STAFF NEWS & ANALYSIS
Prosecute Fraud to Right the System
By Staff News & Analysis - July 11, 2011

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 … 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. – Washington's Blog

Dominant Social Theme: Once the bad guys are put in jail, everything will be OK and America will work the way it's supposed to. This remedy cured America of its problems in the 1930s and can do so again if politicians simply have the will to incarcerate those in the private sector who are evil.

Free-Market Analysis: We've cited Washington's blog on several occasions, mostly because of his apparent distrust with the powers that be. In early June of this year, we remarked on one report of his entitled, "High-Level American Officials Admit that the United States Uses False Flag Terror … And Warn of Future Attacks." The article appeared at the Zero Hedge website under the name "George Washington" and was posted on his own "Washington's Blog" as well.

But Washington's courageous appraisal of the realities of Washington DC, has given way to another post entitled, "There's No Recovery Because the Government Made it Official Policy Not to Prosecute Fraud." This post makes the case that there would be less crime (white collar anyway) if "fraud" was prosecuted by the powers that be. Here's the beginning of the article:

Fraud caused the Great Depression and it has caused the current financial crisis. But fraud is 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."

Washington cites Gretchen Morgenson and Louise Story, as well, in a New York Times article. He points out that "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."

For Washington, this is a bridge too far. The Feds are moving in entirely the wrong direction. He quotes Mary Ramirez at Washburn University School of Law. "If you do not punish crimes, there's really no reason they won't happen again. 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."

He also cites Frank Rich "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. 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.'"

For Washington, it is the 1929 crash and the resultant hearings in the 1930s that reorganized America's securities industry that provides the apt lesson. "The legendary Ferdinand Pecora's fierce thirties Senate hearings [gained America] a Securities and Exchange Commission, the Public Utility Holding Company Act, and the Glass-Steagall Act to forestall a rerun.

Of course, the first chairman of the SEC was Joseph P. Kennedy, the patriarch of the Kennedy clan, who seems to have made his fortune via bootlegging, and via insider trading and other practices of stock manipulation. "After Franklin Delano Roosevelt called Joe to Washington, D.C. to clean up the securities industry, somebody asked FDR why he had tapped such a crook. 'Takes one to catch one,' replied Roosevelt." (Wikipedia)

From our point of view what causes the terrible boom and bust cycle of Western economies is central banking, the ability to print money-from-nothing. Curiously, Washington does not mention central banking at all and we are not sure why. Without central banking, the booms and busts the West regularly faces would be much ameliorated and so would the buying frenzies of the Middle Class desperate for cash. As a result, those who wish to take advantage of people would not have nearly the kinds of opportunities they do now.

Washington mentions the 1930s securities reorganization, but it did little or nothing to stop the securities fraud about which Washington is concerned. How could it? Free-market economics shows us clearly that every law and regulation is a price-fix, further distorting the market as it attempts to rectify past wrongs. Each law only creates further loopholes and opportunity for some to take advantage of others.

Curiously, despite his distrust of the power elite, Washington seems to forget one of his major theses in this post: That the powers-that-be are perhaps not really interested in creating a fairer society even if they could. He writes about US government officials intending to use false-flag events to consolidate power; these same officials he expects will prosecute fraud?

Regulation is a kind of fraud in our view. Financial regulation is especially pernicious because it demands that all those involved in the market do the same kinds of things at the same time. This makes the system evermore brittle and prone to vast capital surges that, when they recede, leave only ruin and bankruptcy in their wake.

Regulators know their financial regulations do not work. And doubtless law enforcement officials know that the system itself is self-replicating and that incarcerating those who took advantage of previous capital surges will not have one bit of impact on those who are going to take advantage of the next. It is a systemic issue, not one that has much to do with individual morality.

The only solution to fraud is free-markets and free-market thinking. One cannot regulate one's way to honesty. In fact as the Japanese say, the more laws there are, the more criminals there will be. From our point of view, the kind of regulatory insanity of the current age is approaching critical mass. We can't see it lasting much longer.

Every wave of regulation brings further abuses and larger catastrophes. Putting people in jail has little or not effect on this larger phenomenon. What makes more sense is the determined application of the Invisible Hand. Inevitably, over time, people sort out what works and what doesn't work. Private agencies spring up to warn people for a fee. Opportunities for misdeeds subside.

Of course, if the madness of incarceration were to be stripped out of modern governance a lot of people would lose money. The law-enforcement/industrial complex would be considerably trimmed; the four million or so US inmates would be substantially reduced. The modern incarceration lobby is not apt to tolerate this with enthusiasm. Much better to support the myth that one "pays one's debt to society" and society is improved as a result.

The issue is really that the entire system is broken. The modern economy, including its voracious stock trading, would likely not exist in this form absent a series of powerful laws passed over the past 150 years that have shaped Western finance. It is the elites that want the current system, for it provides the most avenues for stripping the Middle Class of their wealth.

There is another way, one that purposefully supports the activities of the free market. We've written about it now in several articles and were surprised to find that our solutions mimicked those arrived at by the famous French philosopher Jean-Jacques Rousseau. Rousseau, of course, believed that people were a kind of tabula rasa, and thus he helped give rise to the idea that the state itself could be the vehicle of humanity's perfection.

This was an incorrect, even genocidal, assumption. Nonetheless, Rousseau had many insights into the human condition. His idea, and ours, is to urge smaller populations, even agrarian ones, and to work and relate within the context of flexible, free-market partnerships rather than vast, corporate structures that reduce or eliminate personal responsibility. You can see two of our articles here:

How Real Freedom Works

How Read Freedom Works – Part II

After Thoughts

The real conundrum with which "Washington" did not grapple in our view is that the system itself is in a sense criminal, or at least arranged for criminal purposes. By reinforcing the "laws" that surround it, one merely reinforces its dysfunction and destructiveness. The more "justice" that is demanded of such a system, the worse it gets.

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