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164 10 Unintended Consequences and the Epistemology of Fraud in Dickens and Hayek Eleanor Courtemanche One surprising and unnerving result of the 2007–8 financial crisis has been the reactivation of the long-dormant Victorian debate about the difference between “investment”—a term that connotes fiscal soundness, prudence, and morality—and irrational, emotional “speculation,” which shades into “gambling” and which might be thinly disguised “fraud.”1 Given the increasing democratization of finance culture on both sides of the Atlantic, and the widespread vestment of prestigious pension funds and university endowments in growth equities, the thought of avoiding the stock market because of moral hesitations about gambling would, up until the late unpleasantness , have seemed positively medieval. It is easy to find places in Victorian literature where this distinction is represented crudely as one of personal character, with scam artists distinguishable by their Jewish or otherwise foreign mannerisms while the “gentlemen” cling to outmoded standards of philanthropy that may or may not actually make them money.2 In many of these novels you can detect who is moral and who is not simply by looking at their flashy clothing or noting their untrustworthy slang. One of the most frustrating elements of the recent crash, however, was the discovery not only that many investments made with perfect confidence were in fact deeply unsound in retrospect (something true of most scandals) but that as a result of inaccurate ratings by the credit ratings agencies it had become at a certain point impossible to tell the difference between sound and unsound investment. Contrary to previous crashes, the victims of the crash included not just the foolish individual investors who are the usual victims of financial scams but the investment banks themselves, which despite multiple safeguards seemed not to be aware that they remained liable for Unintended Consequences and the Epistemology of Fraud | 165 so many bad equities. As journalist Michael Lewis reports in The Big Short, “The big Wall Street firms, seemingly so shrewd and self-interested, had somehow become the dumb money. The people who ran them did not understand their own businesses, and their regulators obviously knew even less.”3 Anna Quindlen expressed this widespread unease in a 2009 column noting that “the great unspoken issue behind the tanking of the market, the mess in subprime mortgages and the bailout bill is that Americans don’t understand the basics of the economy.”4 Because no one seemed to understand the complexity of the bad investments, government regulators had no choice but to turn over the cleanup to those who had made the bad investments in the first place. Thus the recent crisis was not just one of insolvency but one of financial epistemology . If there had been fraud, who had committed it? Was the difference between sound and fraudulent investment discernible either at the time or after the crash? Did any of the many interest groups that created the crisis understand what they had done? It might be seen as an advance over the Victorian era that no particular ethnic group was routinely scapegoated, except for those who blamed the entire mortgage securities crisis on minorities who, despite their total disenfranchisement in every other way, were supposed to have gamed the entire banking system into extending them cheap housing loans.5 The search for scapegoats mostly came up empty, since the perpetrators had all conveniently vanished or gone out of business, with the exception of Goldman Sachs. There were several kinds of political response to this atmosphere of paralyzing universal distrust, one of which was to return to the Keynesian politics of stimulus , deficit spending, and regulatory restraint that had arisen in response to the Great Depression but had been gradually eliminated during the post-Reagan era of financial deregulation. Both parties participated in the politics of stimulus and new regulatory probity, but there was also a return among conservatives to issuing warnings about the “unintended consequences” of government action (warnings that had been strangely silent during the previous administration). David Brooks, for example, in his New York Times op-ed of April 22, 2010, claimed that what he called “progressive conservatism” was something that “starts with the wisdom of Edmund Burke—the belief that the world is much more complex than we can know and [therefore] we should be skeptical of handing too much power to government planners.”6 Though one might see the financial collapse as a massively unintended consequence of the creative repackaging of home mortgage repayment risk and...

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