Another Nobel Economist Says We Have to Prosecute Fraud Or Else the Economy Won't Recover → Washingtons Blog
Another Nobel Economist Says We Have to Prosecute Fraud Or Else the Economy Won't Recover - Washingtons Blog

Wednesday, November 3, 2010

Another Nobel Economist Says We Have to Prosecute Fraud Or Else the Economy Won't Recover

As economists such as William Black and James Galbraith have repeatedly said, we cannot solve the economic crisis unless we throw the criminals who committed fraud in jail.

And 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. See this, this and this.

Nobel prize winning economist Joseph Stiglitz just agreed. As Stiglitz told Yahoo's Daily Finance on October 20th:

This is a really important point to understand from the point of view of our society. 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.


A lot of the predatory practices in automobile loans are going to be able to be continued. Why is it OK to engage in bad lending in automobiles and not in the mortgage market? Is there any principle? We all know the answer to that. No, there's no principle. It's money. It's campaign contributions, lobbying, revolving door, all of those kinds of things


The system is designed to actually encourage that kind of thing, even with the fines [referring to former Countrywide CEO Angelo Mozillo, who recently paid tens of millions of dollars in fines, a small fraction of what he actually earned, because he earned hundreds of millions.].


I know so many people who say it's an outrage that we had more accountability in the '80's with the S&L crisis than we are having today. Yeah, we fine them, and what is the big lesson? Behave badly, and the government might take 5% or 10% of what you got in your ill-gotten gains, but you're still sitting home pretty with your several hundred million dollars that you have left over after paying fines that look very large by ordinary standards but look small compared to the amount that you've been able to cash in.

So the system is set so that even if you're caught, the penalty is just a small number relative to what you walk home with.

The fine is just a cost of doing business. It's like a parking fine. Sometimes you make a decision to park knowing that you might get a fine because going around the corner to the parking lot takes you too much time.


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.


So do we have any confidence that these guys who got us into the mess have really changed their minds? Actually we have pretty [good] confidence that they have not. I've seen some speeches where they said, "Nothing was really wrong. We didn't get things quite right. But our understanding of the issues is pretty sound." If they think that, then we really are in a sorry mess.


There are many aspects of [deterring people from committing crime]. 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.

And that's why, for instance, in our antitrust law, we often don't catch people when they behave badly, but when we do we say there are treble damages. You pay three times the amount of the damage that you do. That's a strong deterrent. Unfortunately, what we've been doing now, and more recently in these financial crimes, is settling for fractions – fractions! – of the direct damage, and even a smaller fraction of the total societal damage. That is to say, the financial sector really brought down the global economy and if you include all of that collateral damage, it's really already in the trillions of dollars.

But there's a broader sense of collateral damage that I think that has not really been taken on board. And that is confidence in our legal system, in our rule of law, in our system of justice. When you say the Pledge of Allegiance you say, with "justice for all." People aren't sure that we have justice for all. Somebody is caught for a minor drug offense, they are sent to prison for a very long time. And yet, these so-called white-collar crimes, which are not victimless, almost none of these guys, almost none of them, go to prison.


Let me give you another example of where the legal system has gotten very much out of whack, and which contributed to the financial crisis.

In 2005, we passed a bankruptcy reform. It was a reform pushed by the banks. It was designed to allow them to make bad loans to people to who didn't understand what was going on, and then basically choke them. Squeeze them dry. And we should have called it, "the new indentured servitude law." Because that's what it did.

Let me just tell you how bad it is. I don't think Americans understand how bad it is. It becomes really very difficult for individuals to discharge their debt. The basic principle in the past in America was people should have the right for a fresh start. People make mistakes. Especially when they're preyed upon. And so you should be able to start afresh again. Get a clean slate. Pay what you can and start again. Now if you do it over and over again that's a different thing. But at least when there are these lenders preying on you should be able to get a fresh start.

But they [the banks] said, "No, no, you can't discharge your debt," or you can't discharge it very easily.


This is indentured servitude. And we criticize other countries for having indentured servitude of this kind, bonded labor. But in America we instituted this in 2005 with almost no discussion of the consequences. But what it did was encourage the banks to engage in even worse lending practices.


The banks want to pretend that they did not make bad loans. They don't want to come into reality. The fact that they were very instrumental in changing the accounting standards, so that loans that are impaired where people are not paying back what they owe, are treated as if they are just as good as a well-performing mortgage.

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.


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


  1. THis is an ongoing peeve of mine -- I don't understand why we have not aggressively pursued this . . .

  2. The countrywide guy doesn't even have to pay his paltry fine himself. He is indemnified by bank of america, which was a condition of the sale

  3.'s a never ending sin. Those in power realize that the government does not have the will or manpower to regulate or enforce laws, therefore white collar crime is rampant. Lobbying groups and attorney's are running our government and changing laws to protect the guilty.

    "Those with the Gold make the Rules". Unless society demands real change, then the middle class will fade away and we will end up looking like our neighbors to the south...Mexico and other third world countries. We are in the process of developing a Caste System - a social structure in which classes are determined by heredity.

    Hopefully our country and society will start demanding real change before it's too late. Wake Up America, we better find the "Restart Button Soon"

  4. Think of how different the world would be today if JFK were not murdered by the World Banksters.

    On June 4, 1963, President John F. Kennedy signed Executive Order No. 11110 that returned to the U.S. government the power to issue currency, without going through the Federal Reserve (US Central Bank); Kennedy was on his way to putting the Federal Reserve Bank out of business.

    JFK knew who the enemy was within the USA that is destroying us today.

    “For we are opposed around the world by a monolithic and ruthless conspiracy that relies primarily on covert means for expanding its sphere of influence--on infiltration instead of invasion, on subversion instead of elections, on intimidation instead of free choice, on guerrillas by night instead of armies by day. It is a system which has conscripted vast human and material resources into the building of a tightly knit, highly efficient machine that combines military, diplomatic, intelligence, economic, scientific and political operations.” - John F. Kennedy

  5. "Think of how different the world would be today if JFK were not murdered [...]"

    Just think how different the world would be if every idiot and fool on the planet didn't fall for all the myths spun by those who pretend to speak for an entirely non-existent zeitgeist.

    JFK was a stinking turd, just like all of the rest of our stinking American politicians, every Caesar and Alexander too.

    JFK was a full-blown megalomaniac higher than a kite on barbiturates 24/7.

    The most obvious myths are myths about geniuses and saviors.

    Grow up.

  6. Don said: “Just think how different the world would be if every idiot and fool on the planet didn't fall for all the myths spun by those who pretend to speak for an entirely non-existent zeitgeist.”

    As usual Don, you have no facts, just your childish screaming and name calling. Ha. Ha. Where is your proof that you are a better man than JFK?

    Unfortunately, the privately held and secretive Federal Reserve multinational banking system does exist. I can visualize you wailing and throwing yourself down over that! Ha. Ha.

  7. Something I don't see mentioned often enough. I'd really like to see Professor Black comment on it sometime. It seems the fraudsters learned their lesson in the S&L collapse; ever since then they systematically dismantled not only the regulations but also the regulatory agencies. In addition to their leaders being captured by their "clients", the regulatory agencies have been regularly stripped of funds to hire enough people to to the job that needs to be done. And not only the regulatory agencies. The Department of Justice and the FBI were stripped of experienced fraud investigators and prosecutors after 9/11, as they were reassigned to work in anti-terrorism, and THEY HAVE NEVER BEEN REPLACED! Of course, we already know that Obama and Holder do not want to look back, so they have made a conscious decision to protect the banksters who committed massive fraud, as well as the war criminals who made torture our official policy.

  8. Request for Congressional Foreclosure Panel to Examine Foreclosure Lawyers

    "Although increasing numbers of courts are continuing to reject improper and fraudulent foreclosures, the Congressional Foreclosure Panel examination of mortgage services and foreclosure practices did not include foreclosure lawyers.

    Lawyers are officers of the court; knowledge of applicable laws and civil procedure is not required from mortgage lenders. In states that require judicial foreclosures, lawyers are the ones who file lawsuits to seize and sell property; and lawyers are responsible for filing and recording foreclosure property deeds.

    An investigation could prove helpful to sorting out whether improper and illegal foreclosure proceedings are linked to any self-dealing conduct disadvantaging lenders, investors, homeowners, and city governments. . .”

    Request for fraudulent foreclosure investigation


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