Two Frauds, and Preventing Another
Actually, a lot of things are obvious to people with the information, but are best ignored. Back in the 1950s and 1960s and 1970s, a bunch of really smart guys from the big American banks were making huge loans to dictatorships in South America. They knew damn well that the loans could never be paid back. See, they knew that every time they loaned $100 million to a country run by General So and So, within 2 months a woman who happened to be General So and So’s wife would show up at their local branch in Miami, and her bodyguard would be carrying $10 million in cash to be deposited in their bank accounts. And a few days before that, his mistress would show up with one suitcase. And a month after that, the Vice President would show up with a suitcase. So they knew damn well the money was being stolen, and thus could never be paid back (though the South American countries would eventually try, and hyperinflation would be the result).
But… so what? Because, the defaults came ten and twenty years later, and the guys who made the loans had long been promoted by then. And two decades worth of bonuses and promotions never had to be paid back. (And the fraudsters on the other side, the generals, were also long gone by then.)
The more interesting folks are the ones who came around later, or were still in the business of getting bonuses from making loans ten and twenty years after the game started. Many of them simply assumed that since it worked in the past, it would continue to work in the future. Put another way – most scam artists are as duped as the folks being scammed, but they do it to themselves, after a eventually believing the story line they peddle after they repeat it long enough. The smart ones and the lucky ones get out long before. What complicates the current mess, relative to the scam of loaning money to dictators, is that the time frame was compressed – instead of decades, we’re talking years.
What makes stories like this tragic, though, is not that a bunch of fraudsters defrauded themselves and a bunch of marks. What makes this tragic is that the bill ends up getting paid by the third parties who didn’t participate in the fraud. The reason is simple – the really guilty, the ones who cook up these schemes, never pay a price. Ever. You want to prevent stuff like this from happening in the future, its simple – prosecute the former heads of every investment bank and every other organization that participated in this sort of nonsense. And yes, I do include our current Treasury Secretary. Charge them with “financial terrorism.” No need for trials… for the duration of the economic crisis and for however long the ripples may be moving through the economy. Ask them repeatedly to see if they give up names of other financial terrorists.
You can’t stop smart fraudsters from dreaming up schemes, especially the ones that are smart enough to get out on time. But bailing the ones who were too slow and too stupid to get out on time? That just guarantees that the next fraudulent scheme will have a bunch of thugs joining in and thus grow to massive proportions. Capitalism doesn’t work, it isn’t even capitalism, if people don’t pay a price for failure.