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Aprés Great Recession, Whither Capitalism?

“Capitalism without failure is like religion without sin”Allan Meltzer

As we slowly and painfully recover from the Great Recession, Judge Jed Rakoff asks a very fundamental question: “Why has the financial crisis not led to anyone being penalized” in a thought-provoking essay, and one we’d do well to heed if the country would like to prevent a recurrence of the meltdown that was 2008.

Quick takeaways:

In Rakoff’s opinion, we haven’t seen more prosecutions because

1) The prosecutors had other priorities, whether it was the FBI (counter-terrorism), the SEC (the Madoff fraud & other Ponzi schemes) or the US Attorney’s Office in New York (insider-trading cases).

2)  The government, through its policies and actions, partly helped create the conditions that led to fraud in the mortgage-backed securities market.  Given its complicity, the government had every incentive to forgive and move on.

The government’s role included:

    • Acquiescing and in some instances, actively encouraging the proliferation of “nonsensical” mortgages because they were helping meet homeownership goals.

    • The “low interest rate” policy of the Greenspan Fed, that provided the fuel for the bubble.

    • Deregulation of Glass-Steagall and other loosening of standards & regulations.

    • Match-making a slew of “shotgun marriages” eg, Bank of America with Merrill Lynch, Wachovia with Citi and finally Wells Fargo, J.P. Morgan with Bear Stearns.

3) The most subtle, and in Rakoff’s view, the most suspect reason, both technically and morally, is that government prosecutors have increasingly focused on prosecuting companies, often even without indicting a single person.

As he says:

It is technically suspect because, under the law, you should not indict or threaten to indict a company unless you can prove beyond a reasonable doubt that some managerial agent of the company committed the alleged crime; and if you can prove that, why not indict the manager?

And from a moral standpoint, punishing a company and its many innocent employees and shareholders for the crimes committed by some unprosecuted individuals seems contrary to elementary notions of moral responsibility.

For more on Rakoff, see his opinion on the egregious bonuses paid out to Merrill Lynch at the height of the crisis.

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