Fraud Caused the 1930s Depression and the Current Financial Crisis

George Washington's picture

Washington’s Blog

Robert Shiller - one of the top housing experts in the United States
- says that the mortgage fraud is a lot like the fraud which occurred
during the Great Depression. As Fortune notes:

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

The former chief accountant of the S.E.C., Lynn Turner, told the New York Times that fraud helped cause the Great Depression:

amount of gimmickry and outright fraud dwarfs any period since the
early 1970's, when major accounting scams like Equity Funding surfaced,
and the 1920's, when rampant fraud helped cause the crash of 1929 and led to the creation of the S.E.C.

Economist Robert Kuttner writes:

In 1932 through 1934 the Senate Banking Committee, led by its Chief Counsel Ferdinand Pecora, ferreted out the deeper fraud and corruption that led to the Crash of 1929 and the Great Depression.

Similarly, Tom Borgers refers to:

The 1930s’ Pecora Commission, which investigated the fraud that led to the Great Depression ....

Professor William K. Black writes:

The original Pecora investigation documented the causes of the economic collapse that led to the Great Depression. It ... established that conflicts of interest and fraud were common among elite finance and government officials.

Pecora investigations provided the factual basis that produced a
consensus that the financial system and political allies were corrupt.

the Glass Steagall Act was passed because of the fraudulent use of
normal bank deposits for speculative invesments. As the Congressional
Research Service notes:

the Great Depression after 1929, Congress examined the mixing of the
“commercial” and “investment” banking industries that occurred in the
1920s. Hearings revealed conflicts of interest and fraud
in some banking institutions’ securities activities. A formidable
barrier to the mixing of these activities was then set up by the Glass
Steagall Act.

Economist James K. Galbraith wrote in the introduction to his father, John Kenneth Galbraith's, definitive study of the Great Depression, The Great Crash, 1929


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. In 2004, the FBI warned publicly of
"an epidemic of mortgage fraud." 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 and
a chainsaw. There followed every manner of scheme to fleece the
unsuspecting ....



This was fraud, perpetrated in the first instance by the government on the population, and by the rich on the poor.




The government that permits this to happen is complicit in a vast crime.

As the Great Crash, 1929
documents, there were many fraudulent schemes which occurred in the
1920s and which helped cause the Great Depression. Here's one example of a pyramid scheme in Florida real estate:

enterprising Bostonian, Mr. Charles Ponzi, developed a subdivision
“near Jacksonville.” It was approximately sixty-five miles west of the
city. (In other respects Ponzi believed in good, compact neighborhoods
; he sold twenty-three lots to the acre.) In instances where the
subdivision was close to town, as in the case of Manhattan Estates,
which were “not more than three fourths of a mile from the prosperous
and fast-growing city of Nettie,” the city, as was so of Nettie, did not
exist. The congestion of traffic into the state became so severe that
in the autumn of 1925 the railroads were forced to proclaim an embargo
on less essential freight, which included building materials for
developing the subdivisions. Values rose wonderfully. Within forty
miles of Miami “inside” lots sold at from $8,000 to $20,000; waterfront
lots brought from $15,000 to $25,000, and more or less bona fide
seashore sites brought $20,000 to $75,000.”

As DoctorHousingBubble notes:

Mr. Ponzi of course is the man who gave name to the “Ponzi scheme”
that many use today. He laid the groundwork for many of the criminals
today in the housing industry. Yet during the boom he wasn’t seen as a
criminal but a player in the Florida real estate bubble. Here’s a nice
picture of the gentleman:

Charles Ponzi Charles Ponzii

James Galbraith recently said
that "at the root of the crisis we find the largest financial swindle
in world history", where "counterfeit" mortgages were "laundered" by the

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, this and this.

No wonder James Galbraith has said economists should move into the background, and "criminologists to the forefront."

Note 1: I asked Professor Black to comment on this essay, and he said the following:

amount of fraud that drove the Wall Street bubble and its collapse and
caused the Great Depression is contested [keep reading to see what Black
means]. The Pecora investigation found widespread manipulation of
earnings, conflicts of interest, and insider abuse by the nation's most
elite financial leaders. John Kenneth Galbraith's work documented these
abuses. Theoclassical economic accounts, however, ignore or excuse
these abuses. The Justice Department did not respond effectively to the
crimes that helped spark the Great Depression so we have far fewer
facts available to us.

decisive role that "accounting control frauds" played in driving the
current crisis is clear. The FBI warned of an "epidemic" of mortgage
fraud in 2004 and predicted that it would cause an economic crisis if it
were not stopped. The mortgage lending industry's own experts reported
that "liar's" loans were "an open invitation to fraudsters" and fully
warranted their name -- "liar's" loans -- because fraud was endemic in
such loans. Lenders and their agents led these lies. They led the lies
for an excellent reason -- the strategy is a "sure thing" (Akerlof
& Romer 1993 -- Looting: the Economic Underworld of Bankruptcy for
Profit). It guarantees record (albeit fictional) profits, which
maximize the CEO's bonuses. The same strategy for maxmizing fictional
income maxmizes
real losses in
the longer term. When many lenders follow the same fraudulent strategy
the result is a hyper-inflated bubble followed by a severe crisis.

fraud epidemics also produce "echo" epidemics of fraud in other fields.
For example, when lenders are control frauds the CEO establishes
perverse incentives ("Gresham's dynamics") that corrupt other industries
and professions.

rewarding professionals who are willing to inflate asset values, and
refusing to hire honest professionals, control frauds cause the
unethical to drive the ethical out of the markets. When one combines
deregulation, desupervision, and the perverse incentives of modern
executive and professional compensation the result is recurrent,
intensifying crises.

Note 2: The Austrian economists point out that it is bubbles which cause crashes. I agree. But as Professor Black points out, fraud is one of the main things which causes bubbles.

3: Of course other factors, such as excess leverage and
counterproductive actions by the Federal Reserve, also contributed to
the 1930s Depression and the current crisis.

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David Merrill's picture

The remedy was written into §16 of the Fed Act and codified at Title 12 USC §411 - redeem lawful money. Of course that cannot be done at this time because of the Bretton Woods Agreements but the law reads:

"They (FRNs) shall be redeemed in lawful money on demand..."

So you make your demand. The bank tellers will not stand in your way. They will not distinguish your signing your demand (non-endorsement) from a traditional endorsement either. So what? You keep a copy of your demand.



David Merrill.



CYBERTOOTH's picture

Ron Paul tells it like it is, so that's not completely true.

unum mountaineer's picture

I found this quite interesting...


true blood, new blood...its of little consequence..this is the perversion of our election cycle to a "T". IMHO this is the catalyst for a loss of confidence in government and (fill in the blank)...

tony bonn's picture

the main difference between this crash and that of 1929 is that a few good men like pecora good be found who would tear down corruption and call crap on crap....we do not have that now - especially of pelosi and reid....republicans are no better....

gwar5's picture

So where does the fraud play out from here?

Unlawful Justice's picture

Total destruction of the middle class American.  FEMA camps for all those who "can't take care of them selves"   New world gumberment and and new world currency.  All according to plan.  If you really want to read it for your self read "The Creature from Jekyll Island".(non-fiction)  Chapter 24-25 If you want to see the right now possible out come.    Most people will find it to difficult to read.  The truth is brutal, thus our infinity for the lie.

TheMonetaryRed's picture



There's a simple fact about market economies that EVERYONE on this site needs to learn from William K. Black: Laissez Faire Capitalism Favors Fraudsters - NOT BY DESIGN, but inevitably. Market participants who cheat will always have a lower cost basis than market participants who don't cheat. 

What can you do about it? 

Stop letting people who have economic power put their thumb on the scale. A lot of you think that merely bringing in a gold standard and pushing out the government will fix everything. The entire world history of banking says different. What's needed is smart governance, not no governance. 

The impulse to demand "good collateral" is a righteous one, but you can't be naive. There just are no easy answers. No governance means a paradise for fraudsters. 

unum mountaineer's picture

yip yip yipes!! you mean I should critically think and ask questions at every turn? Even if I "think" I know the answers? ....pppppffffttt..nah, no yet..more kool aid please!!! :-)

slimfinger's picture

You're right that they're waking up.  Like, for instance, pointing out the way people forge pretty statements such as yours by sneaking inaccuracies into them, such as the implication that your audience supports the idea of "no governance".

Rollerball's picture

What can you do about it? 

Just say no, that's what.  Stop tithing the loan shark and starve the beast.  Financial Darwinian-ism is not the evolution of moral intelligence.  It's retains conscription.  

Let's imagine a culture without "money" (by studying previous "trinket-less" tribes).  Nothing is traded/exchanged but the fruits of labor.  No ownership.  None.  No ownership = no owners.  Period.  

Usury (ownership) of any exchange medium provides only inflation of misallocation.  Adding -1 to +10 is not synergy.  It's sympathy for the devil.  

Money is nothing more than the CON-tract of CON-script-ors (debt instruments).  To find real treasure, put gold back to the ground.  There is no store of value in a futureless "society". 

knukles's picture

Don't that one picture look familiar?  Was he on CNBS the other morning?

Mark Noonan's picture

Sure there was fraud surrounding the 1929 crash - and our recent replay.  But why fault banksters and bureaucrats for the particular bits of idiocy which triggered the immediate problem when the real fraud is the fact that we don't have real money?  As long as our currency is backed by nothing, fraud will be inherent in the system.  Nothing we do to fix the problem will really fix it until you can turn in paper currency for silver and gold.

slimfinger's picture

Exactly.  But the fiat system is in place for exactly that reason.  The government and banks will never give that up, because it is how they stay rich - by literally stealing from you and I while having the masses believing it is for their own good.

TheMonetaryRed's picture

Silver and gold money did nothing to stop hundreds of years of financial fraud. 

Mark Noonan's picture


Slimfinger mostly answered your issue, but I'd like to clarify a bit.  Going to gold won't elminate fraud because there will always be people who want to get over on others.  But a fiat-based monetary system makes fraud not just a thing to deal with but, instead, makes it a de-facto requirement.

Of course, it doesn't really have to be a gold-backed currency...but it must be a currency backed by something of tangible value not subject to government manipulation.  The United States government owns many millions of acres of valuable land which could also be part of a basket of things used to provide value to the currency.  The key is to make it so that a dollar earned in 2010 is worth a dollar in 2110.  Currency must retain its value over time in order to have an investment and banking system which is based upon reality, rather than upon guesses about where "the market" will go over time.

Right now, "investment" tends to mean one of two things:

1.  How do I protect the real value of what I currently own?

2.  Is there anyway I can play these market variations to screw somebody out of their real wealth, thus increasing my pile?

Real investment would be someone taking a look at a company - established or start-up - and deciding that the thing is such a good wealth generator that they want a part of it.  I believe if we go back to a gold currency, that is what we'll have, again.  And while fraud will exist, it won't be built in.  It'll just be a hazard because there will always be dishonest people. 

slimfinger's picture

It is amazing how the correct answers and solutions are nearly always the simplest.

You will no doubt be mocked for your lucidity.

slimfinger's picture

Notice that he said "until you can turn in paper currency for silver and gold".  Within a fractional reserve system, you cannot do this.  Simply promising gold isn't the same as actually delivering it.

Notice that he also did not say that it would stop fraud.  What he said was that "nothing we do to fix the problem will really fix it until you can turn in paper currency for silver and gold".

It is inaccurate to say that silver and gold money "did nothing" to stop fraud.  It would have been accurate and fruitful to discussion to say that there were still problems with fraud when we were under such a system, and then to detail the reasons.

mt paul's picture


the new change 

you can't believe in ..

Fred Hayek's picture

Aren't we all just a little tired of the conflation of the stock market with the (much) larger economy?  Yes, there was a lot of fraud in the late 20's stock market.  But it likely would have been a bubble of nearly the same proportions without any fraud.  The fraud simply took some money from people wanting to profit from the bubble and gave it to some con artists instead of having it go into the stock market.  You can even argue that some money being misdirected into the pockets of con artists instead of the stock market caused some very minor cooling rather than further overheating of the market.

As for the wildly over praised Pecora Commission, it put only one guy in jail, a schemer who ripped off some of the big money guys.  No one who ripped off small investors got so much as a minute in jail as a result of the Pecora Commission.


TheMonetaryRed's picture

there was a lot of fraud in the late 20's stock market.  But it likely would have been a bubble of nearly the same proportions without any fraud.  The fraud simply took some money from people wanting to profit from the bubble and gave it to some con artists instead of having it go into the stock market.  You can even argue that some money being misdirected into the pockets of con artists instead of the stock market caused some very minor cooling rather than further overheating of the market.

I'm sorry, but the above is theology, not economics. 

First, the author has forgotten about the enormous amount of real estate and banking fraud in the 20's that began the waves of bank failures. Second, the author has apparently forgotten his von Mises and has reduced subjectivism to a silliness.

Where do you rank fraud in your goods basket? You see the problem? You exchange at a price of what you think the fraud is worth, but what you get is less than nothing.

Fraud uses subjectivism to pervert and undermine the price system. That's what fraud is - the process of using subjective assessments of value to pervert the price system. 

This naive notion of subjectivism is why simplistic, doctrinaire, Austrian theo-nomics has so little real-world value.

Bill Lumbergh's picture

Sadly we never learn from history and in another 70 years or so there will likely be a similar fiasco brewing.

knukles's picture

Ain't revisionist history neat?

Unlawful Justice's picture

The FEDERAL RESERVE is congress no limit credit card and they don't want to give it up.  The American tax payer pays the interest on the "loan" from the Federal Reserve in taxes and inflation.  The principle of the loan will NEVER be paid!.  Congress will not stop spending money they don't have.  Their addicted!  Any man is corruptible given the opportunity to take care of himself, and sell everyone else down the river.  

David Merrill's picture

The history of which you speak is the highly compressed information infrastructure. Without carefully regulated release valves, like Title 12 USC §411 available to the layman, it will just build up until it implodes.


David Merrill's picture

By way of explanation, the links show that the Subprime Mortgage Crisis (Global Financial Crisis) began August 13th, 2007 which was the date on the Request.

lynnybee's picture

FRAUD, just come right out & say it, FRAUD = FEDERAL RESERVE BANKING SYSTEM .    I'm fighting back like I've never fought back = I'm ONLY PURCHASING METAL & FOODSTUFFS ........... THE REST CAN JUST ROT ON THE STORE SHELVES FOR ALL I CARE.    Criminals have messed up what little is left of my life & my kids lives, it's time to get off the grid & spend as little as possible supporting this system.    Good luck government, good luck FED ........ what little I have anymore is mine & you're NOT draining it out ........ if it's not in the bank, you won't get it = METAL.

umop episdn's picture

Has anyone gone to jail yet for bankster fraud? Even a very obvious offender (Mozillo) has had to pay back only 50 mil or so of his own money, when the take was much much larger than that. The rule of law in the US is broken, and this will become more and more obvious to the population in general. Welcome to Scamerica! 

Hansel's picture

I agree that the rule of law has disappeared.  Fraud is everywhere and the official shtick out of the PTB doesn't mention it.  It seems that property rights have disappeared, that you have a mortgage or deed to your house if the banks tell the government you do.  And because D.C. is filled with spendthrifts and because we just have to keep bailing out the banks, our taxes will have to go up to pay for it.  What isn't taxed directly is taxed via inflation by Ben F'n Bernanke with his $1+ trillion QE schemes.  This banana republic sucks.

razorthin's picture

Let he who is without sin... The only virtue that man seems to have left is an aversion to overt hipocrisy.  At least where it would hit his own wallet.  Which of course makes it unvirtuous anyway. 

linrom's picture

Actually Mozilo pays only a small fraction of the $60 million settlement: Countrywide Financial will pay $50 out that.

knukles's picture

No, Countrywide will only pay a deductible.  The rest (like just about the whole shebang, for all intents and purposes) will be paid by Countrywide's D&O and E&O carrier.

surfsup's picture

Great article btw.  And again, its why Glass Steagall was put in place originally.

surfsup's picture

An idea for an article for you George:  The Trickle Down of a debt based banking system which induces various fraudulent practices as more and more people are having to do double time on the traceious rhodensia just to keep up.  If there is ever more debt than hard money in the system the disequilibrium will show up all through out the playing field as form of greed inducement.   Gresham's Law applies as well...'s_law

Where can I apply to be able to post pics?   ty

vy100's picture

I guess GW finally ran out of "end of the world" scenarios from the Gulf Spill so now it's time to switch to the next "doom and gloom"... Come on ZH- let's get back to the basics that made this blog great in the first place- unbiased reporting of facts not opinionated BS from ever growing list of "experts"...

pitz's picture

Allowing H1-B guest workers into the United States to displace its best and brightest tech workers, and suppress the wages of tech workers across the board, is largely responsible for the current mess.

Fraud and perjury is rampant in the contemporary immigration system. 

Kiss My Icelandic Ass's picture

You are a complete idiot.

No "bright" American tech workers are displaced by H-1B immigrants.

I work at a company where the majority of tech workers, myself included, entered the US under H-1B status.

H-1B immigrant workers are not "cheap" replacements of American tech workers. We are paid the prevailing wage. I make much more money than the average American and I believe my employer is happy to have me.

It is in fact more expensive for a company to hire immigrants than to hire Americans, given the costs involved with H-1B processing.

The fact is there are just not enough talented tech workers to go around.

No fraud here. Move along.

(And note, it is H-1B, not H1-B).

pitz's picture

You're full of shit, Sir.    H1-B displacement of US workers at all skill levels has been absolutely rampant.  The concept of "prevailing wage" is a complete fraud.  And H1-B or not, you better be making more money than an "average" US worker because you're working in quite an above-average job.  (and chances are, if you're a H1-B, you live in a high-cost area...which skews the wage upwards anyways!)

The rest of your claims are complete and unadulterated bullshit.  Even MIT CS grads can't find jobs because of the H1-B program.  And I really don't give a fuck about the proper spelling; you obviously know what I'm talking about, you piece of H1-B Indian shit.

Dr_Dazed's picture

"Allowing H1-B guest workers into the United States to displace its best and brightest tech workers, and suppress the wages of tech workers across the board"


Arguably, but you follow with:


"is largely responsible for the current mess."


Just what current mess is a logical consequence of the HB-1 visas?  Your inability to get a tech job?  I'd suggest that it's more likely that your lack of a job is a consequence of your inability to formulate a logical statement - a fatal flaw in many tech oriented positions.