Failing to Prosecute Wall Street Fraud Is Extending Our Economic Problems

George Washington's picture

Washington’s Blog

Bill Gross, Nouriel Roubini, Laurence Kotlikoff, Steve Keen, Michel Chossudovsky and the Wall Street Journal all say that the U.S. economy is a giant Ponzi scheme.

Virtually all independent economists and financial experts say that rampant fraud was largely responsible for the financial crisis. See this and this.

But many on Wall Street and in D.C. - and many investors - believe that we should just "go with the flow". They hope that we can restart our economy and make some more money if we just let things continue the way they are.

But the assumption that a system built on fraud can continue without crashing is false.

In fact, top economists and financial experts agree that - unless fraud is prosecuted - the economy cannot recover.

Fraud Leads to a Break Down in Trust and Instability in the Markets

As Alan Greenspan said recently:


Fraud creates very considerable instability in competitive markets. If you cannot trust your counterparties, it would not work


Similarly, leading economist Anna Schwartz - co-author of the leading book on the Great Depression with Milton Friedman - told the Wall Street journal in 2008:

"The Fed ... has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible."


So even though the Fed has flooded the credit markets with cash, spreads haven't budged because banks don't know who is still solvent and who is not. This uncertainty, says Ms. Schwartz, is "the basic problem in the credit market. Lending freezes up when lenders are uncertain that would-be borrowers have the resources to repay them. So to assume that the whole problem is inadequate liquidity bypasses the real issue."




Today, the banks have a problem on the asset side of their ledgers -- "all these

exotic securities that the market does not know how to value."


"Why are they 'toxic'?" Ms. Schwartz asks. "They're toxic because you cannot sell them, you don't know what they're worth, your balance sheet is not credible and the whole market freezes up. We don't know whom to lend to because we don't know who is sound. So if you could get rid of them, that would be an improvement."

And economics professor and former Secretary of Labor Robert Reich wrote in 2008:

The underlying problem isn't a liquidity problem. As I've noted elsewhere, the problem is that lenders and investors don't trust they'll get their money back because no one trusts that the numbers that purport to value securities are anything but wishful thinking. The trouble, in a nutshell, is that the financial entrepreneurship of recent years -- the derivatives, credit default swaps, collateralized debt instruments, and so on -- has undermined all notion of true value.

Robert Shiller - one of the top housing experts in the United States - said recently that failing to address the legal issues will cause Americans to lose faith in business and the government:

Shiller said the danger of foreclosuregate -- the scandal in which it has come to light that the biggest banks have routinely mishandled homeownership documents, putting the legality of foreclosures and related sales in doubt -- is a replay of the 1930s, when Americans lost faith that institutions such as business and government were dealing fairly.

Nobel prize-winning economist Joseph Stiglitz says about the failure to prosecute Wall Street fraud:


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's really the problem that's going on.


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's the point. There were victims all over the world.


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.


Wall Street insider and New York Times columnist Andrew Ross Sorkin writes:

“They will pick on minor misdemeanors by individual market participants,” said David Einhorn, the hedge fund manager who was among the Cassandras before the financial crisis. To Mr. Einhorn, the government is “not willing to take on significant misbehavior by sizable” firms. “But since there have been almost no big prosecutions, there’s very little evidence that it has stopped bad actors from behaving badly.”








Fraud at big corporations surely dwarfs by orders of magnitude the shareholders’ losses of $8 billion that Mr. Holder highlighted. If the government spent half the time trying to ferret out fraud at major companies that it does tracking pump-and-dump schemes, we might have been able to stop the financial crisis, or at least we’d have a fighting chance at stopping the next one.

Economics professor James Galbraith says:


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's a process which needs to get underway.


No wonder Galbraith says that economists should move into the background, and "criminologists to the forefront"

Failure to Stop Fraud and Prosecute Criminals Causes a Loss of Trust in Government, Which Makes Government Less Effective

As Shiller stated in the quote above, the failure of government officials to stop fraud and prosecute the financial fraudsters has caused a lack of trust in government itself.

Indeed, polls show that people no longer trust our economic "leaders". See this and this.


A psychologist wrote an essay published by the Wharton School of Business arguing that restoring trust is the key to recovery, and that trust cannot be restored until wrongdoers are held accountable:

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. "Abusive
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."
The public, expecting to be protected from such abuse, has suffered a
trauma of loss similar to that after 9/11.
"Normal expectations of what is safe and dependable were abruptly
shattered," Sachs noted. "As 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."

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.

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.
"She 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.

"By no means a sophisticated
economist, she knew ... that some people had become fantastically
wealthy by misusing other people's money -- hers included," Sachs said.
"In short, John and Betty had done everything right and were being
punished, while the dishonest people were going unpunished."

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 "hold the perpetrators of the economic disaster responsible and take what actions they can to prevent them from harming the economy again." 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.

regulators know this - or at least pay lip service to it - as well.
For example, as the Director of the Securities and Exchange Commission's
enforcement division told Congress:

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's 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.

people don't trust their government to enforce the law, government will
become more and more impotent in addressing our economic problems. If
government leaders take action, the market will not necessarily respond
as expected. When government leaders make optimistic statements about
the economy, people will no longer believe them.

Trying to Cover Up the Truth Extends Financial Crises

Elizabeth Warren, William Black and others say that attempting to cover up the truth extended Japan's financial problems into an entire "Lost Decade".

As Joseph Stiglitz said about Wall Street fraud:


So the whole strategy of the banks has been to hide the losses, muddle through and get the government to keep interest rates really low.


As long as we keep up this strategy, it's going to be a long time before the economy recovers ....


Pam Martens - who worked on Wall Street for 21 years - writes:

The massive losses by big Wall Street firms, now topping those of the Great Depression in relative terms, have yet to be adequately explained. Wall Street power players are obfuscating and Congress is too embarrassed or frightened to ask, preferring to just throw money at the problem and hope it goes away. But as job losses and foreclosures mount and pensions and 401(k)s shrink, public policy measures to address the economic stresses require a full set of unembellished facts...

It was four years after the crash of 1929 before the major titans of Wall Street were forced to give testimony under oath to Congress and the full magnitude of the fraud emerged. That delay may well have contributed to the depth and duration of the Great Depression. The modern-day Wall Street corruption hearings in Congress ... must now resume in earnest and with sworn testimony if we are to escape a similar fate.

To the extent that the government tries to cover up - instead of openly discuss - financial fraud, it will only extend America's economic malaise.

Failing to Prosecute Fraud Encourages Financial Players to Take Bigger and More Blatantly Illegal Actions

Nobel prize winning economist George Akerlof has demonstrated that failure to punish white collar criminals - and instead bailing them out- creates incentives for more economic crimes and further destruction of the economy in the future. Joseph Stiglitz, Professor Black, and many others agree. See this, this and this.

It was largely fraud which brought down the financial system in 2008. Unless we prosecute the fraudsters, they will do even bigger, stupider and more blatantly illegal things in the future which will lead to even bigger crises.

Failure to Prosecute Fraud Exacerbates the Sovereign Debt Crisis

The governments of the world have spent trillions trying to paper over the fraud and prop up the big, insolvent banks, instead of forcing them to restructure and forcing bondholders and shareholders to take a haircut.

A study of 124 banking crises by the International Monetary Fund found that propping banks which are only pretending to be solvent drives up the costs to the country:


Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.


Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions’ liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.



All too often, central banks privilege stability over cost in the heat of the containment phase: if so, they may too liberally extend loans to an illiquid bank which is almost certain to prove insolvent anyway. Also, closure of a nonviable bank is often delayed for too long, even when there are clear signs of insolvency (Lindgren, 2003). Since bank closures face many obstacles, there is a tendency to rely instead on blanket government guarantees which, if the government’s fiscal and political position makes them credible, can work albeit at the cost of placing the burden on the budget, typically squeezing future provision of needed public services.

The American banks and government have certainly pretended that all of the big banks are solvent. As ABC wrote in October 2009:


The Treasury Department and the Federal Reserve lied to the American public last fall when they said that the first nine banks to receive government bailout funds were healthy, [the special inspector general for the Troubled Asset Relief Program] states in a new report released today.

Similarly, the stress tests were a complete and utter sham.


The government has given the giant banks huge amounts in loans and guarantees based upon their false representations about their financial health. The Fed has larded up its balance sheet with toxic assets from the banks.

Debt levels are also getting dangerously close to the level that they become a drag on the economy. See this and this. When Keynesian economists argue that debt does not harm the economy, they are talking about debt incurred to pay for stimulus and productive things for the economy. But throwing trillions at the giant banks - who are mainly using the money to gamble - is not stimulus. It helps the executives of the big banks and their shareholders and bondholders, but not the broader economy.

Indeed, attempting to prop up big, insolvent banks is preventing stimulus from getting out into the economy.

Fraud Causes Growing Inequality, Which Undermines the Economy

Growing inequality is very harmful to our economy. Indeed, if wealth is concentrated in too few hands, the "poker game" ends, as only too few fat cats are left with all of the chips. See this, this, this and this.

Fraud benefits the wealthy more than the poor, because the big banks and big companies have the inside knowledge and the resources to leverage fraud into profits. Joseph Stiglitz noted in September that giants like Goldman are using their size to manipulate the market. The giants (especially Goldman Sachs) have also used high-frequency program trading (making up between 40- 70% of all stock trades) which not only distorts the markets, but which also lets the program trading giants take a sneak peak at what the real traders are buying and selling, and then trade on the insider information. See this, this, this, this and this.

Similarly, JP Morgan Chase, Bank of America, Goldman Sachs, Citigroup, and Morgan Stanley together hold 80% of the country's derivatives risk, and 96% of the exposure to credit derivatives. They use their dominance in the market to manipulate the market.

Fraud disproportionally benefits the big players (and helps them to become big in the first place), increasing inequality and warping the market.

Fraud Increases the Severity of Boom-Bust Cycles

More and more people - such as the Bank of International Settlements and Barons - are saying that bubbles inevitably lead to busts, thus destabilizing the economy.

Professor Black says that fraud is a large part of the mechanism through which bubbles are blown.

Without strong laws against fraud, bubble after bubble will be blown, guaranteeing that the financial system cannot be stabilized in a fundamental sense.

Failure to Prosecute Fraud Is Worsening the Housing Crisis

Finally, failure to prosecute mortgage fraud is arguably worsening the housing crisis. See this and this.

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SwingForce's picture

When it comes time to actually do something about this problem, maybe Julian Assange can help.

RunningMan's picture

I think this post does a very nice job articulating the nature of the crisis we CURRENTLY face. All our resident bulls who post are opining on the direction of the market, and to a large extent they have been right. What they are missing is the fact, that many of us, myself included, do not believe that the equities markets are reflective of true value. We don't trust the firms that are involved in all of the behind the scenes activities, from market makers to the banks manufacturing ETFs or collateral for securities. The liquidity crisis is over. Now we have a crisis of confidence, that quite honestly is the true bear market for America. The only things of value that people can *trust* is what we can see and touch. Our relationships with each other have been weakened by our technological advances (you think your online social networks are really your friends? think again).

The malaise that grips this country is bad, and only going to get worse. That is our Greatest Depression.

jus_lite_reading's picture

Let's be honest: Bernie Made-off was the sacrificial lamb for the sins of the entire ponzi- from the bottom feeding market makers to the Whore Street CEO's to the Capital Hill puppets. What the Fed is doing is nothing short of a ponzi. What our ENTIRE SOCIAL SECURITY SYSTEM is, is nothing short of a ponzi. And the sheeple, knowing or unknowingly perpetuate the system that is designed to rob them, by using credit cards, keeping CASH in corrupt banks, buying things you don't need, paying points on your mortgage (yes, you can get out of that), not asking for the bank to show you the note, etc etc etc. The list is endless. Why? Because everything we do, somehow, somewhere along the chain, a bank is profiting from your demise.


It's time to shift the tables.

TexDenim's picture

The situation today is reminiscent of the state of affairs just prior to FDR's appointment of Joseph P. Kennedy to head the new SEC. Wall Street has become an unregulated Wild West where frontier justice holds. You can get away with whatever you have the balls to get away with. That can't last. We're about to get a new kind of SEC that will make the old SEC seem like a college campus police compared to a New York City SWAT team. Things are gonna change.

anony's picture

Unlike your lubricious avatar, your take on the SEC is a way wrong.

The only thing that will change is the 'carpet and the drapes'.

The structure itself will never be anything other than a license for the top 2% to maintain and secure their place in the hierarchy for the nest 3,000 years.

Noto bene: nothing important for the middle class will change until several dozen at the top of the financial food chain become suddenly extinct, with extreme prejudice. 

anony's picture

"OUR" problems?

I don't think Goddamn Sucks, CITI, Merrill and the other primaries view the issue as a problem.  For them, the Lord Blankfeinds, Dimons, Finks, Genslers and the rest it was and is the finest opportunity ever created to become instantly wealthy for 3,000 year and far beyond the reach of the rest of us mere mortals.

We do live in at least two different worlds.


Burticus's picture

When there is no enforcement, there is no law, forcing The People to resort to whatever means are necessary to protect themselves from the violent abuse of others.  Our founding fathers accepted this reality:


If the representatives of the people betray their constituents, there is no recourse left but in the exertion of that original right of self-defense which is paramount to all positive forms of government. - Alexander Hamilton

A free people ought not only to be armed and disciplined, but they should have sufficient arms and ammunition to maintain a status of independence from any who might attempt to abuse them, which would include their own government. - George Washington

The strongest reason for the people to retain their right to keep and bear arms is as a last resort to protect themselves against tyranny in government. - Thomas Jefferson

A people armed and free forms a barrier against the enterprises of ambition and is a bulwark for the nation against foreign invasion and domestic oppression. - James Madison

The very atmosphere of firearms anywhere and everywhere restrains evil interference; they deserve a place of honor with all that's good. - George Washington

Firearms are second only to the Constitution in importance; they are the peoples' liberty's teeth. - George Washington

Guard with jealous attention the public liberty. Suspect everyone who approaches that jewel. Unfortunately, nothing will preserve it but downright force. Whenever you give up that force, you are ruined. - Patrick Henry

Coldfire's picture

The United States government is beyond redemption. Time to move on.

tony bonn's picture

it's articles like this which cause me to call for a third term for george washington.

in addition to the uncertainty and paralysis which legalized control fraud brings to the economy there is one other plague which most analysts overlook - and that is removal of unintelligent people from power.

many are intimidated by the powers that be thinking that the credentials they sport are signs of advanced intelligence. that is simply not the case. stupid and inadequate people resort to crime to obtain what they cannot obtain legally, morally, and ethically. greed is NOT good.

prosecution of these substandard holes would purge the world of incompetent leaders and that includes frauds like alan greedscam....anyone who quotes him for anything but a butt of jokes needs his head examined. he is clueless and a fraudster of the first order.

and where does the fraud start? it starts in the homes and schools....i was aghast when i heard a student in one of my fucktarded classes express the view that anything goes in business...and this wasn't even a greedy business class.

i can't remember the name of the blithering asshole who ran indymac into the ground but he also did the same to a california s&l during the 1980s/90s....and the criminal keating 5 should be rotting in jail today but the bush crime syndicate got them out of trouble so that they could return to spread more financial terrorism...

prosecutions must occur...however if they don't the system will rot and collapse to the point where the control fraudsters are removed and replaced by those who will prosecute. but by then things will be even more ugly than they are now.


Mark Medinnus's picture

Washington, who set a poor precedent during the Whiskey Rebellion, was Hamilton's principal enabler.  To me, a third Washington term would have been neither deserved nor desirable. 

UP4Liberty's picture


Thanks for the excellent post!  That sinking feeling I've had since I was a teenager has been continuously reinforced by the antics of these dastardly rapscallions...

Those responsible for this mess really should go to prison...

anonnn's picture

All faud is lack of transparency, yet attempting to remedy transparency will not preempt new fraud, because there is no penalty for fraud.

If you were looking for a remedy for fraud, and found heads on poles, that will do it. 

Not other fraudsters, aka accountants, czars, watchdogs, notary publics.

Only real examples, loud, visible and timely. 

[BMadoff not timely and no threat. Justice delayed was justice denied. Plea deal=no prosecution=no transparency= no justice effect.]

Ruth's picture

Excellent, could not agree more, friggin round up time!

I Am The Unknown Comic's picture

ahhh...if only that's what the FEMA camps were really being built for..."bankster residence centers" would be a dream, sweetheart.....

laughing_swordfish's picture


Guantanamo has been kept open to be the new "Financial Crimes Detention Center"

The drumhead trials will take place there.

They will then be brought back to the US to be guillotined or hung on the National Mall

<sarcasm off>

Seasmoke's picture

after hearing Harry Markopolos speak of how for 10 years he handed the SEC Madoffs ponzi scam on a silver platter and nothing was done , just convinced me what i was thinking all along was true, the whole thing is fixed ......and nothing has made me change my mind in the 2 years since

greenewave's picture

To find out more about the Imminent Collapse of the U.S. Economy, watch this video "PUMP AND DUMP HORROR SHOW, END OF U.S. EMPIRE PONZI SCHEME" at (

by Anonymous

This feels like late summer 2008, when the Dow went like a rocket from 10000 to 14000 within a few months and we all know how that ended. I'm all cash now because I'm terrified by what is going on. I think we are headed for a huge CRASH sometime in 2011 or 2012. This time the Gov is so much in debt that it can do nothing and we will slide into the Greatest of Depressions.

revenue_anticipation_believer's picture


.yes, it IS the end of the World for some....but nothing like the worl that MOST people lived in....THIS TIME is the best of times, STILL, as compared to REAL POVERTY,  REAL MISERY....


dthe World is going thru a Political/Economic paradigm shift, 'Creative Destruction" as Schumpter called it....the 1930's was ALSO such a time, with a technology-demand-pusher at the end NAMELY WORLD WAR 2.....


this TIME 2010 is a time of rebirth, and death at an accelerated rate, AND PERMANENT SECULAR CHANGES....i mean, Detroit...burned out DEAD....permanent....cities die, companies die, countrys die/degenerate...




In July 1942...USA stock market was at a low point, still Depression of 1938 priced...but in THAT JULY was the Battle of Midway...seemed to some just another battle...IT WAS DECISIVE, for those who KNEW what it THAT TIME, meant that JAPAN had not a was only a matter of time..and the theme was, Europe FIRST, then the Far East...hence the time delaying Island hopping of Macarthur...1942-1944 culminating in Okinawa...early 1945..


from July 1942 onward, the stock market began a very very long SECULAR rise still continued, really....those 1930's technical stocks - some of them went up 100x in 25 years thereafter...






windcatcher's picture

“Ben Shalom Bernanke is wanted for violating the United States Constitution, committing acts of financial terrorism and crimes against humanity. As a leading member of the Global Banking Cartel, he is considered a highly dangerous enemy combatant. Citizens of the United States hereby demand that he be properly detained under the laws and customs of war.”

One secret recently divulged by the Fed is the corrupt and unconstitutional 12.3 trillion world bankster bailout (taxpayer debt). The 700 billion bankster bailout was propagandized (public lied to). What the Main Stream Media didn’t tell you is that the bailout was a rolling bankster bailout with allotments of 700 billion given out at any one time! There are trillions more that is secretly spent that the Fed is not telling us about.

Were Dead! Audit the Federal Reserve Central Bank!


Christobevii3's picture

Until they put mark to market accounting and stop doing make believe I will not touch a financial.  I'd rather sleep at night in hard assets and something boring like exxon mobil in resources that is low debt.  


Mark to model is about as accurate as the old cooks buying happy meals because beanie babies will be worth something.

williambanzai7's picture

"We should all listen very very carefully to what Alan GreenNuts has to say about fraud, right Brooksley?"


Delmar's picture

Happy Belated Birthday to the Ben Bernank.

There's nothing you can do that can't be done.
Nothing you can sing that can't be sung.
Nothing you can say but you can learn how to play the game
It's easy.
There's nothing you can make that can't be made.
No one you can save that can't be saved.
Nothing you can do but you can learn how to be you
in time - It's easy.