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The Government Has It Bass-Ackwards: Failing To Prosecute Criminal Fraud by the Big Banks Is Killing – NOT Saving – the Economy
U.S. Attorney General Eric Holder said today:
I am concerned that the size of some of these institutions [banks] becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy
As we’ve repeatedly noted, this is wholly untrue.
If the big banks were important to the economy, would so many prominent economists, financial experts and bankers be calling for them to be broken up?
If the big banks generated prosperity for the economy, would they have to be virtually 100% subsidized to keep them afloat?
If the big banks were helpful for an economic recovery, would they be prolonging our economic instability?
In fact, 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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Unfortunately the number of Citizens who care, let alone cherish our constitution are quickly diminishing.
Hey, if we got some munchies, a bag of weed and a decent amount of TV programming and the internet, it all good right? Freedom is just way too much work afterall. Thats why we hire sharp guys like Obama...to kind of work things out.
Sorry, I'm trying here but this shit is killing me! Fucking "World of Retards" I guess we deserve what we get, right? Thank God my parents don't have to see this. I'm ashamed.
The big banks own the government - what do you expect?
george - while you are entirely correct about the benefits of prosecuting criminal banks, you completely misunderstand the rhetoric. nazi holder was doing 2 things with his statement - he was signaling banksters everywhere that they are safe and may proceed to do as they please, and he was telling the world, quoting baby bush, that the constitution is nothing but a goddamned piece of paper.....
assuming that the indonesian citizen gives a rat's ass about law is a betrayal of naievete....both men are card carrying nazis. they work for the rockefeller axis of evil which was one of adolph hitler's biggest supporters in the usa during the 1920s until the very bitter end of the war.
it's time to give up the childish understanding and begin to accept that the usa is ruled by nazis who have wiped out this nation's constitution. do some research on the nazi origins of america's post world war 2 government....one good starting place - and it is admittedly shallow - russ baker's bush biography and antony sutton's works....
Anthony Sutton, a foriegner who became one of the greatest American historians in history, an unsung national treasure.
This probably won't get off the ground but a bill is being floated in RI that will (supposedly) prevent tarot cards and fortune cookies from being used as "legal" documents in foreclosures.
RI House Bill H 5512 - Legislative Attempt to Make Lenders Follow the Law. (No...really)
Of course it is not their intention to save the economy. They get paid by the CIA and banksters to destroy the economy. Who do you think they work for anyhow. They are the FEDs. That's what FEDs do. Oklahoma City, World Trade Centers Gulf of Tonken and all that kind of thing.
It's not like they put the Fox in charge of the Henhouse.
It would be more accurate to suggest that first they paid the Fox an exorbitant sum of money to both design and implement all of the security systems for the Henhouse. Then, they paid an exorbitant sum of money the Fox’s good buddies and campaign supporters to provide insurance coverage against the possible loss of the Hens.
Then, after the Fox ate the Hens, the Fox was put in charge of the investigation into what happened to the Hens and why the Fox’s buddies couldn’t cover the total loss of the Hens as required by their insurance sales. Then, after causing the Fox’s buddies to be bailed out from having to go bankrupt from inability to pay the insurance claims, the Fox promptly blamed the Dog for the losses.
cute--but not accurate---
what we have is like pedifiles that use under 5yr old kids to mutilate and then kill and then have laugh with their buds over a beer while watching the vids.
deal with them accordingly
No-one is in jail, and no-one is going to jail. Just accept it, the worlds taxpayers are paying for it.
Over here in Europe they are actually arguing about the size of the bonuses these crooks can get. Apparently some thief on a million a year can only have a bonus of 2 million. And that apparently, according to the British Prime Minister, will drive all the talent away.
To somewhere where the bastards will be prosecuted I hope.
The essence of justice is fairness.
Without fairness, there will be chaos.
Such was the declaration of a survivor of the 1972 Andes plane crash. There ensued some early attempts to secrete/hoard a food stash. When the connection between fairness and chaos was stated, all those alive began about as pure fairness regimen as can be imagined. After months, many were finally resued.
The 1972 flight 571 was high in late-winter Andes. The simple declaration that unfairness would bring chaos and lessen chance of survival was by Nando Parrado. Long after rescue attempts were ended, he and partner Cannessa trekked over 18000' altitude and a week later reached help.
Best to read his account for the exact circumstances Miracle In The Andes, [the book, not the movie].
The rule of law is all that seperates a republic from mob rule. When you quit enforcing the law- people no longer have protection. Without protection, they quit participating altogether because there is no law to protect what they have earned and there is no restorative justice. Therefore the majority or the mob, simply seize your assets as they see fit and redistribute them.
That is Obama's America. You didn't build that- the mob did. We own it.
In Amerika, mob own you!
And now they want to take away our guns and tell us its okay for the president to order an execution by drone....hmmmmm...I don't think so. DHS may have billions of rounds of lethal ammo and 2700 new tanks on the way, but if the mood of the US populace ever gets angry, I would warn those like Napalitano that they are way outnumbered, and, unlike the rest of the world, Americans understand the meaning and value of freedom, liberty and justice. This shit will work its way out through the system that exists or some other way, but it will get cleaned up.
. .if the mood of the US populace ever gets angry. . . .
Your scaring me dude! If you folks aint motherfucking Angry right fucking now now then whazz it gonna take? Are you the type of guy who returns home to find the postmans balls resting on your wifes chin and asks her what's for lunch?
Start shooting now and get a heads start.
Get head? What is mean?
The reason why they are buying all that ammo (that type of ammo especially) and all that equipment is the fact they know the game can't continue anymore. They know it wil end and it will be badly. And so they are getting ready to put us into a state of seige and control of the populace when the checks stop coming.
One can always hope they will throw us guys a few hotties at the FEMA camps.
HEY emEffers
It is all about Rand PAul LIvefeed
http://www.c-span.org/Live-Video/C-SPAN2/
I did my part by contributing to Rand Paul's election campaign.