Failing to Prosecute White Collar Crime Guarantees a Weak and Unstable Economy \u2026 and Future Financial Crashes<\/i><\/p>\n
The Departments of Justice and Treasury are pretending<\/a> that criminally prosecuting criminal banksters will destabilize the economy.<\/p>\n The exact opposite<\/em> is true.<\/p>\n Failing to prosecute criminal fraud has been destabilizing<\/em> the economy since at least 2007 \u2026 and will cause huge crashes<\/em> in the future.<\/p>\n After all, the main<\/em> driver of economic growth<\/a> is a strong rule of law.<\/p>\n Nobel prize winning economist Joseph Stiglitz says that we have to prosecute fraud or else the economy won\u2019t recover<\/a>:<\/p>\n The legal system is supposed to be the codification of our norms and beliefs, things that we need to make our system work. If the legal system is seen as exploitative, then confidence in our whole system starts eroding. And that\u2019s really the problem that\u2019s going on.<\/p>\n *** ***<\/p>\n Economists focus on the whole notion of incentives. People have an incentive sometimes to behave badly, because they can make more money if they can cheat. If our economic system is going to work then we have to make sure that what they gain when they cheat is offset by a system of penalties.<\/p>\n Nobel prize winning economist George Akerlof has demonstrated<\/a> that failure to punish white collar criminals \u2013 and instead bailing them out- creates incentives for more economic crimes and further destruction of the economy in the future.<\/p>\n Indeed, professor of law and economics (and chief S&L prosecutor) William Black notes<\/a> that we\u2019ve known of this dynamic for \u201chundreds of years\u201d. And see this<\/a>, this<\/a>, this<\/a> and this<\/a>.<\/p>\n (Review of the data on accounting fraud confirms that fraud goes up as criminal prosecutions go down<\/a>.)<\/p>\n The Director of the Securities and Exchange Commission\u2019s enforcement division told<\/a> Congress:<\/p>\n Recovery from the fallout of the financial crisis requires important efforts on various fronts, and vigorous enforcement is an essential component, as aggressive and even-handed enforcement will meet the public\u2019s fair expectation that those whose violations of the law caused severe loss and hardship will be held accountable. And vigorous law enforcement efforts will help vindicate the principles that are fundamental to the fair and proper functioning of our markets: that no one should have an unjust advantage in our markets; that investors have a right to disclosure that complies with the federal securities laws; and that there is a level playing field for all investors.<\/p>\n Paul Zak (Professor of Economics and Department Chair, as well as the founding Director of the Center for Neuroeconomics Studies at Claremont Graduate University<\/a>, Professor of Neurology at Loma Linda University Medical Center, and a senior researcher at UCLA) and Stephen Knack (a Lead Economist in the World Bank\u2019s Research Department and Public Sector Governance Department) wrote<\/a> a paper called Trust and Growth, showing<\/a> that enforcing the rule of law \u2013 i.e. prosecuting white collar fraud \u2013 is necessary for a healthy economy.<\/p>\n One of the leading business schools in America \u2013 the Wharton School of Business \u2013 published<\/a> an essay by a psychologist on the causes and solutions to the economic crisis. Wharton points out that restoring trust is the key to recovery, and that trust cannot be restored until wrongdoers are held accountable:<\/p>\n According to David M. Sachs, a training and supervision analyst at the Psychoanalytic Center of Philadelphia, the crisis today is not one of confidence, but one of trust. \u201cAbusive financial practices were unchecked by personal moral controls that prohibit individual criminal behavior, as in the case of [Bernard] Madoff, and by complex financial manipulations, as in the case of AIG.\u201d The public, expecting to be protected from such abuse, has suffered a trauma of loss similar to that after 9\/11. \u201cNormal expectations of what is safe and dependable were abruptly shattered,\u201d Sachs noted. \u201cAs is typical of post-traumatic states, planning for the future could not be based on old assumptions about what is safe and what is dangerous. A radical reversal of how to be gratified occurred.\u201d<\/p>\n People now feel more gratified saving money than spending it, Sachs suggested. They have trouble trusting promises from the government because they feel the government has let them down.<\/p>\n He framed his argument with a fictional patient named Betty Q. Public, a librarian with two teenage children and a husband, John, who had recently lost his job. \u201cShe felt betrayed because she and her husband had invested conservatively and were double-crossed by dishonest, greedy businessmen, and now she distrusted the government that had failed to protect them from corporate dishonesty. Not only that, but she had little trust in things turning around soon enough to enable her and her husband to accomplish their previous goals.<\/p>\n \u201cBy no means a sophisticated economist, she knew \u2026 that some people had become fantastically wealthy by misusing other people\u2019s money \u2014 hers included,\u201d Sachs said. \u201cIn short, John and Betty had done everything right and were being punished, while the dishonest people were going unpunished.\u201d<\/p>\n Helping an individual recover from a traumatic experience provides a useful analogy for understanding how to help the economy recover from its own traumatic experience, Sachs pointed out. The public will need to \u201chold the perpetrators of the economic disaster responsible and take what actions they can to prevent them from harming the economy again.\u201d In addition, the public will have to see proof that government and business leaders can behave responsibly before they will trust them again, he argued.<\/p>\n Note that Sachs urges \u201chold[ing] the perpetrators of the economic disaster responsible.\u201d In other words, just \u201clooking forward\u201d and promising to do things differently isn\u2019t enough.<\/p>\n Robert Shiller \u2013 one of the top housing experts in the United States \u2013 says that the mortgage fraud is a lot like the fraud which occurred during the Great Depression<\/a>. As Fortune notes<\/a>:<\/p>\n Shiller said the danger of foreclosuregate \u2014 the scandal in which it has come to light that the biggest banks have routinely mishandled homeownership documents, putting the legality of foreclosures<\/a> and related sales in doubt \u2014 is a replay of the 1930s, when Americans lost faith that institutions such as business and government were dealing fairly.<\/p>\n Indeed, it is beyond dispute that bank fraud was one of the main causes of the Great Depression<\/a>.<\/p>\n Economist James K. Galbraith wrote<\/a> in the introduction to his father, John Kenneth Galbraith\u2019s, definitive study of the Great Depression, The Great Crash, 1929:<\/p>\n The main relevance of The Great Crash, 1929 to the great crisis of 2008 is surely here. In both cases, the government knew what it should do. Both times, it declined to do it. In the summer of 1929 a few stern words from on high, a rise in the discount rate, a tough investigation into the pyramid schemes of the day, and the house of cards on Wall Street would have tumbled before its fall destroyed the whole economy.<\/p>\n In 2004, the FBI warned publicly of \u201can epidemic of mortgage fraud.\u201d But the government did nothing, and less than nothing, delivering instead low interest rates, deregulation and clear signals that laws would not be enforced. The signals were not subtle: on one occasion the director of the Office of Thrift Supervision came to a conference with copies of the Federal Register<\/a> and a chainsaw. There followed every manner of scheme to fleece the unsuspecting \u2026.<\/p>\n This was fraud, perpetrated in the first instance by the government on the population, and by the rich on the poor.<\/p>\n ***<\/p>\n The government that permits this to happen is complicit in a vast crime.<\/strong><\/p>\n Galbraith also says<\/a>:<\/p>\n There will have to be full-scale investigation and cleaning up of the residue of that, before you can have, I think, a return of confidence in the financial sector. And that\u2019s a process which needs to get underway.<\/p>\n Galbraith recently said<\/a> that \u201cat the root of the crisis we find the largest financial swindle in world history\u201d, where \u201ccounterfeit\u201d mortgages were \u201claundered\u201d by the banks.<\/p>\n As he has repeatedly noted, the economy will not recover until the perpetrators of the frauds which caused our current economic crisis are held accountable, so that trust can be restored. See this<\/a>, this<\/a> and this<\/a>.<\/p>\n No wonder Galbraith has said<\/a> economists should move into the background, and \u201ccriminologists to the forefront.\u201d<\/p>\n The bottom line is that the government has it exactly backwards.\u00a0\u00a0 By failing to prosecute criminal fraud, the government\u00a0 is destabilizing<\/em> the economy \u2026 and ensuring<\/em> future crashes.<\/p>\n Postscript:\u00a0 Unfortunately, the government made it official policy not<\/em> to prosecute fraud<\/a>, even though criminal fraud<\/a> is the main business model<\/a><\/em> adopted by the giant banks<\/a>.<\/p>\n Indeed, the government has done everything it can to cover up fraud<\/a>, and has been actively encouraging<\/em><\/a> criminal fraud and attacking<\/a> those trying to blow the whistle<\/a>.<\/p>\n
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\n<\/b>I think we ought to go do what we did in the S&L [crisis] and actually put many of these guys in prison. Absolutely. These are not just white-collar crimes or little accidents. There were victims. That\u2019s the point. There were victims all over the world.<\/p>\n