over to government. When we evacuated from our home—which is situated 40 feet across one of those required wide streets from the burn area—our Camarillo social network was crucial. A friend and neighbor helped us to evacuate our animals; many people offered their homes to us; and one intrepid family took us and our pets into their home overnight.

Too often, American politics is described as a contest between Big Government and civil society. Westerners, in particular, are vulnerable to this point of view. But the historical truth is that we “won” the West through the efforts of individuals and government; yes even the federal government. We continue to win the West through the combined efforts of government and civil society in cooperation.

Less regulation and smaller government would not have saved my home, and no one but my neighbors could have promptly taken in my family in during evacuation. Both were crucial. So thank you, neighbors, and thank you, Big Government.

The post ‘Big Government’ Kept My House From Burning appeared first on Zócalo Public Square.