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.

Category: Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

10 Responses to “No Fraud Prosecution, No Recovery”

  1. 873450 says:

    Obama apologizing for his “Wall Street Fat Cats” remark says it all.

  2. theexpertisin says:

    Not prosecuting white collar fraud is certainly not exclusive to the United States. Certainly, there are exceptions. If you are in Russia and run afoul of the mafia passing for a government, white collar fraud – real or concocted- throws the accused into the Gulag. In China, the accused is “rehabilitated” or summarily shot, depending upon the politics of the moment.

    I speculate that the United States prosecutes more white collar crime than most nations. The fact that the accused must be proved guilty beyond any reasonable doubt sets a high standard to convict. “Rather ten guilty be found innocent than one innocent found guilty” has allowed our lawyer friends to accumulate a lion’s share of wealth over the years.

  3. Stav says:

    Did Obama choose his “Look forward, not back” prosecution policy so that the country would not have to face the political upheaval of seeing Bush, Cheney, Rumsfeld et. al. in the stocks for their role in torturing and other capital crimes, or to protect the enormous criminal enterprises (our financial system) that funds our political system?

  4. partimer1 says:

    This is so true. I think that’s how Japan lost the decades without recovery. We are right behind Japan unless we put those criminals in jail which is unlikely.

  5. blackjaquekerouac says:

    the fact is the Pecora commission among other true “agents of change” yielded some extremely valuable institutions which given our victory in WWII have held us in good stead even today. The most important it would seem is the creation of the FDIC. Europe and Asia do not have this institution so when a large British real estate lender fails it doesn’t annihilate Irish savers because they don’t have that insurance. As the multitude of crisises unfold in Europe–and my understanding is the only insured deposits are in Swiss banks which goes a long way towards saying there’s a massive panic underway in every other European country–then you can understand why “fraud” isn’t being prosceuted. We now know the Rupurt Murdoch’s media empire has been tapping phone lines, bribing police officers, spying on Royals and getting their jollies adjusting text messages from a young girl’s phone later found dead “to keep hope alive.” So THAT is the criminality that our Judicial System is up against. It makes it surprising we’ve made it this far solely on shame alone. Know this though: sovereign collapses in Western Europe and beyond are now a guarantee.

  6. CitizenWhy says:

    It is a long and honored tradition that the nobility not be prosecuted. The law is for peasants, well paid or low paid. This is how God’s work gets done.

  7. uzer says:

    yes, stav.

  8. emaij says:

    Mainstream media is catching on? Roger Lowenstein started the ball rolling in the “there was no crime” came a few weeks ago. He has since been picked up by more than a few other journalists equally as interested in glossing over the fraud and ingratiating themselves with the power elites who are want nothing more than for everyone to forget what they did.

    Obama ignoring the fraud has been a tremendous disappointment. Saying that he appointed compromised people – Rubin, Summers, Geithner… – and that he was relying on their compromised advice is of little consolation when the result is reinforcement of a very corrupt political economy.

    If Obama is re-elected it will be a crushing blow to justice. Then again, if he is not re-elected, someone even less interested in justice will likely be the next president.

  9. Blissex says:

    As a simple example a few years ago several CEOs and executives were found to have issued to themselves and friends huge backdated in-the-money options that were promptly cashed.

    Whatever other issue (accounting fraud, securities fraud come to mind) this may have, it meant that dozens or hundreds of millions of income tax were evaded as income was fraudulently misrepresented as capital gains.

    These are all open-and-shut, documentary evidence, criminal tax fraud cases for large sums of money, has anybody gone to jail in any of these cases? I suspect that only the little people go to jail for tax fraud.

  10. Blissex says:

    «If Obama is re-elected it will be a crushing blow to justice. Then again, if he is not re-elected, someone even less interested in justice will likely be the next president.»

    If there was any way to gain more voters by promising more justice, it would become an issue. But candidates of any sort have noticed the enthusiastic re-election of the representatives of both houses that have voted for TARP (and PATRIOT and everything else).

    The voters are corrupt, and they vote for candidates who support and decriminalize white collar misbehaviour because they think it is a Real American way of getting ahead in life.

    One of my favourite Newt Gingrich quotes:
    «If you have a society where almost every middle class person routinely fudges the law, that’s telling us something. We have laws that matter-murder, rape, and we have laws that don’t matter. Speed limits are an example. Why would you think that a regulatory, process-oriented bureaucratic model would work? The first thing that every good American says each morning is “What’s the angle?” “How can I get around it?” “What does my lawyer think?” “There must be a loophole!” Then he proceeds to work the angle, and the bureaucracy spends its time chasing that and writing new regs to stop him. America is the most incentive-driven society on the planet.»

    Voters are far more concerned with getting low-tax or tax-free capital gains thanks to asset price bubbles than with Real American producer heroes filling their pockets with bezzle, as everybody would like to do the same.