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Seriously, Jail the Bankers or This Economy Will Never Fully Recover

By refusing to hold the corporate criminals at the heart of the housing crisis accountable for their crimes, we’re creating powerful incentives for future malfeasance.

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The consequences of being able to tap the public treasury when private firms near the brink of collapse are predictable. Indeed, in 1993 another Nobel Prize-winning economist, George Akerlof, teamed with Paul Romer, a renowned expert on economic growth, to study the root causes of the 1980s savings and loan crisis. The New York Times summarized their findings last year, writing that the crisis resulted from investors having “borrowed huge amounts of money, made big profits when times were good and then [leaving] the government holding the bag for their eventual (and predictable) losses.”

In a word, the investors looted. Someone trying to make an honest profit, Professors Akerlof and Romer said, would have operated in a completely different manner. The investors displayed a “total disregard for even the most basic principles of lending,” failing to verify standard information about their borrowers or, in some cases, even to ask for that information.

The investors “acted as if future losses were somebody else’s problem,” the economists wrote. “They were right.”

At the time, Akerlof predicted that the next opportunity for the bankers to loot hundreds of billions from the treasury would come in “an obscure little market called credit derivatives.”

When it comes to criminal activity, there is a more fundamental hazard: that potential loss of faith in our justice system. Stiglitz called it “collateral damage” from Wall Street’s crash, noting that “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.”

Even in the S and L crisis that Akerlof and Romer studied, those who perpetrated fraud didn’t get off with a mere fine. As financial reporter Zach Carter noted, “During the savings and loan crisis, more than 1,100 bankers went to jail for fraud.” But, he added, “for some reason, the top brass at today’s SEC seems to think that it’s very important to bring these cases against companies, so long as the perpetrators get to walk away.”

James Galbraith echoed that point, telling Bill Moyers that “the overwhelming emphasis, in the [Obama] administration's program, I think, has been to return things to a condition of normalcy, to use a 1920s word, that prevailed five and 10 years ago.”

It’s a matter of enormous social consequence to see justice done in the wake of Big Finance’s serious crimes. But the takeaway from some of our leading economic experts is that doing so also serves a vitally important economic end; if we don't punish the guilty, we’ll never fully recover from the collapse of Wall Street’s house of cards.