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Joseph E. Stiglitz argues that bad policies in rich countries, not economic inevitability, have caused most people’s standard of living to decline. – Project Syndicate
NEW YORK – Soon after the global financial crisis erupted in 2008, I warned that unless the right policies were adopted, Japanese-style malaise – slow growth and near-stagnant incomes for years to come – could set in. While leaders on both sides of the Atlantic claimed that they had learned the lessons of Japan, they promptly proceeded to repeat some of the same mistakes. Now, even a key former United States official, the economist Larry Summers, is warning of secular stagnation.
The basic point that I raised a half-decade ago was that, in a fundamental sense, the US economy was sick even before the crisis: it was only an asset-price bubble, created through lax regulation and low interest rates, that had made the economy seem robust. Beneath the surface, numerous problems were festering: growing inequality; an unmet need for structural reform (moving from a manufacturing-based economy to services and adapting to changing global comparative advantages); persistent global imbalances; and a financial system more attuned to speculating than to making investments that would create jobs, increase productivity, and redeploy surpluses to maximize social returns.
Policymakers’ response to the crisis failed to address these issues; worse, it exacerbated some of them and created new ones – and not just in the US. The result has been increased indebtedness in many countries, as the collapse of GDP undermined government revenues. Moreover, underinvestment in both the public and private sector has created a generation of young people who have spent years idle and increasingly alienated at a point in their lives when they should have been honing their skills and increasing their productivity.
On both sides of the Atlantic, GDP is likely to grow considerably faster this year than in 2013. But, before leaders who embraced austerity policies open the champagne and toast themselves, they should examine where we are and consider the near-irreparable damage that these policies have caused.
Every downturn eventually comes to an end. The mark of a good policy is that it succeeds in making the downturn shallower and shorter than it otherwise would have been. The mark of the austerity policies that many governments embraced is that they made the downturn far deeper and longer than was necessary, with long-lasting consequences.
Real (inflation-adjusted) GDP per capita is lower in most of the North Atlantic than it was in 2007; in Greece, the economy has shrunk by an estimated 23%. Germany, the top-performing European country, has recorded miserly 0.7% average annual growth over the last six years. The US economy is still roughly 15% smaller than it would have been had growth continued even on the moderate pre-crisis trajectory.
But even these numbers do not tell the full story of how bad things are, because GDP is not a good measure of success. Far more relevant is what is happening to household incomes. Median real income in the US is below its level in 1989, a quarter-century ago; median income for full-time male workers is lower now than it was more than 40 years ago.
Some, like the economist Robert Gordon, have suggested that we should adjust to a new reality in which long-term productivity growth will be significantly below what it has been over the past century. Given economists’ miserable record – reflected in the run-up to the crisis – for even three-year predictions, no one should have much confidence in a crystal ball that forecasts decades into the future. But this much seems clear: unless government policies change, we are in for a long period of disappointment.
Markets are not self-correcting. The underlying fundamental problems that I outlined earlier could get worse – and many are. Inequality leads to weak demand; widening inequality weakens demand even more; and, in most countries, including the US, the crisis has only worsened inequality.
The trade surpluses of northern Europe have increased, even as China’s have moderated. Most important, markets have never been very good at achieving structural transformations quickly on their own; the transition from agriculture to manufacturing, for example, was anything but smooth; on the contrary, it was accompanied by significant social dislocation and the Great Depression.
This time is no different, but in some ways it could be worse: the sectors that should be growing, reflecting the needs and desires of citizens, are services like education and health, which traditionally have been publicly financed, and for good reason. But, rather than government facilitating the transition, austerity is inhibiting it.
Malaise is better than a recession, and a recession is better than a depression. But the difficulties that we are facing now are not the result of the inexorable laws of economics, to which we simply must adjust, as we would to a natural disaster, like an earthquake or tsunami. They are not even a kind of penance that we have to pay for past sins – though, to be sure, the neoliberal policies that have prevailed for the past three decades have much to do with our current predicament.
Instead, our current difficulties are the result of flawed policies. There are alternatives. But we will not find them in the self-satisfied complacency of the elites, whose incomes and stock portfolios are once again soaring. Only some people, it seems, must adjust to a permanently lower standard of living. Unfortunately, those people happen to be most people.
Read more at http://www.project-syndicate.org/commentary/joseph-e–stiglitz-argues-that-bad-policies-in-rich-countries–not-economic-inevitability–have-caused-most-people-s-standard-of-living-to-decline#huJ4BlicZg9e2A6X.99
Joseph Stiglitz, in an interview with CNBC has said what we are all probably thinking right now. Even President Obama can’t be foolhardy and ostrich-like with his head buried in the sand to imagine that the US economy is picking up. Hope against hope and all the rain dancing you can do won’t get the economy moving because the wrong decisions have been taken by the people that thought that they had the ultimate solution to the world’s woes. Joseph Stiglitz is right when he says that the economy is not in recovery mode and hasn’t been.
Talk as much as we might wish about growth, it just hasn’t materialized. The lackluster growth with the highest growth rate in the third quarter of 2013 (the highest since 2011, which is nothing in itself to write home about) has not even dented the US economy let alone kick-started it into 2014. We have everything to be still worried about as the problems are just stagnating there as the people at the top take the decisions that are going to bring the economy further down into the doldrums. Just how far can we go?
The US stock market has hardly had a good start to the year. Just about the only thing that is doing well is the banking sector. As usual, some might say. The correction that has been promised now for months looks set to be rearing its ugly head at any moment now. Equities have fallen already almost 2% since the start of this year. Those that had somehow foolishly believed that the only way was up or that the sky was the limit look as if they are going to be in for a rough ride.
The market hasn’t corrected itself now for the last 28 months. The longer the wait, the bigger it will be. Statistics show that there is a correction of the market roughly every 18 months that is in the region of 10%. Yesterday was the worst session for the Dow Jones Industrial Average. It fell 1.1% at the close, down 1.9% for the start of 2014. The S&P 500 is down 1.6% and the NASDAQ has fallen by 1.5% so far this year.
The US employment situation is far from good. Jobs haven’t and just aren’t been created these days whatever the government has been telling us. We get people rejoicing over a few thousand jobs that are created, when we need literally hundreds of thousands of jobs every month. Data from last week showed that 74, 000 jobs had been created in December. We we’re expecting 200, 000.
It doesn’t create uncertainty; it just leaves the bitter pessimistic taste of failure in your mouth, Mr. President.
The participation rate in the US hasn’t been this low since 1978. It stands at just 62.8% for December. The number of people that are actively looking for work or in work hasn’t been lower now for more than 35 years. Stiglitz stated: “We have millions who have given up looking for a job. They’ve looked and looked and there are no jobs…more and more Americans have said there’s no future”.
All of that just brings on the same old story about the Federal Reserve’s decision ti cut the Quantitative Easing and shut down the printing presses after injecting $3 trillion into the US economy to keep it floating. All the bailing out that you can do is not going to plug the hole in the bottom of the boat, is it?
Stiglitz believes that it’s fiscal stimulus that will get the economy moving again and certainly not throwing bad money after even worse money. No amount of printing the greenback will have little if any effect on the economy. They might as well just go, get down on their knees and start praying in Washington. Nothing else will happen.
Fourth-quarter growth for 2013 looks as if it will be mediocre at best. Profits growth for S&P 500 is predicted to reach an increase of 7.7% in comparison with December 2012.
Robust growth, let alone any growth at all, is certainly not on the cards this year. According to Stiglitz, we should start worrying (or at least continue).
Activist Post: Government of the Rich, by the Rich and for the Rich: It’s Time for ‘Militant Nonviolent Resistance’
John W. Whitehead
“[E]verywhere, “time is winding up,” in the words of one of our spirituals, “corruption in the land, people take a stand, time is winding up.”—Martin Luther King Jr.
We now live in a two-tiered system of governance. There are two sets of laws: one set for the government and its corporate allies, and another set for you and me.
The laws which apply to the majority of the population allow the government to do things like sending SWAT teams crashing through your door in the middle of the night, rectally probing you during a roadside stop, or listening in on your phone calls and reading all of your email messages, confiscating your property, or indefinitely detaining you in a military holding cell. These are the laws which are executed every single day against a population which has up until now been blissfully ignorant of the radical shift taking place in American government.
Then there are the laws constructed for the elite, which allow bankers who crash the economy to walk free. They’re the laws which allow police officers to avoid prosecution when they shoot unarmed citizens, strip search non-violent criminals, or taser pregnant women on the side of the road, or pepper spray peaceful protestors. These are the laws of the new age we are entering, an age of neo-feudalism, in which corporate-state rulers dominate the rest of us, where the elite create the laws which can result in a person being jailed for possessing a small amount of marijuana while bankers that launder money for drug cartels walk free. In other words, we have moved into an age where we are the slaves and they are the rulers.
Unfortunately, this two-tiered system of government has been a long time coming. As I detail in my book A Government of Wolves: The Emerging American Police State, the march toward an imperial presidency, to congressional intransigence and impotence, to a corporate takeover of the mechanisms of government, and the division of America into haves and have nots has been building for years.
Thus we now find ourselves at a point where, for the first time in history, Congress is dominated by a majority of millionaires who are, on average, 14 times wealthier than the average American. Making matters worse, as the Center for Responsive Politics reports, “at a time when lawmakers are debating issues like unemployment benefits, food stamps and the minimum wage, which affect people with far fewer resources, as well as considering an overhaul of the tax code,” our so-called representatives are completely out of touch with the daily struggles of most Americans–those who live from paycheck to paycheck and are caught in the exhausting struggle to survive on a day-to-day basis.
Indeed, although America is supposed to be a representative republic, these people– who earn six-figure salaries and inhabit a world exempt from parking tickets, where gym membership is free and health care is second-to-none, where you only have to work two, maybe three days a week and get 32 fully reimbursed road trips home a year, travel to foreign lands, discounts in Capitol Hill tax-free shops and restaurants, free reserved parking at Washington National Airport, free fresh-cut flowers from the Botanic Gardens, and free assistance in the preparation of income taxes–neither represent nor serve the American people. They have instead appointed themselves our masters.
While Congress should be America’s representative body, too many of its members bear little resemblance to those they have been elected to represent. As Dan Eggen reports for The Washington Post: “The new figures underscore a long-standing trend of wealth accumulation in Congress, which is populated overwhelmingly with millionaires and near-millionaires who often own multiple homes and other assets out of reach for most of the voters they represent.”
Many of our politicians live like kings. Chauffeured around in limousines, flying in private jets and eating gourmet meals, all paid for by the American taxpayer, they are far removed from those they are supposed to represent. Such a luxurious lifestyle makes it difficult to identify with the “little guy”–the roofers, plumbers and blue-collar workers who live from paycheck to paycheck and keep the country running with their hard-earned dollars and the sweat of their brows.
The unfortunate but simple fact is that the rich sit perched at the top of the government. As Joseph Stiglitz writes for Vanity Fair:
Virtually all U.S. senators, and most of the representatives in the House, are members of the top 1 percent when they arrive, are kept in office by money from the top 1 percent, and know that if they serve the top 1 percent well they will be rewarded by the top 1 percent when they leave office. By and large, the key executive-branch policymakers on trade and economic policy also come from the top 1 percent. When pharmaceutical companies receive a trillion-dollar gift–through legislation prohibiting the government, the largest buyer of drugs, from bargaining over price–it should not come as cause for wonder. It should not make jaws drop that a tax bill cannot emerge from Congress unless big tax cuts are put in place for the wealthy. Given the power of the top 1 percent, this is the way you would expect the system to work.
Sadly, electoral politics have been so thoroughly corrupted by corporate money that there is little chance, even for a well-meaning person, to affect any real change through Congress. Whether it be the Oval Office or the halls of Congress, the road to the ballot box is an expensive one, and only the wealthy, or those supported by the wealthy, are even able to get to the starting line.
Just consider the 2012 presidential election cycle. Both parties spent $1 billion each attempting to get their candidate elected to the presidency. This money came from rich donors and corporate sponsors, intent on getting their candidate in office. Once in office, these already privileged wealthy bureaucrats enter into a life of even greater privilege, unfortunately at the expense of the American taxpayer. It doesn’t even seem to matter whether they’re Democrats or Republicans–they all take full advantage of what one news report described as “a mountain of perks that most Fortune 500 companies couldn’t begin to rival.”
Even President Obama’s closest advisers are millionaires, including those on his 15-member cabinet. It is not unusual for some of them to own vacation homes, such as Kathleen Sebelius, secretary of Health and Human Services, who owns a “summer home worth more than a million dollars.”
And then there are the lobbyists, the source of much corruption and exchanging of money in Washington. With an estimated 26 lobbyists per congressman, it should come as no surprise that once elected, even those with the best of intentions seem to find it hard to resist the lure of lobbyist dollars, of which there are plenty to go around.
This lobbying is in turn buoyed by a congressional lifestyle which demands that our representatives spend the majority of their time fund raising for campaigns, rather than responding to the needs of their constituents. In November 2012, the Democratic House leadership offered a model daily schedule to newly elected Democrats which suggests a ten-hour day, five hours of which are dominated by “call time” and “strategic outreach,” including fund raisers and correspondence with potential donors. Three or four hours are for actually doing the job they were elected to do, such as attending committee meetings, voting on legislation, and interacting with constituents.
When half of one’s time is devoted to asking for money from rich individuals and special interests, there is no way that he can respond to the problems which pervade the country. Even well-meaning Congressmen face a Catch-22 where they are pushed to fundraise to secure their seats, but then once in office, it is basically impossible for them to do their jobs. The full ramifications of this are laid out by Rep. Brad Miller (D-NC):
Any member who follows that schedule will be completely controlled by their staff, handed statements that their staff prepared, speaking from talking points they get emailed from leadership… It really does affect how members of Congress behave if the most important thing they think about is fundraising. You end up being nice to people that probably somebody needs to be questioning skeptically… You won’t ask tough questions in hearings that might displease potential contributors, won’t support amendments that might anger them, will tend to vote the way contributors want you to vote.
What we are faced with is a government by oligarchy–in other words, one that is of the rich, by the rich and for the rich. Yet the Constitution’s Preamble states that it is “we the people” who are supposed to be running things. If our so-called “representative government” is to survive, we must first wrest control of our government from the wealthy elite who run it. That is a problem with no easy solutions, and voting is the least of what we should be doing.
“What they don’t want,” noted comedian George Carlin, is “a population of citizens capable of critical thinking. They don’t want well-informed, well-educated people capable of critical thinking. They’re not interested in that. That doesn’t help them. That’s against their interests.”
A population of citizens capable of critical thinking? That’s a good place to start, and it’s a sure-fire way to jumpstart a revolution. As Abraham Lincoln said, “Wise men established these great self-evident truths, that when in the distant future some man, some faction, some interest, should set up the doctrine that none but rich men, or none but white men, were entitled to life, liberty and the pursuit of happiness, their posterity should look up again at the Declaration of Independence and take courage to renew the battle which their fathers began.”
Inspiring words, but what do they really mean for those of us laboring under the weight of an overreaching, militarized, corrupt government that grows increasingly so with each passing day?
How can we change this state of affairs? The government is too big, too powerful, and its overlords too entrenched to willingly give up any of its power or wealth. The wisest option is to employ the tactics of past protest movements such as the Bonus Army, the Civil Rights Movement, and the 1960s anti-war movement, all of which used sleep-ins, sit-ins and marches to oppose government policies, counter injustice and bring about meaningful change.
For example, in May of 1932, more than 43,000 people, dubbed the Bonus Army—World War I veterans and their families—marched on Washington. Out of work, destitute and with families to feed, more than 10,000 veterans set up tent cities in the nation’s capital and refused to leave until the government agreed to pay the bonuses they had been promised as a reward for their services. The Senate voted against paying them immediately, but the protesters didn’t budge. Congress adjourned for the summer, and still the protesters remained encamped. Finally, on July 28, under orders from President Herbert Hoover, the military descended with tanks and cavalry, beating some protesters senseless and setting their makeshift camps on fire. Still, the protesters returned the following year, and eventually their efforts not only succeeded in securing payment of the bonuses but contributed to the passage of the G.I. Bill of Rights.
Similarly, the Civil Rights Movement mobilized hundreds of thousands of people to strike at the core of an unjust and discriminatory society. Likewise, while the 1960s anti-war movement began with a few thousand perceived radicals, it ended with hundreds of thousands of protesters, spanning all walks of life, demanding the end of American military aggression abroad.
What these movements had was a coherent message, the mass mobilization of a large cross section of American society, what Martin Luther King Jr. called a philosophy of “militant nonviolent resistance” and an eventual convergence on the nation’s seat of power—Washington, DC—the staging ground for the corporate coup, where the shady deals are cut, where lobbyists and politicians meet, and where corporate interests are considered above all else.
It is no coincidence that just prior to his assassination in April 1968, King was plotting “to build a shantytown in Washington, patterned after the bonus marches of the thirties, to dramatize how many people have to live in slums in our nation.”
King’s advice still rings true: “We need to put pressure on Congress to get things done. We will do this with First Amendment activity. If Congress is unresponsive, we’ll have to escalate in order to keep the issue alive and before it. This action may take on disruptive dimensions, but not violent in the sense of destroying life or property: it will be militant nonviolence.”
The balance of power that was once a hallmark of our republic no longer exists. James Madison’s warning that “the accumulation of all powers, legislative, executive, and judiciary, in the same hands, whether of one, a few, or many, and whether hereditary, self-appointed, or elected, may justly be pronounced the very definition of tyranny” has, regrettably come to pass.
Clearly, it’s time for a mass movement dedicated to change through “militant nonviolence.” If not, the shadow of tyranny that now hangs over us will eventually destroy every last semblance of freedom.
“We know through painful experience that freedom is never voluntarily given by the oppressor,” Martin Luther King Jr. warned in his “Letter from a Birmingham Jail.” “It must be demanded by the oppressed.”
The Failure To Punish Wall Street Criminals Is The Core Cause Of Our Sick Economy
U.S. Attorney General Eric Holder said:
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.
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.
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.
(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.
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.
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 andthis.
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.
Earlier this month, a prominent New York Federal Court Judge – and former Chief of the fraud unit for the U.S. Attorney’s Office for the Southern District of New York (Jed Rakoff) – said:
Not a single high level executive has been successfully prosecuted in connection with the recent financial crisis ….
[If] the Great Recession was in material part the product of intentional fraud, the failure to prosecute those responsible must be judged one of the more egregious failures of the criminal justice system in many years.
The stated opinion of those government entities asked to examine the financial crisis overall is not that no fraud was committed. Quite the contrary. For example, the Financial Crisis Inquiry Commission, in its final report, uses variants of the word “fraud” no fewer than 157 times in describing what led to the crisis, concluding that there was a “systemic breakdown,” not just in accountability, but also in ethical behavior. As the Commission found, the signs of fraud were everywhere to be seen, with the number of reports of suspected mortgage fraud rising 20-fold between 1998 and 2005 and then doubling again in the next four years. As early as 2004, FBI Assistant Director Chris Swecker, was publicly warning of the “pervasive problem” of mortgage fraud, driven by the voracious demand for mortgage-backed securities. Similar warnings, many from within the financial community, were disregarded, not because they were viewed as inaccurate, but because, as one high level banker put it, “A decision was made that ‘We’re going to have to hold our nose and start buying the product if we want to stay in business.’”
The prevailing view of many government officials (as well as others) was that the crisis was in material respects the product of intentional fraud.
[The Department of Justice doesn’t disagree.] Attorney General Holder himself told Congress that “it does become difficult for us to prosecute them when we are hit with indications that if we do prosecute – if we do bring a criminal charge – it will have a negative impact on the national economy, perhaps even the world economy.”
No one that I know of has ever contended that a big financial institution would collapse if one or more of its high level executives were prosecuted, as opposed to the institution itself.
The Department of Justice has never taken the position that all the top executives involved in the events leading up to the financial crisis were innocent, but rather has offered one or another excuse for not criminally prosecuting them – excuses that, on inspection, appear unconvincing. So, you might ask, what’s really going on here?
[Deferred prosecutions – the current government approach of letting big banks off easy and leaving the individual fraudsters alone – are not the way to go.] Although it is supposedly justified in terms of preventing future crimes, I suggest that the future deterrent value of successfully prosecuting individuals far outweighs the prophylactic benefits of imposing internal compliance measures that are often little more than window-dressing. Just going after the company is also both technically and morally suspect. It is technically suspect because, under the law, you should not indict or threaten to indict a company unless you can prove beyond a reasonable doubt that some managerial agent of the company committed the alleged crime; and if you can prove that, why not indict the manager? And from a moral standpoint, punishing a company and its many innocent employees and shareholders for the crimes committed by some unprosecuted individuals seems contrary to elementary notions of moral responsibility.
These criticisms take on special relevance, however, in the instance of investigations growing out of the financial crisis, because, as noted, the Department of Justice’s position, until at least very, very recently, is that going after the suspect institutions poses too great a risk to the nation’s economic recovery.
Rakoff thoroughly debunks the government’s other lame excuses for failing to prosecute Wall Street criminals as well, such as the “difficulty” of proving “intent” or the “sophistication” of the counter parties.
Indeed, Judge Rakoff notes that the government had a large hand in creating the fraud in the first place. In fact, the government has done everything it can to cover up fraud, and has been activelyencouraging criminal fraud and attacking those trying to blow the whistle.
The failure to punish the fraudsters is the core cause of our sick economy.
When Bubbles Fail: Albert Edwards Explains What Happens When The Fed Can No Longer Contain The Fury Of The “99%” | Zero Hedge
- The Credit Bubble Is Not Only Back, It Is 94% Bigger Than In 2007 (zerohedge.com)
- Is Global Real Estate Still in a Bubble? (ritholtz.com)
- The Consequences Of QE For The Long-Term (etfdailynews.com)
- Fed’s Williams Says to Spot Bubbles Throw Out Idea Investors Are Rational (blogs.wsj.com)
- Is China an ‘Enormous Tail-Risk’? (ritholtz.com)
- Why Interest Rates Will Explode Again (etfdailynews.com)
- Paul Krugman: This Age of Bubbles (economistsview.typepad.com)