Is honesty waning in American business?

US slips from 19 to 22 in latest ranking of perceived public corruption.

Are American businesspeople less honest than they used to be?

An actual level of shady and dishonest practices is probably impossible to measure. Two recent examples:

1. In July, Goldman Sachs paid $550 million – the largest penalty by a Wall Street firm – to settle a federal suit that it misled investors in selling a subprime mortgage instrument as the housing market was beginning to collapse.

2. Attorneys general in all 50 states have launched a fraud investigation into the practices of large banks, such as Wells Fargo, Bank of America, and JPMorgan Chase for having employees sign thousands of foreclosure-related documents without reviewing them, an apparent fraud.

Looking at perceived corruption in the public sector, a report last month found that the United States had slipped from being the 19th least corrupt nation – behind Denmark, New Zealand, Singapore, and its neighbor Canada – to 22nd, behind Chile and Ireland.

"Our rating is pretty awful," says Frank Vogl, cofounder of Transparency International, which puts together the annual report. He figures the drop has been influenced by a series of scandals at the state and city level, such as the September arrests of the mayor and city manager of Bell, Calif., accused of taking $5.5 million from the city. Though not government corruption, the "massive-scale fraud" in the American banking system uncovered since 2008 has probably also played a role in the US slippage, suspects James Galbraith, an economist at the University of Texas, Austin.

"Modern economies run on trust," he says. If a financial system loses its trustworthiness, it can be disastrous for a nation. There is some suspicion that the Great Recession became so serious in part because of dishonesty.

For example: Wall Street firms' misrepresentations about the value of mortgage-backed securities, their use of special investment vehicles to hide financial risk in their accounting, and distortions of investment risk by security-rating firms played a role in the near financial meltdown, notes Mark Weisbrot, codirector of the Center for Economic and Policy Research, a Washington think tank.

Some other economists see the lengthy slump as primarily due to the bursting of a huge bubble in housing prices, a factor involving trillions of dollars, and the widespread mistaken assumption that the rise in prices would continue indefinitely. Exacerbating factors may have been the willingness of buyers to lie about their income and the fact that some mortgage brokers encouraged it.

For developing nations, it is especially vital to develop a fair, basically honest, and independent legal system if they are to advance economically, says Mr. Vogl. If their scarce public and private capital is plundered, fewer schools, hospitals, and sanitation and water systems are built.

One puzzle for Vogl is the extremely high corruption ratings given to Iraq and Afghanistan – after the US poured in huge amounts of aid. They rank 175th and 176th, respectively, among the 178 nations studied. He sees a need to push development of a fair, basically honest, independent judiciary in those nations.

That, he admits, can be difficult. An anticorruption commission in Iraq saw half its staff assassinated and its head flee for safety to the US when it seriously tackled various corruption cases.

Vogl sees little evidence of developing nations making big gains against corruption when their economies are not growing. Yet dealing with corruption, he adds, is hugely important.

David R. Francis writes a weekly column.

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