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Monday, March 24, 2008

The Era of Fraud

posted by on March 24 at 12:55 PM

The deadly, fraudulent, heparin sold by a Chinese manufacturer to Baxter shares much with the deadly, fraudulent, wheat gluten and gluttonous, fraudulent, financial crisis.

These frauds are not accidents, slips of care, but rather deliberate attempts to game tests of quality, to turn garbage into gold.

The toxic wheat gluten was doped with melamine, in a brilliant gambit to fix the protein content tests and make filler look like high quality protein. Overcompensated financial wizards, thanks to deregulation, managed to sell aggregates of dubious mortgages as high quality investments, cleverly bypassing all of the financial tests.

In the case of the fake Heparin, the actual drug was replaced with cheaper Chondroitin sulfate, aggressively modified chemically to fake quality control tests. At least nineteen people have died from this clever gambit, thousands made ill.

Such trickery requires canny chemistry or shrewed accounting—deft minds deriving novel solutions to their problems, rather than the actual, deeper and more pervasive problems leading to shortages of protein, of drug or worthy investments.

In a world that can sustain, at most, about two billion people in the voracious Western lifestyle—in a world of nearly eight seven billion, all of whom promised the Western middle class lifestyle—a thin veneer of success, of false protein and medicine, of false wealth and material growth, must obligately coat a massive, deep and dark well of exaggerations, lies and despairing intelligence.

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broken link

Posted by Justin | March 24, 2008 1:03 PM

One of the genetics researchers I was talking to at the 50th anniversary of Medical Genetics at the UW pointed out the major problem he and his Chinese research lab (he's Scottish, by the way) have is the quality and sourcing of any pharmaceuticals or any materials.

The only way they can be sure what they get is really what it's supposed to be is to follow it every step of the way from the source to the lab, because cheating and other fraudulent practices are endemic in current Chinese supply chains.

Posted by Will in Seattle | March 24, 2008 1:07 PM

Chinese corruption is the prorblem, nothing else.

Posted by John | March 24, 2008 1:12 PM

This kind of fraud is hardly unique to this era; adulteration, for example, had a long history in Victorian England and the US. If anything, an era when it does not exist is an anomaly.

Posted by tsm | March 24, 2008 1:13 PM

Nicely done analogy.

Posted by Megan | March 24, 2008 1:16 PM

Good post.

Posted by monkey | March 24, 2008 1:18 PM

Nice post

Posted by boyd main | March 24, 2008 1:45 PM

The Heparin scandal disturbs me a great deal. But let's not forget that American companies sell broken shit to China too. I've seen it happen firsthand with consumer electronics that didn't pass QA for the American market. Capitalism requires the rule of law; when there's minimal downside to cheating, people cheat.

Posted by nbc | March 24, 2008 1:48 PM

You're beginning to sound like Charles, towards the end there.

Posted by NapoleonXIV | March 24, 2008 1:49 PM

@8. You put your finger on it. Laws and regulation are the only way to force solutions rather than frauds.

@1. Thank-you. I've corrected the link.

Posted by Jonathan Golob | March 24, 2008 1:55 PM

The modern mania for deregulation, promoted under the sweet-sounding aegis of 'free-trade' ("see, it's got 'free' right there in the name! Who could be against freedom?") seems to inevitably lead to a Yankee-Trader style, caveat-emptor marketplace. It does not require an overarching, malevolent conspiracy to bring about effects like this, just an atmosphere like the one you describe, where the upside of unethical behavior outweighs the downside. Laissez-faire regulatory approaches seem to inevitably breed many little conspiracies, of factory managers substituting melamine, builders substituting substandard concrete, bonds traders substituting junk bonds. It doesn't require malice, just greed and a profound lack of foresight. The malicious effects take care of themselves.

The idea that government oversight of business is nothing but an unnecessary hindrance is such transparent bullshit that it's amazing how thoroughly it has taken root in the public consciousness. With story after story of the disastrous effects of this approach breaking on a daily basis, it boggles the mind that media reporting on these undlessly unfolding crises so rarely bothers to put two and two together.

Posted by flamingbanjo | March 24, 2008 2:13 PM

the problem with government oversight as it is and presumably would be in the future is that is so fundamentally conflicted about what it's job is as regulators. When the government finally gets a mandate from those that elect people to positions rather than who funds campaigns, maybe regulation will be sufficiently and practically applied.

It isn't enough to say more regulation is required if the net effect doesnt change.

Posted by Bellevue Ave | March 24, 2008 2:43 PM

Exactly, @11. But you also need competence, something that GOP appointees never have and never will.

Posted by Will in Seattle | March 24, 2008 3:19 PM

i think regulation actually needs some teeth. more regulation of handslaps isn't actually encouraging anyone to stop fraudulent behavior, it merely makes it a cost of doing business. if regulation had the balls to penalize people in ways that mattered to the person and the business, we might see less of it.

Posted by Bellevue Ave | March 24, 2008 3:23 PM

Two distinct issues exist here, the failure of the Hobbesian capitalistic state (embodied by contemporary China) to efficiently produce legitimate products--as the most corrupt have such an advantage--and the inability to regulate the impossible into existence.

The world, with declining natural resources, needs to become six times as productive in a decade or two; it's not clear this is possible. It certainly won't happen in a regulation-free war of all against all. The only chance is with some rules to weed out the most heinously corrupt.

Nor would it happen if you simply demand the impossible--like asking all new cars to be powered by perpetual motion engines.

Posted by Jonathan Golob | March 24, 2008 3:57 PM

is it impossible to ask for people to enforce rules in existence before creating new ones they would subsequently half- assedly enforce?

Posted by Bellevue Ave | March 24, 2008 4:01 PM

I'd guess that the rules are necessary, but not sufficient to get where you want to go re corruption. Culture is the ultimate arbeiter of behavior, not law. Law exists merely to protect the culture from being damaged. Our long lasting state of lawlessness and lack of real justice (in the financial and commercial realm) has damaged our culture such that dishonesty seems normal - the culture has been bent for so long that it's now stuck that way.

Changing the laws is necessary, but it may take some time for the culture to respond. And as Bellevue points out you need a willing enforcement arm, and the Bush admin has been running around with a scythe whacking away at that part, too...

Posted by bakfiets | March 24, 2008 5:04 PM

The issue of culure is an intteresting one I think there might be merit with that, but i'd also point out that the government hasn't provided any answers into shaping the incentives to not be skewed towards causing calamity.

Like Realtors for instance. Should an agent that sells a product that is subsidized by the government be held accountable if they use deception to encourage sales (I hate NAR for all the lying and phoniness they spout)? Or Mortgage Brokers? or appraisers? one of the problematic obstacles to squashing the bubble before it started was that local governments benefitted from these inflated prices and appraisals through property taxes...

Its like eexpecting a warden to stop prisoners from fighting when he makes money by orchestraring fights.

Posted by Bellevue Ave | March 24, 2008 5:30 PM

you know what should really piss all of you off? the bear stearns shit.

Posted by Bellevue Ave | March 24, 2008 10:00 PM

Charles is beating off to this post right now.

Posted by Greg | March 25, 2008 12:07 AM


Do you mean that coke was not 100 per cent pure? God, the guy lied to me.

Posted by Barry | March 25, 2008 9:15 AM

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