From the New York Review of Books, Jeff Madrick and Frank Partnoy:

[P]rivate financial firms on Wall Street and around the country unambiguously and overwhelmingly created the conditions that led to catastrophe. The risk of losses from the loans and mortgages these firms routinely bought and sold, particularly the subprime mortgages sold to low-income borrowers with poor credit, was significantly greater than regulators realized and was often hidden from investors. Wall Street bankers made personal fortunes all the while, in substantial part based on profits from selling the same subprime mortgages in repackaged securities to investors throughout the world.

Yet thus far, federal agencies have launched few serious lawsuits against the major financial firms that participated in the collapse, and not a single criminal charge has been filed against anyone at a major bank. The federal government has been far more active in rescuing bankers than prosecuting them.

Why is this? Lobbying has something to do with it:

Many argue that the reluctance of prosecutors derives from the power and importance of bankers, who remain significant political contributors and have built substantial lobbying operations. Only 5 percent of congressional bills designed to tighten financial regulations between 2000 and 2006 passed, while 16 percent of those that loosened such regulations were approved, according to a study by the International Monetary Fund. The IMF economists found that a major reason was lobbying efforts. In 2009 and early 2010, financial firms spent $1.3 billion to lobby Congress during the passage of the Dodd-Frank Act. The financial reregulation legislation was weakened in such areas as derivatives trading and shareholder rights, and is being further watered down.

But it’s also the case, the authors say, that financial crimes are hard to prove in court. The article goes on to explain why this is, and to use a particular instance to prove its point. The conclusion:

If serious prosecutions of fraud by Wall Street firms are never brought, the public’s suspicion about Washington’s policies toward bankers will only grow, as will cynicism about the rule of law as it is applied to the rich and powerful. Moreover, if investing institutions and individuals come to believe that bankers cannot be trusted, the underpinnings of the market will be eroded. Without solid, well-functioning markets, the economy cannot adequately and efficiently allocate capital to high-valued uses and create jobs. Lack of ethics and corrupt behavior will channel the nation’s resources to uses that are wasteful and unproductive, as they arguably have for several decades now as too many unethical practices have gone unchallenged.

You cannot have successful capitalism if people cannot trust the institutions of capitalism, including the government’s regulatory bodies to make sure that everybody’s playing fair. Today, fewer than one in four Americans trusts the U.S. financial system. This, combined with an electorate that overwhelmingly believes the government favors the wealthy, indicates a level of instability that ought to unnerve the ruling class, and all of us. This can’t go on.

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