The Government Has It Bass-Ackwards: Failing To Prosecute Criminal Fraud by the Big Banks Is Killing – NOT Saving – the Economy

Failure to Prosecute Fraud Causes Economic Downturns

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.


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.

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.


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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  • amerikagulag

    That the government has it bass-ackwards can only be based on the assumption that the government is interested in justice or in reviving this economy. We all know the government does what it’s told to do by both Israel and the Federal Reserve. Perhaps the destruction of the economy is in fact the ‘intent’ of the government. We shouldn’t forget the “Amero”. Now, there’s only one way to introduce a new currency – that’s to destroy the old one. And of course, we only have to look at Europe and what the IMF and the Rothschild-owned Central banks of Europe have done to those countries to wonder, “when will our time come”? Well perhaps it’s in the making, and all this ‘the economy is doing better’ is just a smoke screen until the ultimate/intentional crash, and the necessity to introduce another currency. A currency which the New World Order desires.

    Then again, perhaps not…perhaps they’ve just made some ‘mistakes’. Perhaps we should maintain faith in the government that it has the best interests of the American people at heart; that justice and truth and the Constitution are still at its core. Perhaps we should just hang on and hope that the next administration will set things right again. That the next administration will dissolve TSA and repeal the Patriot Act(s) and the Military Commissions Act; that they will revoke citizenship for corporations, eliminate tax loopholes for US corporations who manufacture offshore. That they will ground all drones and close all ‘secret prisons’, outlaw torture permanently and finally admit they had a hand in 911.

    In view of the current state of government in the US, I’m tempted to lean toward the first scenario. Just me perhaps.

    • nveric

      Faith in waiting 4 more years?


      Time waits for no one!!

      Money is an abstraction whose worth is set and is best maintained under stable conditions. After going off the Gold / Gold-Silver standards, the soundness of an un-backed currency requires it be maintained so as to not allow it to fall in value by inflating it with more currency in circulation.

      The old and new methods are somewhat the same in that money is still an abstraction of labor, as some maintain, but an abstraction nonetheless. I think the worry today may be misplaced, because panic is fear at an extreme and is generally used to make prices fluctuate in order to make obscene profits. While this sounds unusual, it may also be unusual, but may not be as far-fetched as it sounds. After all, boom and bust cycles are simple ploys to also make obscene profits, because Capitalism works much like casinos operate. A steady-state economy would not require so much attention, but then these high-strung money mongers would have nervous breakdowns from inactivity. Profit seekers are thrill seekers who wear suits while they work. Adrenaline junkies also fits these individuals.

      In short, financial affairs are part showmanship, part real, and part made up nonsense. These worries are never explained to the public, which indicates the worry is being faked.

  • nveric

    Too Big to Fail?

    People are the most important part of a country.

  • Energy Doctor

    This article acts as if Holder and Obama have our bestinterests in mind and are being honest. They don’t prosicute the big banks because they are in league with them! they are partners, don’t you get it?

  • Holder is giving reasons for his inability to do his job. Those reasons might be legitimate or not. I suspect not. Nonetheless, if he, and by extension his boss, who took an oath to uphold the law, cannot satisfy the obligations of his position, then he, and his boss, President Obama, if they were honorable men, would resign their positions.

  • Hey Holder you worthless pos, take a look at what Iceland did!

  • Robin Hood in reverse or the opposite of what the sanctified “Free Markets” are supposed to be about.

  • greensachs

    .,..this is so upsetting. We were certain the missing dollars were being
    skimmed by school teachers and family workers that were given elaborate
    benefits like say, health-care.

    now hush…it’s all about the market…didn’t you get the memo?

    Of course, with it brings wealth creation and trickle down, all code
    for a greed-based, narcissistic hyperindividualism that radiates with a
    new sociopathic lack of interest in others…”

  • Scott Mcgowan

    When I saw Holder tongue kiss janet reno (her favorite saying, kids are better incinerated and riddled with bullet holes, than to be Christan) on a stage in front of TV camera’s, I fully understood, that he was no better then a turd out of her backside. No normal, human man could have done that act.

  • j w
  • Perplexed

    Holder is another narcissist in the Obuma gang. Think about it.

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