Re: Another Nobel Economist Says We Have t o Prosecute Fraud Or Else the Economy Won’t Recover

http://www.nakedcapitalism.com/2010/11/guest-post-another-nobel-economist-says-we-have-to-prosecute-fraud-or-else-the-economy-wont-recover.html

On Nov 4, 2010, at 11:10 AM, Lance McLain wrote:

> THURSDAY, NOVEMBER 4, 2010
> Guest Post: 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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