The Lie that Prosecuting Bank Fraud Will Destabilize the Economy Is What Is REALLY Destroying the Economy | The Big Picture

The Lie that Prosecuting Bank Fraud Will Destabilize the Economy Is What Is REALLY Destroying the Economy | The Big Picture

By Washingtons Blog - December 23rd, 2012, 1:30AM

Failing to Prosecute White Collar Crime Guarantees a Weak and Unstable Economy … and Future Financial Crashes

 

The Departments of Justice and Treasury are pretending that criminally prosecuting criminal banksters will destabilize the economy.
The exact opposite is true.

When the I civil police become biased to Iv then they can also be deceptive for their own advantage, for example to cover up their own previous incompetence or corruption.

Failing to prosecute criminal fraud has been destabilizing the economy since at least 2007 … and will cause huge crashes in the future.

A weak I-O police cause a disconnect in the economy where Iv-B and V-Bi become separated, this Iv-B component tends to boom and bust with fraud and secrecy.

After all, the main driver of economic growth is a strong rule of law.

This moderates the disconnect so companies grow more like trees that are stable rather than Iv-B weeds and V-Bi grass.

Nobel prize winning economist Joseph Stiglitz says that we have to prosecute fraud or else the economy won’t recover:

If I-O is not strengthened then stimulus or new resources will tend to feed the Iv-B weed companies first which mutate and then collapse. 

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.

This is part of the cycle of color imbalance, it starts at B where diminishing Gb resources cause weakness and then economic problems spread up the Biv economy. The legal system is composed of Bi normal represented on a normal curve as to what people think is normal behavior or deviant. It also has an Iv component where exploitive and competitive behavior is allowed to some degree even if deviant because people have rights even if abnormal. in between these two there is always uncertainty which is why the legal system tries to chart a middle course between these two.

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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.

When resources are scarce people turn to O crime rather than just I civil infractions of the law, Y-Oy predatory business looks for prey among Ro-R people in a negative sum game.

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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.

Often these penalties need to be O criminal because when resources are scarce I civil penalties are just deducted against the profits made. The exception is when resources are abundant and it is easier to make more honest money in a positive sum game than to steal so much that others lose money.


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.

Bailing out Iv-B companies is like putting fertilizer on weeds in the hope they will evolve into more stable plants. Better to weed them out and use this fertilizer on balanced Biv companies.

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.

The I-O police are slowly strengthening against Y-V companies after the economy hit the Iv-B ceiling. The Y-V top of the food chain is usually the last to lose money. 
 
Paul Zak (Professor of Economics and Department Chair, as well as the founding Director of the Center for Neuroeconomics Studies at Claremont Graduate 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.

The problem is color rebalancing follows a set process, the I-O police are still weak after deregulation as Iv agents pressed for more freedom to exploit B clients. The momentum of change has not yet become strong enough, this can also be because of not enough Iv whistle blowers showing the true causes if the GFC.

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.”

The Bi community had their concept of normal business shattered by Iv-B chaos, this occurred in part because of a bias in the I-O police towards Iv agents allowing secretive problems to become systemically large.

 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.

V-Bi people like to save money rather than look for growth, this creates stagnation. The Iv-B growth parts oft he economy are still disconnected because of mistrust and because the I-O police are no longer believed to be stemming this chaos.

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.

They were B and chaotically deceived by Iv agents because of weak I-O policing, also because of other deceptive B people using liar loans which fed the deception from below. 

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.”

They ended up as R prey to Oy financial predators, this happened because the middle oft he Roy food chain collapsed with weak policing. Usually these Oy predators would be moderated by O criminal penalties. When they weren't they multiplied exponentially like a contagion.

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.

Weak I-O policing happens in a cycle and will return again.

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.

If the I-O police don't have enough snitches and whistle blowers then they have to wait for things to actually go wrong before they can try to fix them. 

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 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 one of the main causes of the Great Depression.

Chaos grows like cracks in the shape of B roots and Iv branches avoiding I-O police, where there is little oversight contagion like cockroaches will grow in numbers faster. To avoid this random auditing of these areas is like randomly exposing dark areas to look for cockroaches.

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.

This is usually not possible in a color imbalance which has to work itself through the colors in order. The problem is this color imbalance makes these stern words impossible to deliver or ineffective.

 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 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.

When the I-O police are weakened Iv-B civil infractions of the law grow exponentially but this seems very slow at first, it appears there is plenty of time to stop it. However exponentially growth can quickly zoom up wards when it develops momentum.