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The Lie that Prosecuting Bank Fraud Will Destabilize the Economy Is What Is REALLY Destroying the Economy
The Departments of Justice and Treasury are pretending that criminally prosecuting criminal banksters will destabilize the economy.
The exact opposite is true.
Failing to prosecute criminal fraud has been destabilizing the economy since at least 2007 … and will cause huge crashes in the future.
After all, the main driver of economic growth is a strong rule of law.
Nobel prize winning economist Joseph Stiglitz says that we have to prosecute fraud or else the economy won’t recover:
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.
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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.
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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.
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.
Indeed, professor of law and economics (and chief S&L prosecutor) William Black notes that we’ve known of this dynamic for “hundreds of years”. And see this, this, this and this.
(Review of the data on accounting fraud confirms that fraud goes up as criminal prosecutions go down.)
The Director of the Securities and Exchange Commission’s enforcement division told Congress:
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’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.
Paul Zak (Professor of Economics and Department Chair, as well as the founding Director of the Center for Neuroeconomics Studies at Claremont Graduate University, 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’s Research Department and Public Sector Governance Department) wrote a paper called Trust and Growth, showing that enforcing the rule of law – i.e. prosecuting white collar fraud – is necessary for a healthy economy.
One of the leading business schools in America – the Wharton School of Business – published 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:
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.”
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.
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.”
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 “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.
Note that Sachs urges “hold[ing] the perpetrators of the economic disaster responsible.” In other words, just “looking forward” and promising to do things differently isn’t enough.
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:
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.
Indeed, it is beyond dispute that bank fraud was one of the main causes of the Great Depression.
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.
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The government that permits this to happen is complicit in a vast crime.
Galbraith also 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.
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 banks.
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 Galbraith has said economists should move into the background, and “criminologists to the forefront.”
The bottom line is that the government has it exactly backwards. By failing to prosecute criminal fraud, the government is destabilizing the economy … and ensuring future crashes.
Postscript: Unfortunately, the government made it official policy not to prosecute fraud, even though criminal fraud is the main business model adopted by the giant banks.
Indeed, the government has done everything it can to cover up fraud, and has been actively encouraging criminal fraud and attacking those trying to blow the whistle.
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If you ever wanted a clearer vision of who the "us vs. them" really are - the fraud and the lack of prosecution and the continuing fraud certainly puts things into focus.
Lying, cheating scumbag bankers/financiers/Wall St. assholes - and all who feed off of the fraud (politicians) believe that the end (they get rich) justifies the means.
Anyone - and I do mean anyone whol believes that there is an actual difference between repubs and dems on the actual issues that matter - like financial reform and globalization should check out the vote tally on the renewal of the "Patriot Act" and the last 3-4 supposed "free trade agreements". Shit went through slick and quick - real bi-partisanship available when screwing your country in favor of the rich few...
No wonder the central bankers can’t find the key to world government; their combination of Keynesianism and tyranny doesn’t work. They don’t understand man and what he wants out of life. For their operation to work, they must have a police state.
The international bankers have shuttered US industry in their quest to profit from Communism and its imperialistic slave system, using America as “a place for financiers to relax, unwind and plan their raids.”
The phrase is from Israel Shamir in his current description of England as a “home base to al Fayed and Abramovich and to the millions of immigrants imported to service them.” The companion shoe fits America.
The international bankers are unraveling both societies. Both are in dire straits.
Shimir says England “has become the most godless society in the world. Buses emblazoned with There’s probably no God cruise London. In the Globe theatre, medieval British plays are still staged…but eerily different: today’s versions are overtly anti-Christian. The Holy Virgin is now represented as a young coloured tart in a short dress. Instead of the Jewish high priest and his coterie, the antagonists are now Christian priests in full dress. Not a single voice of protest has sounded…”
The European Union is the handiwork of the international bankers’ Keynesian folly. America’s collapsing economy and culture was designed by the same financial kleptomaniacs, in their greed stealing the wealth as fast as they can. If Blankfein doesn’t steal it, Bernanke will.
But unlike England, in America the government is facing a sea of weapons it can’t get its hands on. And history has proven America isn’t England.
Merry Christmas!
George Carlin : Religion is Bullshit http://www.youtube.com/watch?v=MeSSwKffj9o
Merry Christmas JR.
Kayman! My heart leaped like a school boy’s when I saw your name! You’ve made my Christmas!
Merry Christmas! Kayman.
And here’s to a Happy New Year! with great expectations of seeing more of you and your cutting edge posts on ZH in 2013. I’ve missed you!
Forget about prosecution- Hang the bitchezz and their families. No need for prolonged trials and crap.
The Federal Government is spending so much beyond its tax revenues that it depends upon the Federal Reserve Corporation (owned by the "member financial institutions") to create an ocean of fiat money out of thin air to ensure that the feds never have a failed bond auction.
If 14% of all grocery spending in the US is paid for via food stamps, and the Treasury borrows over 40% of its spending and the Federal Reserve Corporation is covering 90% of the Federal bond auction, how much of Procter and Gamble's profit is thin air and how much of P & G's share price is elevated by thin air, and how much of the American worker's 401k bloated by thin air, and what happens when the Fed gets exhausted and can no longer keep printing thin-air-backed fiat money?
It appears that the federal government is giving the owners of the Federal Reserve Corporation (the "member financial institutions") a big pass because the federal government needs the Federal Reserve to keep playing the present game and there will be political hell to pay should it ever come to a halt.
Boy are we screwed.
They have run up so much debt, the only answer is a Hard On Police State with 30 million dead in order to control the rest.
Excellent work, George. Merry Christmas!
I'm with Winston on this one.
O.J. Simpson walked on murder charges but got his assets stripped by a civil case.
I'd gladly contribute to a deep pockets litigator team to file civil charges against these criminals.
Granted that it would be a David vs. Goliath battle but the criminality is so egregous that I can't see how a jury couldn't find for the plantiff.
Is Jon Corzine still looking behind the file cabinets for that lost money?
A sign of the time. Write an entire article on the problem of lack of prosecutions by this administration and not one time mention the president's role.
OTOH, the supposed opposition party didn't make a peep about it, either.
That has been the real story of bipartisan cooperation over the past 4 years.
Do you mean the person to be sworn in in secret for the second time ?
It's Bush's fault.
This is hardly a new issue.
The law on this was settled at Runnymeade all those years ago with the Magna Carta.
All it takes is the balls ad money to privately criminaly prosecute the banksters.
Magna Carta was all about the State(King) playing favorites with the law.It removed
criminal prosecution from being the sole right of the State.
Perhaps Bill Black would lead such a prosecution, to be funded by donations ?
Bill Black will return to the gov about the same time the Law returns to gov.
Never.
Its too profitable for both the vampire oligacrhs and their merry little minons the plutocrats controlling both partys.
Russell mohkiber - corporate crime reporter.com interview
http://www.kpfa.org/archive/id/87243
I said Bill Black as lead prosecutor in a PRIVATE criminal prosecution.
It not like it would be a hard case to make to a jury.
The evidence is everywhere.
The problem is funding said trial thru' to conviction when the State has to pick
up the tab, inc. costs in the cause leading to the conviction..
Exactly how does a private Criminal investiagtion and prosecution work?
Never heard of it.
In fact investiagting and prosecuting Criminal Wrongdoing is the Mandate of legitimate government.
Of course we dont have that -
Exact same method as the state doing it.
Judge and jury.Only difference is that private parties do it.
If they do it and get a conviction,the state repays those parties, and pays for the
incarcerations.
It is not the sole domain of the state.Its the most important right granted under
Magna Carta, and enshrined in US law as well.It seems to have fallen out of
favor here in last hunderd years probably because of the cost.
Its very much alive elsewhere in the world,notably UK, Canada ,and the commonwealth
countrys.
well the Oligarchs and some of us are going to have a merry xmas!
Heaven can wait!
But come New Year the storm clouds reappear. And here is a stone in the Oligarchy garden that looks meteor sized! On the issue of crony bond market CB plays.
Gerald Celente: Bonds Away! - Business Insider
My Blog
Wait for it....
Serfs never willingly get bound to the land.
There is no way these crimes will ever be prosecuted, the trajectory in fact is leaning toward increased tolerance and deregulation. The situation is systemic, there is a bubble in unethical behavior covered up by making it "legal" or at least not illegal. Every one of us except those who have been kicked out of the system, has an interest in maintaining the economic and legal ponzi. The only solution is a natural one... a complete collapse of the economic and legal system, and its ultimate bottom up renewal. Lots of fallout and, ironically, "collateral damage" on its way.
5 year Statute of Limitations on most financial fraud, which means the clock has damn near already run out.
I'm sure Wall Street recognizes every dollar to Obama was damn well spent.
The clock has only just started.
Robosigning was just one act in an ongoing conspiracy to defraud.
If the banks had stopped (they haven't)robosigning last year ,the clock started then.
True, crime rewarded begets ever more crime that could, in a different world from the one we've come to know, be newly prosecuted, but we've seen no signs it is likely to happen.
Add this cockroach to your swarm. I suspect that Romney would have won if he had addressed this bank corruption with campaign vigor. Instead, he decided that the banksters would not be of much help if they were imprisoned and not in his cabinet. and that was the trust issue that was the reason that the fiscal conservative voters pulled their votes and stayed home.
That may be true. But I suspect that if he had seemed at all serious, he would have been found strapped to the roof of his own car in a dog carrier, not looking at all well.
The self described "fiscal conservative" voters are that in name only (except the Ron Paul supporters). They are in fact war spending promoters and inlfationists. Romney is a creature of inlfationist monetary policy... using low interest rate leverage to buy out companies, cutting wages (contrary to the interests of supply siders who need consumers to be well paid), converting the increased cash flow to a higher buy out price and flipping the balance sheet to the next "job-creator". There is no way he would have reigned in the bankers and has publicly expressed his sympathy and admiration of them.
His policies were simply an extension of the Bush foolishness... more tax cuts, increasing wasteful spending and having the Fed pick up the slack with more debt and debt-monetization.
Exactly.
It is a big lie.
Today at 1:00 EST Attorney Glenn Russell (lead counsel for the Larace Family in Ibanez/Larace) will be on Senka live radio. That case is arguably the biggest foreclosure ruling to date.
Borrowers ARE Essential Parties to Securitized Mortgages
The program will be archived. Tune in because Glenn has really got it going on.
Thanks GW and Merry Christmas.
TARP was to cover the fact that the RMBS investors money was outright stolen.
The problem is far from settled.TARP provided money via AIG to settle the CDS
written on the RMBS which should have cleaned up the system a little.
However the banks kept the CDS proceeds instead of paying it to the RMBS investors.
They are currently playing a massive shell game with the Notes owned concurrently by
mulitple REMIC trusts.
This is a time bomb that the $50bna month in RMBS purchases by the FedRes is really just
pissing into the ocean to try to raise sea levels.
Best estimates are $16Tn in phony securities still out there.
Glenn is making some very strong arguments in the MA SJC.
They are so strong that some of the Judges are actually listening.
Many others as well all over the country.
The way thats currently working against the banks ,is; the Deny and Discover method.
Deny the Note(a fraud ab intio anyway),and demand the full money trail thru' discovery..
The cases are immediately dropped or settled(with a no publicity clause) once you get past the summary
judgement hearing.
Its happening a lot but being kept very quiet.
The girl who runs the program is just a "regular mom".
Here's the question people have to ask: If one had the wherewithal to pay off their mortgage right this minute - who would keep the money?
Is it the same party who made the disbursement? More likely - it would be a "servicer" with zero skin in the game.
The Judges typically say "well your client got the money so they owe it to somebody".
Paraphrasing Glenn..."well your honor, the folks trying to foreclose on my client are right there. None of them are named *somebody*."
I know Glenn and talked to him yesterday. He is not advertising and I'm frankly surprised he's spending an hour of his time on this since he works practically 24/7.
Clients are lined up for blocks and he can't take them all and many of them are non gratis.
Hopefully other (skilled) attorneys listen in and join the fight.
The only logical conclusion is that unlike the crash of 1929 the Fed and it's primary dealers were granted sweeping authority to save the US economy by the Bush criminals after 9/11...and so what should have been regarded as criminal activity was most likely authorized in support of the war effort and National Security interests. In that context banking crimes become subjective and their victims collateral damage.
Given the Bush administrations outlook upon entering office of don't pay the bills, just give the money back to the people that made it, the next logical step would have been to extend the color of law to previously fraudulent activity allowing the recovery of wealth reluctantly paid to the sheeple during the cold war period. Is there any doubt that TPTB regard labor/Unions as thieves and parasitic obstacles to their absolute power(I mean National Security)?
When historians are finally allowed access to enough information, to unpack what happened and why, I believe they will conclude that Congress enabled the Administrations' activity by failure to declare war, leaving the Executive near dictatorial powers with little or no oversight. COG won the day and can hardly be considered proper oversight under our Constitution.
Perhaps some brave journalist might consider asking Obama/Bernanke if in fact the banking sector has been extended certain protections due to the nature of the governments' imposition on them in the interests of National Security. Nothing else makes sense when you consider all that has transpired.
PRESIDENT OBAMA: Well, I think you're absolutely right in your interpretation. And, you know, I can't, as President of the United States, comment on the decisions about particular prosecutions. That's the job of the Justice Department. And we keep those things separate, so that there's no political influence on decisions made by professional prosecutors. I can tell you, just from 40,000 feet, that some of the most damaging behavior on Wall Street, in some cases, some of the least ethical behavior on Wall Street, wasn't illegal.
What an absolutely hilarious statement for a POTUS to make. After all, no one is calling for prosecutions based on ethics but we all expect prosecutions based on LAW. The 40,000 feet reference has always troubled me...is this a reference to Bushs' activation of Continuity of Government on 9/11 from AF1 at 40,000'? Is he saying there is nothing he can do because COG redefined Fed Res system obligations? We will never know.
Thanks for your continued diligence on these most important matters ZH and George.
+1. I am aure the irony runs deeper than we can imagine. Sad.
DITTO.
Yeah, I agree with most of what he says. But under law these guys broke many. It is really that many just don't want to dig up the dirt which is the problem. Even the SEC did put some people in Jail for insider trading. But that was just show. Why? Because Goldman Sachs is guilty of insider trading all the time. They found a little and fined them. Why didn't Blankfien go to Jail for that. Because he is a Goldman employee. I find it quite interesting that Lloyd criminalized himself under oath to Congress when he testified about some of Goldman's misdeeds. Thinking he was careful he actually blew it. Doesn't anybody remember his saying to congress that nobody understands how these deals and trades are done. He said, "somebody has to take the other side of the trade". Hmmmm. You sell somebody shit, and then knowing it is shit you take the other side. If that is not criminal and trading on inside information I guess I just don't understand what is. It is so funny and unbelievable that nobody called him out on it. Are they that stupid or just a good act faking it? Didn't fake me out.
Why prosecute the Candyman if you're a Congressman?
Banks got candy:
A summary I made of what's wrong w/ the banks:
http://demonocracy.info/infographics/usa/derivatives/bank_exposure.html
Woof! That's quite a list on that site.
Spot on...walked away and won't bother returning until ALL the top names on Wall Street and DC are in pound-me-in-the-ass prison and the system is flushed of the corruption.
It wouldn't surprise me if I'm a cockroach in cockroach theory.
Yes, ass-pounding prison should be their due, but with all respect to GW (and much is due), if they are to be brought to justice, it won't be until after the coming economic collapse that they will get it. In which case they won't be imprisoned but stripped naked and hung by their balls until dead, intermittent tortures visited upon them as deemed appropriate (and which ones won't be?) by their executioners.
To quote the recent ZH post by Keith Weiner:
These big banks are deemed “too big to fail.” And the label is accurate. The monetary system would not survive the collapse of JP Morgan, for example. A default by JPM on tens or perhaps a few hundred trillion of dollars of liabilities would cause many other banks, insurers, pensions, annuities, and employers to become insolvent. Consequently, second-worst problem is that the government and the central bank will always provide bailouts when necessary. This, of course, is called “moral hazard” because it encourages JPM management to take ever more risk in pursuit of profits. Gains belong to JPM, but losses go to the public.
There is something even worse. Central planners must increasingly plan around the portfolios of these banks. Any policy that would cause them big losses is non-viable because it would risk a cascade of failures through the financial system, as one “domino” topples another.
http://www.zerohedge.com/news/2012-12-21/guest-post-unadulterated-gold-s...
In other words, the Fed/USG and TBTF banks are only doing what they have to do in order to sustain the unsustainable, meaning that it's only a matter of time before what can't be sustained won't be sustained, and the "cascading defaults," as The Maestro so aptly termed what his policies aided and abetted, usher in TEOTWAKI.
Sorry, but that's the reality we face, the question being whether any of us, no matter how well prepared, will survive the hell that these monsters have unleashed upon the world.
"This, of course, is called “moral hazard”"
Shouldn't this be called immoral-hazard since the hazard is immorality?
Seriously, arrest that little bitch Bernanke.
Where the fuck is Homeland Security when you need them?
And they want to take weapons away from us?
EPIC FAIL
this would do nothing:
shalom bernanke is nothing more than a shtadlan that does what the hofjuden tell him to do. the problem here are hofjuden operating from behind the scenes; not their public puppets that will be thrown under the bus at the most convenient time
Amen to that, I forgot him on my list. But then again, there were still many more.
Homeland Security is to keep YOU and ME in line not the connected criminal class.
Look no further than Eric Holder and his sidekick Lanny Breuer - both were partners at Covington and Burling - the top law firm for the corporate criminal class in America, and Both facists holder and breuer will return there after their time at the Justice dept is over.
UBS - too big to prosecute? Or Connected too prosecute? Ubs is Represented by Covington and Burling - why would Holder and bruer want to convict their past and future client?
Bp - also represented by Covington snakes.....
If we has a true democracy here in the US we'd drone strike the Covington offices not some dirt poor village in afpak.
Burn that village to save it.
Obama's form of justice is third world tribal...if you're a member of his tribe then you're not guilty of anything ever. If your a member of an opposing tribe then you are always guilty...for a supposedly bright a nd thoughtful man he is surprisingly shallow and thin skinned...but he lies as well as the best of them.