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 ….

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  • dean

    What can we do about a corrupt system that includes all of govt and even the people that are being taken care of by govt checks? There is not an enity large enough or powerful enough to prosecute these theives,,it would take yrs and yrs and all the money that we confiscated to try these people,,in my opinion the only ones that can put a stop to it is the people and I don’t know if there are enough honest people to get the job done,it would take some very brave people and maybe not so lawful to bring these people to justice. Since we have let it fester this long it looks like the only thing left,,hopefully there is another way that is not so drastic.

  • our system is based on money. until the system is based on something other than money, these same global economic failures will continue in the future. the human body does not require paper money to sustain itself. we require food, water, vitamins and minerals. in these things we find value. Paper money enabled people who do NOT produce anything of value to trade for things they require to sustain themselves. This is the system that needs attention…simply putting people in prison may make some people feel better about “justice” but this will not solve this problem. The problem is in the system of values. Political and corporate leaders really never cared about what you want or need. They only care about what they want. They take what they want by exerting force. if a corporation wants control of the Hawaiian sugar and coffee trade, they lobby and exert force on political leaders until the us army invades and overthrows the queen in the name of ‘freedom’.
    that is just one example of course. The point is: people in power do not willingly give it up, they must be coerced and violently. This applies to the US Gov. army, navy, marines, dea, cia, fbi, nsa, tsa etc etc… also applies to walmart, mcdonalds, national newspapers and news stations.
    so we are forced with a question in all of this: should we use force to overthrow the people in power or do we sit by and watch freedom disappear. most would say, FIGHT! but we all know that is not the answer. the answer is to base a society on a system of values, values that would help to sustain that society, not keep it in financial bondage through future taxation for wars fought in the past. it is clear the current system has spiraled out of control, intentionally so that a few families could ensure their own sense of security by taking away everyone else’s.
    so, in closing : YES! prosecute fraud, but let us not pretend for one nanosecond that prosecuting frauds will send any message whatsoever or solve the problem. Maybe if we lock up all the drug dealers and drug users then drugs will go away forever. sound ridiculous? because it is. and that is exactly what you are proposing. just put them in prison and the problem will go away. AND THAT is the fault in your logic, and that is the fault in our system. stop searching for people to blame for the problem and just solve the problem. The solution is in re-examining societal values, not simply prosecuting the guilty. : )

  • mike

    plunder is groundless and only leads to further breaking, this is why the planet is melting.