There's No Recovery Because the Government Made it Official Policy Not to Prosecute Fraud → Washingtons Blog
There's No Recovery Because the Government Made it Official Policy Not to Prosecute Fraud - Washingtons Blog

Friday, July 8, 2011

There's No Recovery Because the Government Made it Official Policy Not to Prosecute Fraud

Fraud caused the Great Depression and it has caused the current financial crisis. But fraud is not not being prosecuted, and so it will occur again and again, and prevent a sustainable economic recovery.

Numerous economists have been saying this for years. As I pointed out in March:

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, William Black notes that we've known of this dynamic for "hundreds of years".

Now mainstream journalists are starting to catch on.

Market Watch senior columnist Brett Arends writes:

No one has been punished. Executives like Dick Fuld at Lehman Brothers and Angelo Mozilo at Countrywide, along with many others, cashed out hundreds of millions of dollars before the ship crashed into the rocks. Predatory lenders and crooked mortgage lenders walked away with millions in ill-gotten gains. But they aren’t in jail. They aren’t even under criminal prosecution. They got away scot-free. As a general rule, the worse you behaved from 2000 to 2008, the better you’ve been treated. And so the next crowd will do it again. Guaranteed.

Gretchen Morgenson and Louise Story point out in the New York Times that:

As the financial storm brewed in the summer of 2008 ... Federal prosecutors officially adopted new guidelines about charging corporations with crimes — a softer approach that, longtime white-collar lawyers and former federal prosecutors say, helps explain the dearth of criminal cases despite a raft of inquiries into the financial crisis.

Though little noticed outside legal circles, the guidelines were welcomed by firms representing banks. The Justice Department’s directive, involving a process known as deferred prosecutions, signaled “an important step away from the more aggressive prosecutorial practices seen in some cases under their predecessors,” Sullivan & Cromwell, a prominent Wall Street law firm, told clients in a memo that September.


“If you do not punish crimes, there’s really no reason they won’t happen again,” said Mary Ramirez, a professor at Washburn University School of Law and a former assistant United States attorney. “I worry and so do a lot of economists that we have created no disincentives for committing fraud or white-collar crime, in particular in the financial space.”

(This appears to be true on both sides of the Atlantic.)

And Frank Rich reports in a much-discussed piece in the New Yorker:

What haunts the Obama administration is what still haunts the country: the stunning lack of accountability for the greed and misdeeds that brought America to its gravest financial crisis since the Great Depression. There has been no legal, moral, or financial reckoning for the most powerful wrongdoers. Nor have there been meaningful reforms that might prevent a repeat catastrophe. Time may heal most wounds, but not these. Chronic unemployment remains a constant, painful reminder of the havoc inflicted on the bust’s innocent victims. As the ghost of Hamlet’s father might have it, America will be stalked by its foul and unresolved crimes until they “are burnt and purged away.”

After the 1929 crash, and thanks in part to the legendary Ferdinand Pecora’s fierce thirties Senate hearings, America gained a Securities and Exchange Commission, the Public Utility Holding Company Act, and the Glass-Steagall Act to forestall a rerun. After the savings-and-loan debacle of the eighties, some 800 miscreants went to jail. But those who ran the central financial institutions of our fiasco escaped culpability (as did most of the institutions). As the indefatigable Matt Taibbi has tabulated, law enforcement on Obama’s watch rounded up 393,000 illegal immigrants last year and zero bankers. The Justice Department’s bally­hooed Operation Broken Trust has broken still more trust by chasing mainly low-echelon, one-off Madoff wannabes.


Those in executive suites at the top of that chain have long since fled the scene with the proceeds, while bleeding shareholders, investors, homeowners, and ­cashiered employees were left with the bills. The weak Dodd-Frank financial-reform law that rose from the ruins remains largely inoperative ....

Obama arrives at his reelection campaign not merely with a weak performance on Wall Street crime enforcement and reform but also with a scattershot record (at best) of focusing on the main concern of Main Street: joblessness. One is a consequence of the other. His failure to push back against the financial sector, sparing it any responsibility for the economy it tanked, empowered it to roll over his agenda with its own.


Unless and until there’s a purging of the crimes that brought our president to his unlikely Inauguration Day, much more in America than the second term of his administration will be at stake.


  1. We have a similar situation over here in the UK where our governments make a big point of hunting down social security fraud, (at a cost variously described as between £500,000 - £900,000 for every £65,000 defrauded), supposedly because such costs are warranted by their deterrent effect, and because social security fraud shouldn't be seen to pay.

    Yet their approach to high finance fraud - operating at monumentally greater scales and therefore at monumentally greater cost to the country - is not only the exact reverse to that of social security fraud, but seems almost intended to encourage it.

  2. Just to emphasize the priorities of the Justice Department: The perjury trial for the "oh so vital and important to all Americans" Roger Clemens steroid matter will be kicking off within days.

    The perjury committed by various Goldman Sachs executives in testimony in front of Congress is minor in comparison and apparently not worth pursuing.

  3. Before posting articles suggesting there is hope for 'new, improved' forms of nuclear energy, you should do a little more research. This is a good place to start: It would appear that Dr. Josephson's e-cat reactor is some variety of a thorium-fueled reactor, a technology which MAY be slightly better than uranium-fueled reactors - but nowhere near good enough. Here is the NIRS take on thorium:

    Time is getting very short to deal with the energy problem. The technology for real, cost-effective solutions in the form of energy conservation, renewables exists now. And if it isn't already, it would be vastly more cost-effective than nuclear energy - or for that matter fossil fuels - if all the hidden subsidies were removed and all the un-paid external costs were counted.

  4. Remember JFK? When the powers that be (monied interests in this case) don't like what a president is doing, they will get him out one way or another. Maybe I'm a wacky conspiracy theorist but I think this president knows this and that is why he is kowtowing.


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