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TMFPostOfTheDay (< 20)

Bring the Broken Windows Theory to Wall Street?



March 14, 2012 – Comments (0)

Board: Macro Economics

Author: Goofyhoofy

Everybody knows what the 'Broken Windows' theory is; the originator of it just died a few days ago. I wish he were still around, because I would like to ask how he explains that while crime in New York did go down after his recommendations were implemented (going after the small problems, which, if ignored, lead to larger problems and an overall sense of 'who cares'?), crime also went down in cities across the country where his recommendations were not implemented.

Still, the theory holds some interest merely because it seems to appeal to common sense, and because everyone has, at one time or another, seen the blight of "broken windows", albeit in the form of derelict buildings, squeegee men, or whatnot.

Now the author says "Suppose we applied the theory of Broken Windows to Wall Street." In other words, how about if we stop allowing small crimes to accumulate there, which beget an attitude of "it doesn't matter" and which lead to larger and larger crimes, culminating in things like stock frauds, bank frauds, ratings company fraud, mortgage industry fraud, tax evasions, and all the rest that litter the headlines these past few years.

Suppose we stopped allowing companies to manage earnings, which is seen as "minor" but which is, at its heart, lying to shareholders about results. How about if we prosecute vigorously tax shifting to offshore havens? Why not put CFO's on notice that their numbers must be accurate or they will go to jail? Why not stop trying to gut the regulations that provide the orderly framework for investment?

An interesting take:

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