The Ongoing Cover Up of the Truth Behind the Financial Crisis May Lead to Another Crash

→ Washington’s Blog.

William K. Black - professor of economics and the senior regulator during the S & L crisis - says that that the government's entire strategy now - as during the S&L crisis - is to cover up how bad things are ("the entire strategy is to keep people from getting the facts").

Indeed, as I have previously documented,
7 out of the 8 giant, money center banks went bankrupt in the 1980's
during the "Latin American Crisis", and the government's response was
to cover up their insolvency.

Black also says:

There has been no honest examination of the crisis because it would embarrass C.E.O.s and politicians . . .

Instead, the Treasury and the Fed are urging us not to examine the crisis and to believe that all will soon be well.

PhD economist Dean Baker made a similar point, lambasting
the Federal Reserve for blowing the bubble, and pointing out that those
who caused the disaster are trying to shift the focus as fast as they
can:

The current craze in DC policy
circles is to create a "systematic risk regulator" to make sure that
the country never experiences another economic crisis like the current
one. This push is part of a cover-up of what really went wrong and does absolutely nothing to address the underlying problem that led to this financial and economic collapse.

Baker also says:

"Instead of striving to uncover the truth, [Congress] may seek to conceal it" and tell banksters they're free to steal again.

Economist Thomas Palley says that Wall Street also has a vested interest in covering up how bad things are:

That
rosy scenario thinking has returned to Wall Street should be no
surprise. Wall Street profits from rising asset prices on which it
charges a management fee, from deal-making on which it earns advisory
fees, and from encouraging retail investors to buy stock, which boosts
transaction fees. Such earnings are far larger when stock markets are
rising, which explains Wall Street’s genetic propensity to pump the
economy.

The media has largely parroted what the White
House and Wall Street were saying. As a Pew Research Center study on
the coverage of the crisis found:

The
gravest economic crisis since the Great Depression has been covered in
the media largely from the top down, told primarily from the
perspective of the Obama Administration and big business, and reflected
the voices and ideas of people in institutions more than those of
everyday Americans…

Citizens may be the primary victims of the downturn, but they have not been not the primary actors in the media depiction of it.

A
PEJ content analysis of media coverage of the economy during the first
half of 2009 also found that the mainstream press focused on a
relatively small number of major story lines, mostly generating from
two cities, the country’s political and financial capitals.

A
companion analysis of a broader array of media using new “meme tracker”
technology developed at Cornell University finds that phrases and ideas
that reverberated most in the coverage came early on, mostly from
government, particularly from the president and the chairman of the
Federal Reserve...

• Three storylines have dominated: efforts
  to help revive the banking sector, the battle over the stimulus package
  and the struggles of the U.S. auto industry. Together they accounted
  for nearly 40% of the economic coverage from February 1 through August
  31. Other topics related to the crisis have been covered much less. As
  an example, all the reporting of retail sales, food prices, the impact
  of the crisis on Social Security and Medicare, its effect on education
  and the implications for health care combined accounted for just over
  2% of all the economic coverage.

• Actions by
  government officials and business leaders drove much of the coverage.
  The White House and federal agencies alone initiated nearly a third
  (32%) of economic stories studied through July 3. Business triggered
  another 21%. About a quarter of the stories (23%) was initiated by the
  press itself and did not rely on an external news trigger. Ordinary
  citizens and union workers combined to act as the catalyst for only 2%
  of the stories about the economy.

• Fully 76% of the
  datelines on economic stories studied during the first five months of
  the Obama presidency were New York (44%) or metro Washington D.C.
  (32%). Only about one-fifth (21%) of the stories originated in any
  other city in the U.S., and about a quarter of those emanated from two
  other major media centers: Atlanta and Los Angeles.

As I have previously reported, concentration in the mainstream media (along with a number of other dynamics) has severely undermined the credibility of the media.

Why Should We Care?

Why should we care if there has been a cover up?

Well,
initially, if there has been activity which is harmful to the economy
and may lead to another financial crisis, wouldn't we want to know
about it, so that we prevent it from happening again?

The answer is obviously yes.

But
if the government, Wall Street, and the media are all in cover-up mode,
then independent auditors, financial analysts and economists cannot
shine a light into financial practices to find out what really went
wrong.

In addition, if we don't know what's really going on, we
can't gauge whether the government's economic policies are working. For
example, Time Magazine called Tim Geithner a "con man" and the stress tests a "confidence game" because those tests were so inaccurate.

William Black said:

How
do you think we did the stress tests? Like doing a stress test on an
airplane wing, but you don’t actually have airplane wing. And don’t
know what airplane wing is made out of. It’s a farce.

I agree.

Without accurate information, we will not know if we're heading in the right or the wrong direction.

Fraud

One of the foremost experts on structured finance and derivatives - Janet Tavakoli - says that rampant fraud and Ponzi schemes caused the financial crisis.

University of Texas economics professor James K. Galbraith agrees:

You had fraud in the origination of the mortgages, fraud in the underwriting, fraud in the ratings agencies.

Congress woman Marcy Kaptur says that there was rampant fraud leading up to the crash (see this and this).

According to economist Max Wolff:

The
securitization process worked by "packag(ing), sell(ing), repack(aging)
and resell(ing) mortages making what was a small housing bubble, a
gigantic (one) and making what became an American financial problem
very much a global" one by selling mortgage bundles worldwide "without
full disclosure of the lack of underlying assets or risks."

Buyers
accepted them on good faith, failed in their due diligence, and rating
agencies were negligent, even criminal, in overvaluing and endorsing
junk assets that they knew were high-risk or toxic. "The whole process
was corrupt at its core."

William Black says that massive fraud by is what caused the economic crisis. Specifically, he says
that companies, auditors, rating agencies and regulators all committed
fraud which helped blow the bubble and sowed the seeds of the
inevitable crash. And see this.

Indeed, as I have previously noted, the giant ratings agencies have a culture of covering up improper ratings (and they essentially took bribes for giving higher ratings).

Black also notes:

• Everyone
  involved knew that the CDOs which packaged subprime loans were not AAA
  credit-worthy (which means that they are completely risk-free). He also
  said that the exotic instruments (CDOs, CDS, etc.) which spun the
  mortgages into more and more abstract investments were intentionally created to defraud investors

• The
  government knew about mortgage fraud a long time ago. For example, the
  FBI warned of an "epidemic" of mortgage fraud in 2004. However, the
  FBI, DOJ and other government agencies then stood down and did nothing.
  See this and this

• "Accounting
  is the weapon of choice in the financial sphere", with the top
  executives involved in these fraudulent schemes vacuuming out huge
  profits for themselves and select insiders, and having auditors rubber
  stamp what's being done

• In November 2007, one
  rating agency - Fitch's - dared to take a look at some loan files.
  Fitch concluded that there was the appearance of fraud in nearly every file reviewed

Black and economist Simon Johnson also state
that the banks committed fraud by making loans to people that they knew
would default, to make huge profits during the boom, knowing that the
taxpayers would bail them out when things went bust.

See also this, this and this.

The Economy Won't Recover Until We Prosecute

So there was a little fraud, no big deal, right?

Wouldn't looking backwards at fraudulent conduct be distracting for the people, the government, and the economy? Shouldn't we look forward so we can recover?

No.

Specifically, the Wharton School of Business has written an essay stating that restoring trust is the key to recovery, and that trust cannot be restored until wrongdoers are held accountable.

The Wharton paper states:

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...

For more on the importance of trust in the economy, see this.

The stakes are high. As 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.

Comments

[Anonymous]

This market is turning "the people" into animals... Backlash against the government and bank runs coming soon.

[Anonymous]

quality government all the way
makes me ashamed to be an american

[Cistercian]

 I understand.But lets face it, the entire carnival is rigged by the 2 ruling parties.A decent candidate in my state has to get 50,000 certified signatures to get on the ballot if not backed by either party machine.In my opinion, that is simply evil.How many people have enough money to do that?We need...we desperately need good people who won't be purchased to run.We could use the net/grass roots approach.....but 50k takes time.We need to tell everyone not to vote for the incumbents, or any demopublicans....or the screwing continues unabated.And we need people to step forward to run.RIGHT NOW!

 Failing a takeover of congess this way........

 There is always the other path.

 But it would be more fun to get real people into power.And watch the trials of the wall st scum.I would so LOVE to see paulson get 1200 years in prison.

  My God, it would be GLORIOUS!!!!!!

[faustian bargain]

The collusion between the two parties in setting up the presidential debates to exclude outside parties is pretty well documented.

[Commander Cody]

I'm with Faust.

[Daedal]

+1

Repeat a lie often enough & some will believe it - but it's still a lie.

[agrotera]

 "The great mass of people... will more easily fall victim to a big lie than to a small one." Mein Kampf, Vol 1, Chap. 3

[ZerOhead]

May lead to another crash?

GW I love your work... the next crash however is already baked into the cake.

The cover up is a lame attempt to buy time and shift/obfuscate blame and make yet more cash. It's already over. The question is when and how bad. Answer... soon and real bad.

Heres a well written account coming from sources at the BIS (the central bank to the central bankers). Not a big fan personally but they called the crisis early and correctly... and anyone who is anyone is a member.

Tick tick tick tick...

http://www.globalresearch.ca/index.php?context=va&aid=15501

BOOM !!!

[Jendrzejczyk]

Thanks ZerO, that was a good read.

[Anonymous]

This just echoes what we "mad as hell and not going to take it anymore" folks have been talking about this year.Yet "We The People" are apparently in a hopeless situation against the ruling class. They buy the politicians, they buy the legislation and that makes it all legal. Maybe what we really needed was a depression and restructuring of the world so the old playbooks would be destroyed. Maybe we'll get it.

[faustian bargain]

Let's prosecute the government first.

[Anonymous]

AMEN ! ! ! !

[Anonymous]

yes but which government? the one which failed to stop it? the one[s] which perpetuated it? or the one[s] that began it?

[faustian bargain]

two answers:

a. all of them - I didn't vote for any of them, that's for sure.

b. 'prosecute' in this case is sortof half-metaphorical. Yes it would satisfy my blood lust to put some heads on pikes, but more useful would be a change in government. That's ostensibly why we have elections periodically, rather than bloody revolutions or coups. However, the government has worked tirelessly to render the Constitution obsolete (because it's the only thing standing in the way of complete power) and subsequently has figured out how to perpetuate itself across elections without ever having to make any actual changes beyond rearranging deck chairs.

So anyway, if there's a way to re-institute the Constitution by putting government officials on trial, I'm all for it. It would take a real sea change though.

I don't think the American people want that much change yet, however. So they will get what they deserve. Believing that putting bankers in jail will somehow fix anything is naive. That addresses a symptom, not the cause.

[Anonymous]

"Let's prosecute the government first."

This could not have happened on this scale without government complicity.

Some very public hangings would restore market confidence.

[Rusty_Shackleford]

Sunlight the best disinfectant?

Nah,

It's gravity.

[Veteran]

excellent as always

[Anonymous]

"May lead to a crash"
May?
How about did?

Respectfully, the dollar and Dow are down -84% since
2001 and 1999 respectively in terms of gold.
That's a 16 cent real dollar in 8 years and a 1760
real Dow in a decade.
In other words, the nominal dollar would have to go to
$1.84 and the nominal Dow to 20,240 just to break even.

On top of that, the greatest crash in the history
of the world may have just begun today...

http://www.jubileeprosperity.com/

[Anonymous]

Speaking of coverups, MB interviewed TG on CNBS
yestarday and no mention 33 TARP recipients are in
defualt, hello. Even the Huff and Puff knows this.
Incidentally, she's calling for the resignation of
Biden. How about the entire government? Today's
Consumer Confidence a vote of No Confidence...

http://www.huffingtonpost.com/2009/10/12/tarp-deadbeats-33-firms-m_n_317...

http://blogs.reuters.com/rolfe-winkler/2009/10/08/tarp-deadbeats/