Connecting the two ends of the transaction: fraud in the economy

At the Big Picture: James K. Galbraith: Why the ‘Experts’ Failed to See How Financial Fraud Collapsed the Economy, the text of a written statement to members of the Senate Judiciary Committee delivered this May.

Ask yourselves: is it possible for mortgage originators, ratings agencies, underwriters, insurers and supervising agencies NOT to have known that the system of housing finance had become infested with fraud? Every statistical indicator of fraudulent practice – growth and profitability – suggests otherwise. Every examination of the record so far suggests otherwise. The very language in use: “liars’ loans,” “ninja loans,” “neutron loans,” and “toxic waste,” tells you that people knew. I have also heard the expression, “IBG,YBG;” the meaning of that bit of code was: “I’ll be gone, you’ll be gone.”

The financiers must be made to feel, in their bones, the power of the law. And the public, which lives by the law, must see very clearly and unambiguously that this is the case.

There is a pool of money whose owners are desperately seeking some return in an investment. There is a political push to make money available for certain needs. There are managers willing to connect the two. Some of those managers, perhaps even as a consequence of a chain of managers, cloud over aspects of one end of the transaction to the other as they take their cut on the money flow. Some may even intentionally cloud the transaction so those with the money to invest can’t really see the nature of their investment. When the realities of the money use end hit reality, the cloud clears and the owners of the investments find out where their money went. The only profit is the IBG, YBG crowd. Galbraith describes the presumptions and conditions that allowed this to happen. That must be learned to find the proper way to minimize future pains.

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