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Call It Corruption

April 16, 2010

The Wall Street Journal has a boffo take on corruption as a macroeconomic drag. The story is about Greece, but the methods are applicable worldwide, and in places like Baltimore.

Leaning on forthcoming research from the Brookings Institution and reports from Transparency International, the story links Greece’s culture of corruption to its flagging tax collection and impending bailout. Key quote:

“The core of the problem is that we don’t have a culture of civic society,” says Stavros Katsios, a professor at Greece’s Ionian University who specializes in economic crime. “In Greece, complying with the rules is a matter of dishonor. They call you stupid if you follow the rules.”

That should sound familiar to Baltimoreans, and Americans in general.

There’s a chart alongside the WSJ piece depicting levels of corruption in many countries, along with their debt burdens. The United States falls somewhere in the middle. Daniel Kaufmann, the Brookings guy cited in the story, has written that ordinary measures of corruption focus too tightly on the crude cash in an envelope variety. More attention, he says, should be paid to “legal” corruption like regulatory capture:

Would this broader view of corruption result in different corruption ratings? Absolutely.

Let’s look at the U.S. Over the past few years, traditional measures of corruption, such as the Corruption Perceptions Index by Transparency International, have placed the U.S. among the least corrupt nations in the world, currently ranking No. 18 among 180 rated countries.

In stark contrast, when in 2004 I calculated an index of “legally corrupt” manifestations (measured through the extent of undue influence through political finance and powerful firms influencing politicians and policy making), the U.S. rated in the bottom half among the 104 countries surveyed. Countries like the Netherlands, Norway, Denmark and Finland exhibited low levels of “legal corruption” (ranking Nos. 1 through 4, respectively). Yet the U.S. was rated 53rd, a few ranks below Italy. Chile rated 18th. Also rating better than the U.S. were countries like Botswana, Colombia and South Africa.

Perhaps coincidently, today is the day former Washington Mutual executives get grilled in congress (Here’s the CSPAN feed) about the collapse of their once-giant bank. As usual, the bosses say their plan would have worked if not for those meddling government regulators. The reality is quite different, as exposed in this New York Times story from the other day. That story focuses on the battle between two regulators—the Office of Thrift Supervision and the Federal Deposit Insurance Corporation:

The report said the F.D.I.C. “met resistance” from the thrift supervisor when it assigned additional examiners to look at WaMu from 2005-8 and when it challenged the 2 rating in 2008.

The L.A. Times has the more visceral take on it, noting in its story yesterday that the OTS examiners who actually did their jobs were disparaged by their own government bosses:

One examiner said he was derided by colleagues as “the housing ‘bubble’ boy” for his “gloom and doom” predictions for some risky loans, and another complained that critics of subprime loans were called “chicken little.”

The full report, released today, is available here.

The hearings are going on right now. If you’re reading this after April 16, here’s a link to the YouTube vids.

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