The Fraudulence of Economic Theory

by Eric Zuesse / June 9th, 2025

Ever since the economic crash in 2008, it has been clear that the foundation of standard or “neoclassical” economic theory — which extends the standard microeconomic theory into national economies (macroeconomics) — fails at the macroeconomic level, and therefore that in both the microeconomic and macroeconomic domains, economic theory, or the standard or “neoclassical” economic theory, is factually false. Nonetheless, the world’s economists did nothing to replace that theory — the standard theory of economics — and they continue on as before, as-if the disproof of a theory in economics does NOT mean that that false theory needs to be replaced. The profession of economics is, therefore, definitely NOT a scientific field; it is a field of philosophy instead.

On 2 November 2008, the New York Times Magazine headlined “Questions for James K. Galbraith: The Populist,” which was an “Interview by Deborah Solomon” of the prominent liberal economist and son of John Kenneth Galbraith. She asked him, “There are at least 15,000 professional economists in this country, and you’re saying only two or three of them foresaw the mortgage crisis” which had brought on the second Great Depression?

He answered: “Ten or twelve would be closer than two or three.”

She very appropriately followed up immediately with “What does this say about the field of economics, which claims to be a science?”

He didn’t answer by straight-out saying that economics isn’t any more of a science than physics was before Galileo, or than biology was before Darwin. He didn’t proceed to explain that the very idea of a Nobel Prize in Economics was based upon a lie which alleged that economics was the first field to become scientific within all of the “social sciences,” when, in fact, there weren’t yet any social sciences, none yet at all. But he came close to admitting these things, when he said: “It’s an enormous blot on the reputation of the profession. There are thousands of economists. Most of them teach. And most of them teach a theoretical framework that has been shown to be fundamentally useless.” His term “useless” was a euphemism for false. His term “blot” was a euphemism for “nullification.”

On 9 January 2009, economist Jeff Madrick headlined at The Daily Beast, “How the Entire Economics Profession Failed,” and he opened:

At the annual meeting of American Economists, most everyone refused to admit their failures to prepare or warn about the second worst crisis of the century.

I could find no shame in the halls of the San Francisco Hilton, the location at the annual meeting of American economists. Mainstream economists from major universities dominate the meetings, and some of them are the anointed cream of the crop, including former Clinton, Bush and even Reagan advisers.

There was no session on the schedule about how the vast majority of economists should deal with their failure to anticipate or even seriously warn about the possibility that the second worst economic crisis of the last hundred years was imminent.

I heard no calls to reform educational curricula because of a crisis so threatening and surprising that it undermines, at least if the academicians were honest, the key assumptions of the economic theory currently being taught. …

I found no one fundamentally changing his or her mind about the value of economics, economists, or their work.”

He observed a scandalous profession of quacks who are satisfied to remain quacks. The public possesses faith in them because it possesses faith in the “invisible hand” of God, and everyone is taught to believe in that from the crib. In no way is it science.

In a science, when facts prove that the theory is false, the theory gets replaced, it’s no longer taught. In a scholarly field, however, that’s not so — proven-false theory continues being taught. In economics, the proven-false theory continued being taught, and still continues today to be taught. This demonstrates that economics is still a religion or some other type of philosophy, not yet any sort of science.

Mankind is still coming out of the Dark Ages. The Bible is still being viewed as history, not as myth (which it is), not as some sort of religious or even political propaganda. It makes a difference — a huge difference: the difference between truth and falsehood.

The Dutch economist Dirk J. Bezemer, at Groningen University, posted on 16 June 2009 a soon-classic paper, “‘No One Saw This Coming’: Understanding Financial Crisis Through Accounting Models,” in which he surveyed the work of 12 economists who did see it (the economic collapse of 2008) coming; and he found there that they had all used accounting or “Flow of Funds” models, instead of the standard microeconomic theory. (In other words: they accounted for, instead of ignored, debts.) From 2005 through 2007, these accounting-based economists had published specific and accurate predictions of what would happen: Dean Baker, Wynne Godley, Fred Harrison, Michael Hudson, Eric Janszen, Stephen (“Steve”) Keen, Jakob B. Madsen, Jens K. Sorensen, Kurt Richebaecher, Nouriel Roubini, Peter Schiff, and Robert Shiller.

He should have added several others. Paul Krugman, wrote a NYT column on 12 August 2005 headlined “Safe as Houses” and he said “Houses aren’t safe at all” and that they would likely decline in price. On 25 August 2006, he bannered “Housing Gets Ugly” and concluded “It’s hard to see how we can avoid a serious slowdown.” Bezemer should also have included Merrill Lynch’s Chief North American Economist, David A. Rosenberg, whose The Market Economist article “Rosie’s Housing Call August 2004” on 6 August 2004 already concluded, “The housing sector has entered a ‘bubble’ phase,” and who presented a series of graphs showing it. Bezemer should also have included Satyajit Das, about whom TheStreet had headlined on 21 September 21 2007, “The Credit Crisis Could Be Just Beginning.” He should certainly have included Ann Pettifor, whose 2003 The Real World Economic Outlook, and her masterpiece the 2006 The Coming First World Debt Crisis, predicted exactly what happened and why. Her next book, the 2009 The Production of Money: How to Break the Power of Bankers, was almost a masterpiece, but it failed to present any alternative to the existing microeconomic theory — as if microeconomic theory isn’t a necessary part of economic theory. Another great economist he should have mentioned was Charles Hugh Smith, who had been accurately predicting since at least 2005 the sequence of events that culminated in the 2008 collapse. And Bezemer should especially have listed the BIS’s chief economist, William White, regarding whom Germany’s Spiegel headlined on 8 July 2009, “Global Banking Economist Warned of Coming Crisis.” (It is about but doesn’t mention nor link to https://www.bis.org/publ/work147.pdf.) White had been at war against the policies of America’s Fed chief Alan Greenspan ever since 1998, and especially since 2003, but the world’s aristocrats muzzled White’s view and promoted Greenspan’s instead. (The economics profession have always been propagandists for the super-rich.) Bezemer should also have listed Charles R. Morris, who in 2007 told his publisher Peter Osnos that the crash would start in Summer 2008, which was basically correct. Moreover, James K. Galbraith had written for years saying that a demand-led depression would result, such as in his American Prospect “How the Economists Got It Wrong,” 30 November 2002; and “Bankers Versus Base,” 15 April 2004, and culminating finally in his 2008 The Predator State, which blamed the aristocracy in the strongest possible terms for the maelstrom to come. Bezemer should also have listed Barry Ritholtz, who, in his “Recession Predictor,” on 18 August 2005, noted the optimistic view of establishment economists and then said, “I disagree … due to Psychology of consumers.” He noted “consumer debt, not as a percentage of GDP, but relative to net asset wealth,” and also declining “median personal income,” as pointing toward a crash from this mounting debt-overload. Then, on 31 May 2006, he headlined “Recent Housing Data: Charts & Analysis,” and opened: “It has long been our view that Real Estate is the prime driver of this economy, and its eventual cooling will be a major crimp in GDP, durable goods, and consumer spending.” Bezemer should also have listed both Paul Kasriel and Asha Bangalore at Northern Trust. Kasriel headlined on 22 May 2007, “US Economy May Wake Up Without Consumers’ Prodding?” and said it wouldn’t happen – and consumers were too much in debt. Then on 8 August 2007, he bannered: “US Economic Growth in Domestic Final Demand,” and said that “the housing recession is … spreading to other parts of the economy.” On 25 May 2006, Bangalore headlined “Housing Market Is Cooling Down, No Doubts About It.” and that was one of two Asha Bangalore articles which were central to Ritholtz’s 31 May 2006 article showing that all of the main indicators pointed to a plunge in house-prices that had started in March 2005; so, by May 2006, it was already clear from the relevant data, that a huge economic crash was comning soon. Another whom Bezemer should have listed was L. Randall Wray, whose 2005 Levy Economics Institute article, “The Ownership Society: Social Security Is Only the Beginning” asserted that it was being published “at the peak of what appears to be a real estate bubble.” Bezemer should also have listed Paul B. Farrell, columnist at marketwatch.com, who saw practically all the correct signs, in his 26 June 2005 “Global Megabubble? You Decide. Real Estate Is Only Tip of Iceberg; or Is It?”; and his 17 July 2005 “Best Strategies to Beat the Megabubble: Real Estate Bubble Could Trigger Global Economic Meltdown”; and his 9 January 2006 “Meltdown in 2006? Cast Your Vote”; and 15 May 2006 “Party Time (Until Real Estate Collapses)”; and his 21 August 2006 “Tipping Point Pops Bubble, Triggers Bear: Ten Warnings the Economy, Markets Have Pushed into Danger Zone”; and his 30 July 2007 “You Pick: Which of 20 Tipping Points Ignites Long Bear Market?” Farrell’s commentaries also highlighted the same reform-recommendations that most of the others did, such as Baker, Keen, Pettifor, Galbraith, Ritholtz, and Wray; such as break up the mega-banks, and stiffen regulation of financial institutions. However, the vast majority of academically respected economists disagreed with all of this and were wildly wrong in their predictions, and in their analyses. The Nobel Committee should have withdrawn their previous awards in economics to still-practicing economists (except to Krugman who did win a Nobel) and re-assigned them to these 25 economists, who showed that they had really deserved it.

And there was another: economicpredictions.org tracked four economists who predicted correctly the 2008 crash: Dean Baker, Nouriel Roubini, Peter Schiff, and Med Jones, the latter of whom had actually the best overall record regarding the predictions that were tracked there.

And still others should also be on the list: for example, Joe Weisenthal at Business Insider headlined on 21 November 2012, “The Genius Who Invented Economics Blogging Reveals How He Got Everything Right And What’s Coming Next” and he interviewed Bill McBride, who had started his calculated riskblog in January 2005. So I looked in the archives there at December 2005, and noticed December 28th, “Looking Forward: 2006 Top Economic Stories.” He started there with four trends that he expected everyone to think of, and then listed another five that weren’t so easy, including “Housing Slowdown. In my opinion, the Housing Bubble was the top economic story of 2005, but I expect the slowdown to be a form of Chinese water torture. Sales for both existing and new homes will probably fall next year from the records set in 2005. And median prices will probably increase slightly, with declines in the more ‘heated markets.’” McBride also had predicted that the economic rebound would start in 2009, and he was now, in 2012, predicting a strong 2013. Probably Joe Weisenthal was right in calling McBride a “Genius.”

And also, Mike Whitney at InformationClearinghouse.info and other sites, headlined on 20 November 2006, “Housing Bubble Smack-Down,” and he nailed the credit-boom and Fed easy-money policy as the cause of the housing bubble and the source of an imminent crash.

Furthermore, Ian Welsh headlined on 28 November 2007, “Looking Forward At the Consequences of This Bubble Bursting,” and listed 10 features of the crash to come, of which 7 actually happened.

In addition, Gail Tverberg, an actuary, headlined on 9 January 2008 “Peak Oil and the Financial Markets: A Forecast for 2008,” and provided the most detailed of all the prescient descriptions of the collapse that would happen that year.

Furthermore, Gary Shilling’s January 2007 Insight newsletter listed “12 investment themes” which described perfectly what subsequently happened, starting with “The housing bubble has burst.”

And the individual investing blogger Jesse Colombo started noticing the housing bubble even as early as 6 September 2004, blogging at his stock-market-crash.net “The Housing Bubble” and documenting that it would happen (“Here is the evidence that we are in a massive housing bubble:”) and what the economic impact was going to be. Then on 7 February 2006 he headlined “The Coming Crash!” and said “Based on today’s overvalued housing prices, a 20 percent crash is certainly in the cards.”

Also: Stephanie Pomboy of MacroMavens issued an analysis and appropriate graphs on 7 December 2007, headlined “When Animals Attack” and predicting imminently a huge economic crash.

In alphabetical order, they are: Dean Baker, Asha Bangalore, Jesse Colombo, Satyajit Das, Paul B. Farrell, James K. Galbraith, Wynne Godley, Fred Harrison, Michael Hudson, Eric Janszen, Med Jones, Paul Kasriel, Steve Keen, Paul Krugman, Jakob B. Madsen, Bill McBride, Charles R. Morris, Ann Pettifor, Stehanie Pomboy, Kurt Richebaeker, Barry Ritholtz, David A. Rosenberg, Nouriel Roubini, Peter Schiff, Robert Shiller, Gary Shilling, Charles Hugh Smith, Jens K. Sorensen, Gail Tverberg, Ian Welsh, William White, Mike Whitney, L. Randall Wray.

Thus, at least 33 economists were contenders as having been worth their salt as economic professionals. One can say that only 33 economists predicted the 2008 collapse, or that only 33 economists predicted accurately or reasonably accurately the collapse. However, some of those 33 were’t actually professional economists. So, some of the world’s 33 best economists aren’t even professional economists, as accepted in that rotten profession.

So, the few honest and open-eyed economists (these 33, at least) tried to warn the world. Did the economics profession honor them for their having foretold the 2008 collapse? Did President Barack Obama hire them, and fire the incompetents he had previously hired for his Council of Economic Advisers? Did the Nobel Committee acknowledge that it had given Nobel Economics Prizes to the wrong people, including people such as the conservative Milton Friedman whose works were instrumental in causing the 2008 crash? Also complicit in causing the 2008 crash was the multiple-award-winning liberal economist Lawrence Summers, who largely agreed with Friedman but was nonetheless called a liberal. Evidently, the world was too corrupt for any of these 33 to reach such heights of power or of authority. Like Galbraith had said at the close of his 2002 “How the Economists Got It Wrong“: “Being right doesn’t count for much in this club.” If anything, being right means being excluded from such posts. In an authentically scientific field, the performance of one’s predictions (their accuracy) is the chief (if not SOLE) determinant of one’s reputation and honor amongst the profession, but that’s actually not the way things yet are in any of the social “sciences,” including economics; they’re all just witch-doctory, not yet real science. The fraudulence of these fields is just ghastly. In fact, as Steve Keen scandalously noted in Chapter 7 of his 2001 Debunking Economics: “As this book shows, economics [theory] is replete with logical inconsistencies.” In any science, illogic is the surest sign of non-science, but it is common and accepted in the social ‘sciences’, including economics. The economics profession itself is garbage, a bad joke, instead of any science at all.

These 33 were actually only candidates for being scientific economists, but I have found the predictions of some of them to have been very wrong on some subsequent matters of economic performance. For example, the best-known of the 33, Paul Krugman, is a “military Keynesian” — a liberal neoconservative (and military Keynesianism is empirically VERY discredited: false worldwide, and false even in the country that champions it, the U.S.) — and he is unfavorable toward the poor, and favorable toward the rich; so, he is acceptable to the Establishment.) Perhaps a few of these 33 economists (perhaps half of whom aren’t even members of the economics profession) ARE scientific (in their underlying economic beliefs — their operating economic theory) if a scientific economics means that it’s based upon a scientific theory of economics — a theory that is derived not from any opinions but only from the relevant empirical data. Although virtually all of the 33 are basically some sort of Keynesian, even that (Keynes’s theory) isn’t a full-fledged theory of economics (it has many vagaries, and it has no microeconomics). The economics profession is still a field of philosophy, instead of a field of science.

The last chapter of my America’s Empire of Evil presents what I believe to be the first-ever scientific theory of economics, a theory that replaces all of microeconomic theory (including a micro that’s integrated with its macro) and is consistent with Keynes in macroeconomic theory; and all of which theory is derived and documented from only the relevant empirical economic data — NOT from anyone’s opinions. The economics profession think that replacing existing economic theory isn’t necessary after the crash of 2008, but I think it clearly IS necessary (because — as that chapter of my book shows — all of the relevant empirical economic data CONTRADICT the existing economic theory, ESPECIALLY the existing microeconomic theory).

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Eric Zuesse is an investigative historian. His new book, America's Empire of Evil: Hitler’s Posthumous Victory, and Why the Social Sciences Need to Change, is about how America took over the world after World War II in order to enslave it to U.S.-and-allied billionaires. Their cartels extract the world’s wealth by control of not only their ‘news’ media but the social ‘sciences’ — duping the public. Read other articles by Eric.

How it went down: Three accounts of the Lehman bankruptcy


By AFP
Published September 10, 2023

The defunct Lehman Brothers company sign is sold at Christie's auction house in London - Copyright AFP Ben STANSALL

Elodie MAZEIN

A key catalyst for the 2008 global financial crisis, the bankruptcy of Lehman Brothers still reverberates for those who lived through it. Here are the accounts of three who were there.

– Paolo Battaglia, neophyte banker –

After interning in the summer of 2007, the young Italian felt mainly excitement in July 2008 at landing a job in Lehman’s private equity division in London.

“It was the start of a new adventure, my first job out of school,” Battaglia recalled. “At the time, Lehman was a prestigious and rewarding place to work.”

“Of course, I was aware it was not an easy moment for the industry and for Lehman in particular, but until the very last day, nobody expected Chapter 11 as a realistic outcome,” he said, referring to bankruptcy protection proceedings.

When it became clear Lehman would not survive as a stand-alone entity, the thinking was that it would be acquired by another heavyweight such as Bank of America or Barclays.

But on Monday, September 15, 2008, Battaglia and other employees arrived at the office to find bankruptcy administrator PWC distributing leaflets in the lobby, “basically instructing employees not to enter into any transactions anymore,” he recalled.

Everything changed overnight.

“It was a surprise that things stopped so abruptly,” said Battaglia who considered himself lucky to have worked in a division that was more shielded from the layoffs.

He worked through mid-2010 for a fund that was bought by Lehman colleagues before moving to Goldman Sachs, where he still works.

“I got the best I could have in a very unfortunate situation. The options were very limited.”

“I am sure events were thoroughly scrutinized and if nobody was charged it was because there was no crime,” he said. “We tend to associate bankruptcies with crime but it was just another business venture going bad.”

Battaglia views the recent crises hitting Credit Suisse and a slew of US regional banks as completely different, saying, “there are much more policy tools and experienced knowledge of regulators and markets to manage this kind of situation than 15 years ago.”

– William Dudley, troubled regulator –

William Dudley had a full schedule on the weekend before Lehman Brothers’ Monday morning bankruptcy — first a conference at Princeton University, then the wedding of a friend attended by associates in finance.

Dudley, who was vice president of the Federal Reserve Bank of New York at the time, went ahead with these events.

“You can’t really start cancelling things because that makes people even more nervous about what’s going on,” he said. “It was very strange going to the wedding and acting like nothing much is going on.”

Dudley had spent the early part of Saturday morning working on a plan to save Lehman.

“In reality, the story for me begins a bit earlier because Dick Fuld was on the board of directors of the Federal Reserve of New York so I had some interactions with him through 2007 and 2008,” Dudley said of Fuld, who led Lehman from 1994 until its demise in 2008.

“I was quite concerned that (Fuld) was in denial about the risks that the economy was facing, the financial system in general and Lehman Brothers in particular.”

Dudley shared his views with colleagues in the summer of 2008, but “my memo landed with a resounding silence,” Dudley said.

When Lehman filed for bankruptcy protection, the initial reaction “was not that bad,” Dudley recalled.

But the situation quickly shifted into a contagion as investors rushed to withdraw funds and cover their exposure.

Could Lehman have been saved?

“Right behind Lehman, there were other (groups) in trouble like AIG,” said Dudley.

“Maybe I should have been more forceful,” he said. “But it might have been too late already.”

But recent bank troubles have been more visible compared with 2008, Dudley said. “You actually knew why the firms were getting into difficulties.”

– Oliver Budde, whistleblower –

Oliver Budde resigned from Lehman Brothers in 2006, troubled by company practices. But the attorney was back at Lehman on the fateful morning when the firm filed for bankruptcy protection.

“I was actually at the building on the Monday morning when pandemonium broke out, when everyone started walking out with their stuff,” he recalled.

There was “a lot of sadness, a ‘can’t believe this is happening’ sort of shock,” he said.

In the early afternoon, Budde spotted Fuld “sneaking out the back way and leaving in his black Mercedes limousine with his own driver.

“I took a picture,” he said. “It’s a souvenir for me.”

Budde, who was living in Vermont at the time, spent the evening commiserating with former colleagues.

“I had seen that these men were not to be trusted,” he said. “In one sense, I was vindicated by Lehman’s bankruptcy.”

Budde had left his job as vice president and assistant general counsel in 2006, troubled by what he saw as tricks that top executives used to inflate their compensation and not disclose it to investors.

The firm made no changes even after regulators revamped the rules in 2008 to improve transparency.

“It was still hidden,” he said. “It was outrageous to me. So that’s when I became a whistleblower.”

Between April and September of 2008, Budde sent five emails to US authorities, while copying Lehman’s board and legal staff.

“No one ever contacted me, even afterward,” Budde said.

“I’m quite proud of my actions. I did the right thing by reporting my concerns to the authorities.”

Lehman could have been saved through a managed sale to Barclays, but the British firm “got a much better price” for major Lehman assets it acquired during the bankruptcy proceeding.

The worst market crashes


By AFP
September 11, 2023


The global pandemic caused stock markets around the world to crash in 2020 - Copyright AFP/File TIMOTHY A. CLARY

Fifteen years ago, on September 15, 2008, the Lehman Brothers investment bank went bankrupt, a victim of the global financial crisis during which stock markets crashed.

Below is a reminder of the other major crashes in history:

– 1637: Tulip mania –

The first speculative bubble of modern history involves exotic tulips. Prices for coveted varieties of the flower soar in the Netherlands at the beginning of the 17th century before the bubble bursts in 1637.

The blooms lost nine-tenths of their previous value.

– 1720: South Sea Bubble –

In early 18th century England, people are falling over each other to buy shares in the South Sea Company, set up to trade in slaves with South America and restructure the public debt.

When the shares crash, many investors are ruined.

– 1882: French crash –

The French economy suffers its worst crisis of the 19th century following the collapse in January 1882 of the share price of Union Generale bank which causes the Paris and Lyon stock exchanges to crash.

– 1929: Wall Street collapse –

October 24, 1929 becomes known as “Black Thursday” on Wall Street after a bull market implodes, causing the Dow Jones to lose more than 22 percent of its value at the start of trade.


Wall Street: — © Digital Journal

Stocks recoup most lost ground during the day but the rot has set in: October 28 and 29 also see huge losses in a crisis that marks the beginning of the Great Depression in the United States and a global economic crisis.

– 1987: Black Monday –

Wall Street crashes again on October 19, 1987, on the back of large US trade and budget deficits and interest rates hikes.

The Dow Jones index loses 22.6 percent, causing panic on markets worldwide.

– 1998: Russian crash –

In August 1998, the ruble collapses due to speculation linked to falling oil prices and the ripple effect of the 1997 Asian economic crisis.

Moscow declares a 90-day moratorium on the payment of its foreign debt and cannot borrow again on international markets for over a decade.

– 2000: Dot.com bubble –

The start of the millennium sees the deflation of the tech bubble caused by venture capitalists throwing money at unproven companies.

From a record 5,048.62 points on March 10, 2000, the US tech-heavy Nasdaq index loses 39.3 percent in value over the year.

Many internet startups go out of business.

– 2008: Subprime crisis –

The 2008 global financial crisis is caused by bankers in the United States giving subprime mortgages to people on shaky financial footing and then selling them off as investments, fuelling a housing boom.

When borrowers become unable to pay their mortgages, the stock market crashes and the banking system buckles, culminating with the dramatic bankruptcy of Lehman Brothers.

Millions of people lose their homes.

– 2015: Chinese boom-bust –

The popping of a Chinese stock market bubble in the summer of 2015 causes the benchmark Shanghai index to plummet by over 40 percent over several weeks, despite government intervention to try to stop the crash.

– 2020: Pandemic –

Global stocks crash in March 2020 after the World Health Organization declares Covid-19 a pandemic that will put much of the world under lockdown.

The Dow Jones loses 26 percent in four days, one of its biggest-ever drops.

But the rapid response by national governments, which dig deep to keep their economies afloat, helps most markets rebound within months.

US judge says 2008 bank fraudsters got off easy


By AFP
September 11, 2023

Judge Jed Rakoff says the US government failed to impose meaningful punishments on senior bankers involved in the 2008 financial crisis 

- Copyright AFP TIMOTHY A. CLARY

John BIERS

US officials took a victory lap last month to commemorate their response to the 2008 financial crisis, pointing to $36 billion in fines as proof that banks have been held accountable.

But to US District Judge Jed Rakoff, who has criticized the Department of Justice (DoJ) for not criminally prosecuting senior bankers, such fines amount to an “easy cop-out” failing to achieve justice or discourage future chicanery.

“I don’t think it has a meaningful deterrent effect,” Rakoff told AFP as he reflected on the government’s enforcement record 15 years after the Lehman Brothers bankruptcy.

“For the company, it’s a cost of doing business,” Rakoff said.

Rakoff bases this assessment in part on his 15 years in corporate law before being named to the bench.

The corporate defendants Rakoff represented made a “huge distinction” between financial penalties and prison time, seeking to avoid the latter at all costs because they’d “heard how terrible (prison) is,” he recounted.

“And so it follows from that, if you are fairly confident that, even if you don’t get away with it, the worst that will happen is your company will pay a lot of money, then you’re much more ready to go and do it,” said Rakoff.

He added that he wasn’t familiar enough with the details to comment on the bank failures earlier this spring that spurred emergency actions by the Federal Reserve and other regulators.

“To me, it’s a matter of simple morality,” Rakoff said. “Companies do not commit crimes in the moral, intentional sense. It’s individuals within the companies who make the decisions that ‘we’re going to do the wrong thing here, because it’s going to make our company a lot of money.’

“And those are the moral failings that need to be punished.”

Consistently going soft on corporate criminals puts at risk the reputation that US markets “are among the most honest in the world and the most reliable,” Rakoff said.

“And when you have fraud that goes unprosecuted over time, it tends to undercut that confidence. And that is a serious, I think, problem for the United States.”

– Speaking out –

Appointed to the US District Court for the Southern District of New York by former President Bill Clinton in 1996, Rakoff is known for publicly taking on major judicial dilemmas more than colleagues.

He garnered attention in 2002 when he issued a ruling that found the death penalty unconstitutional, a decision that was quickly overturned on appeal.

Rakoff emerged as a critic of the government’s enforcement approach to the 2008 crisis, blocking a $33 million Securities and Exchange Commission settlement with the Bank of America.

In a scathing ruling, Rakoff in September 2009 dismissed the case as a “contrivance designed to provide the SEC with the facade of enforcement, and the management of the bank with a quick resolution of an embarrassing inquiry.”

While Rakoff later approved a modified settlement, citing the need for judicial restraint, he won praise as a rare check on Wall Street at a time of public rage against Big Finance.

After consulting court officers, Rakoff in 2014 began publishing essays questioning the enforcement response to the financial crisis, and in 2020 he authored a book critiquing the US justice system and addressing issues such as mass incarceration.

The DoJ last month announced that Swiss-based investment bank UBS would pay $1.4 billion to settle US charges that it defrauded investors in the sale of mortgage-backed securities.

The DoJ’s original complaint quoted a UBS mortgage official as referring to a pool of loans as “a bag of sh[*]t,” and another employee as calling a group of loans “quite possibly better than little beside leprosy spores.”

The UBS case marked the final major settlement under a DoJ-led working group established in 2012. The DoJ cited $36 billion in civil penalties as bringing accountability to “those who break the law and undermine the well-being of American families,” said an agency press release.

But Rakoff, a former federal prosecutor, likened such fines to a slap on the wrist — a retreat from the prosecutions in the early 2000s of top executives from Enron, Worldcom and other companies.

Limited resources explain some of the change, with DoJ focusing more on terrorism cases after the Sept. 11, 2001 attacks, Rakoff said.

A bigger issue is a shift in strategy. Prosecuting CEOs involves a painstaking process that typically requires charging people lower in the company and getting them to cooperate to catch a big fish.

“But those are hard cases to make,” Rakoff said. “They take a long time and sometimes you won’t be able to prove it in the end.”

By contrast, it may take six months to get a settlement, and “you can have a big splash in the papers: ‘Today Bank X pled guilty to a criminal offense and paid $5 billion.'

What Goes Up...

Must come down. And of course its not a recession...pleads the powers that be...it's a correction.......or maybe it's just fortunes fate (being lady luck and her magick number seven).....actually it's worse than either a correction or recession it's pending stagflation.

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Hauntingly Familiar
Here we are once again, suddenly embroiled amid a frenzy of financial crisis, and looming bail-out interventions.

The jury is still out as to whether or not this crisis will turn out to be “the big one” that will take down the entire house of cards.

Inevitably, the day will come when no form of economic stimulus or monetary policy interventions will be sufficient enough to provide remedy to the decades of sub-standard stewardship rendered by our elected officials.

Until such a day of reckoning arrives, we can not discount the possibility that the present cast of self-perceived masters-of-the-universe and their monopoly stronghold, which is rapidly fracturing, will prevail once again.

The 3 Forces Behind a Market Crash
Back in 1934, Benjamin Graham, the creator of securities analysis, wrote that there are three forces behind a market crash.

1. The manipulation of stocks.
2. The lending of money to buy stocks.
3. Excessive optimism.

Let's assess the level of each factor today.

This article was originally published on Feb. 15, 2007. It has been updated.
Post-mortem: Why did the markets crash?

So, what caused this bloodbath? While the first prognosis of the crisis was that fears of recession in the US brought in the market crash in India, some experts hinted that the markets might be entering a phase of consolidation.

Experts point out that the market movements are based on internal, technical parameters. "The current movements have been caused by margin pressure and heavy selling by the FIIs in the face of bad global clues," market analyst Ashwini Gujaral says.

The global cues were very weak over the weekend. The European markets declined quite heavily on Friday, while the US indices underwent a milder fall. Asian markets were down heavily on Monday morning and there was enough indication that another global sell-off was under way.

SEE:

Black Gold

U.S. Economy Entering Twilight Zone

Tags
asset-backed commercial paper ,, gold
homes, mortgages, housing, bubble, US, economy, oil prices, sub-prime mortgage, Wall Street, crash, recession,
Bernanke, Inflation, Staglation, Stock-Market, US, Federal-Reserve-Chairman, Oil, gold, commodities

STFU 'W'

If I was generous I would say that poor George W. spent the last year as the American economy tanked, viewing the pending crash through rose coloured blinders. As you have read here for the past two years I have predicted the pending crash that brought the market tumbling down last month. It was simple to read in the tea leaves of market excess, or market 'exuberance' as Greenspan called it. But for George W. it was all about denial. The market fundamentals were strong he asserted right up to a few weeks ago. America he had claimed for months is NOT in a recession, denying the obvious. In January oil began its upward spiral, and America was in its third month of downaward spiral. America was in a recession everyone knew it, only George continued to deny it.


Like WMD, which he beleived existed in Iraq, he also believed there was no recsssion, and hence no problem with the market, despite the year of declining housing prices and the ensuing subprime crash.


So it should come as no surprise that the guy who lied to the American people about WMD, could easily lie to himself, and hence the American people, about there being no recession.


Unlike the first U.S. President named George who created the myth of the Honest Presidency, with the allegorical fiction about the cherry tree, this President George has put to bed that myth. While the first George confessed to chooping down the tree this George denies there was a tree.


And so he should not be surprised that over the past three weeks every time he has assured Americans that they need not panic about a market crash, the market responds by crashing further.


It's poetic justice.


Everyone now accepts that W is either a compulsive liar, or a self-deluded fool. What a condemnation the market makes everytime W opens his mouth.


Someone should tell the lame duck to sit down and shut up.



President Bush Speaks on Ailing Economy
Friday Address Marks 10th Time Bush Has Recently Spoken About Volatile Markets
Oct. 10, 2008


President Bush tried to reassure the nation today that the economy is strong enough to weather the current crisis, but by the time Bush stopped speaking nine minutes later, the market had dropped another 107 points.

Following the previous nine times the president specifically addressed the economic crisis, the market ended the day on an upturn on five occasions and closed down the other four.

What the G-7 Should Be Doing To Fix the Financial Crisis

TIME - 10 Oct 2008

Global stock markets were sending an unmistakable signal too: panic. The Dow Jones industrial average finished its worst week ever, off about 22%. On Friday, the market swung wildly, dropping 500 points on three occasions, then vaulting into positive territory before coughing up its gains in the last half-hour of trading to finish the day down 128 at 8,451. The NASDAQ managed a small gain. But European and Asian markets were pummeled again.

DOW PLUNGES 733 POINTS ; Worst Decline Since 1987
Thursday, October 16, 2008
When President Bush speaks, many listen - but apparently investors haven't been reassured by his many speaches about the market meltdown this month.

SEE:

No Austrians In Foxholes

CRASH

Black Gold

The Return Of Hawley—Smoot

What Goes Up...

Wall Street Mantra

Bank Run

U.S. Economy Entering Twilight Zone

Tags

asset-backed commercial paper ,, goldhomes, mortgages, housing, bubble, US, economy, oil prices, sub-prime mortgage, Wall Street, crash, recession,Bernanke, Inflation, Staglation, Stock-Market, US, Federal-Reserve-Chairman, Oil, gold, commodities

VOICE
Is the Coronavirus Crash Worse Than the 2008 Financial Crisis?
The last global economic crisis was a financial heart attack. This one might be a full-body seizure.
BY ADAM TOOZE | MARCH 18, 2020, 12:23 PM
Pedestrians wearing face masks walk toward an electric 
board showing stocks' share price on the Tokyo Stock 
Exchange in Tokyo on March 13.

 PHILIP FONG/AFP VIA GETTY IMAGES

In May 2018, President Donald Trump restructured and downsized the pandemic preparedness unit. Of course, it seems ill-judged in retrospect. But he was not the first president to do so. The National Security Council’s (NSC) global health security unit was set up under Bill Clinton in 1998. Years later, first George W. Bush and then Barack Obama would shut it down, only to reestablish it shortly afterward. The fact is that bureaucracies have never known how to treat low-probability, high-stakes biomedical risks like pandemics. They sit awkwardly within the conventional silos of modern government and models of risk assessment.

If this is true for the NSC, it is even more so for those charged with economic policymaking. Among the tail risks widely discussed in economic policy circles, a deliberate shutdown of national economies on the grounds of a public health emergency has never been seriously considered. Of course, we’ve spoken of “contagion” in financial crises, but we’ve meant it metaphorically—not literally.

In 2008, we saw how the financial uncertainty spreading from the downturn in real estate—by way of subprime to funding markets and from there to the balance sheets of major banks—could threaten an economic heart attack. It was this massive financial shock, piled on top of the losses to households from a downturn in the real estate sector, that caused economic activity to contract. In the worst of times, over the winter of 2008-2009, more than 750,000 job losses were recorded every month—a total of 8.7 million over the course of the recession. Major industrial companies like GM and Chrysler stumbled toward bankruptcy. For the global economy, it unleashed the largest contraction in international trade ever seen. Thanks to massive intervention of both monetary and fiscal policy, it did not become a deep and prolonged recession. After a contraction of 4.2 percent in gross domestic product, a recovery began in the second half of 2009. Unemployment peaked at 10 percent in October 2009.

[Mapping the Coronavirus Outbreak: Get daily updates on the pandemic and learn how it’s affecting countries around the world.]

It is too early to confidently predict the course of the economic downturn facing us due to the coronavirus. But a recession is inevitable. The global manufacturing industry was already shaky in 2019. Now we are deliberately shutting down the world’s major economies for at least several months. Factories are closing, shops, gyms, bars, schools, colleges, and restaurants shuttering. Early indicators suggest job losses in the United States could top 1 million per month between now and June. That would be a sharper downturn than in 2008-2009. For sectors like the airline industry, the impact will be far worse. In the oil industry, the prospect of market contraction has unleashed a ruthless price war among OPEC, Russia, and shale producers. This will stress the heavily indebted energy sector. If price wars spread, we could face a ruinous cycle of debt-deflation that will jeopardize the world’s huge pile of corporate debt, which is twice as large as it was in 2008. International trade will sharply contract.

In the division of labor among different branches of economic policy, addressing the coronavirus recession is a classic task for targeted fiscal policy: tax cuts and government spending. What we need now is less stimulus than a comprehensive national safety net to prevent bankruptcies and long-term financial damage. Once we have survived the epidemic we will need investments in public health infrastructure big and small. Every country clearly needs hugely improved surveillance, modeling, and emergency facilities, as well as substantial reserve capacity. All of this, in due course, will offer excellent opportunities to productively spend money and create high-quality jobs. Unlike in 2008, there will even be sectors that naturally expand. Spending on health care, which already accounts for almost 18 percent of U.S. economic activity, will likely explode. With social distancing, we are, in effect, being mandated to resort to the impersonal delivery and conference systems of the Amazons and Zooms of this world. (If only we already had drones at the ready to deliver billions of care packages.)

But as in 2008, before we can tackle the recession, there is another threat to deal with: the risk of a financial heart attack. A recession is different from a panic. And a financial panic is what we began facing the week of March 8. It is that threat that continues to haunt the markets.

The immediate trigger was the breakdown of oil talks and Saudi Arabia’s announcement of a price war. On top of the worsening coronavirus news from Italy, this shocked markets and induced a contraction in lending and a flight to safety. The demand for cash was insatiable. The reality began to sink in that what started as an external biological shock to the economy might be mutating into an internal collapse in confidence and credit.

A sudden credit crunch exposes those that have too much debt and weak business models and have taken excessive risk. Their distress spreads to the rest by way of business closures, job losses, and fire sales of otherwise good assets. Matters are made even worse if the economic victims have financed their activities with borrowing, such that their losses eventually strike the balance sheets of creditors that were unwise enough to lend to them. Fear of these repercussions contracts credit across the board.

In 2008, the banks were at the center of the storm. Given the consolidation of their balance sheets, it is less likely that America’s big banks will run into difficulty this time. But Europe’s banks never truly recovered from the double shock of 2008 and the eurozone crisis. Italy’s public finances are in precarious balance. On Wall Street, fund managers of all kinds have been booking large losses and are facing huge demand for cash. A hard-pressed oil-producing country might be forced to offload assets from a sovereign wealth fund, thereby depressing prices for otherwise good assets and unleashing a chain reaction.

The most disconcerting sign has been the fact that as stock markets plunged, U.S. sovereign debt fell in price, too. That should not happen. Treasuries should function as safe havens. If their prices fall, it means that enough investors are desperate enough for cash to move even the biggest market.

Toward the end of the week, markets were hoping for goods news from the European Central Bank (ECB). Instead, bank president Christine Lagarde managed to make matters worse by seeming to signal that the ECB had no mandate to support Italy. She was forced to take the remarkable step of apologizing, not to Italy, but to her board. The Fed’s measures, announced at an extraordinary press conference Sunday, were blunt: It dropped interest rates to zero, embarking on a fourth round of quantitative easing. It is broadly the same toolkit it used in 2008.

These are not policies tailor-made for the pandemic. But that is not the point. The point is to not address the impact of the pandemic. As the Fed and ECB have both insisted, that is a task for fiscal policy. Faced with the coronavirus pandemic, the limited but essential role of the central banks is to prevent the credit system from becoming a risk in its own right.

There has not been as much international coordination among the central banks as there eventually was in fighting the 2008 global financial crisis. But explicit coordination may not be necessary. We have spent enough time digesting the experience of the global financial crisis. Everyone knows the playbook, and everyone knows that the Fed must lead. The global financial system is dollar-based. And that is why the most significant step toward cooperation this past weekend was the announcement concerning the standing liquidity swap lines among the major central banks: the U.S. Federal Reserve, the Bank of Japan, the Bank of England, the Bank of Canada, the ECB, and the Swiss National Bank.

The swap lines in their current iteration were first put in place at the end of 2007 to ensure that funding in U.S. dollars was available not only for banks and financial actors based in New York but to the entire global financial system. In 2013, these channels were made permanent among the major central banks. The move this past weekend lengthened the term of the swaps and reduced the interest margin the Fed charges.

We used to worry that Trump and the Republican economic nationalists in his administration would challenge this ultimate expression of global central bank cooperation. After all, the swap lines mean that the Fed provides dollars on demand to its foreign counterparts—not something one would expect the “Make America Great Again” crowd to approve of. But it turns out that when you face a pandemic and you’re arguing over whether it is safe to leave your home, no one cares about nationalist principles.

The Fed’s actions did not stop the selling on financial markets, and it remains to be seen whether the policies will have to be widened. As each new bottleneck is revealed in the credit system, expect more action. First, the Fed increased its support for the repurchase agreement market, where Treasurys and other bonds are lent out for cash. Now, it is supporting the commercial paper market, where big businesses borrow money for three months at a time from investors like money market mutual funds. But the far more basic limitation of central bank action to date concerns the wider world.

The recent swap line measures apply only to the innermost circle of advanced economies. Although it was widened during the global financial crisis, even then only 14 central banks were given access to the Fed’s drip feed of dollars. Amongst Emering Markets only South Korea, Brazil and Mexico were included. The rest were relegated to dependence on the International Monetary Fund. But since 2008, the boundary between the most sophisticated emerging market economies and their advanced economy counterparts has become increasingly blurry.

South Korea has so far weathered the storm in exemplary fashion. Its public health measures along with those of Taiwan appear to be the best in the world. But in a panic, money flows toward the center. So far, we have seen only the beginnings of a flow into U.S. dollar-denominated assets by investors. But several emerging markets are already coming under severe financial pressure. The outflow of foreign funds since the beginning of 2020 has been dramatic. In the past eight weeks since coronavirus fears began spreading, $55 billion has flowed out of emerging markets, a drain twice as large as that seen in 2008 or during the “taper tantrum” of 2013. This will exert severe pressure on countries like Mexico and Brazil, which have large populations, relatively weak public infrastructure, and fragile finances.

The real question concerns China. In 2008, China played a strong hand. It did not suffer a financial run. Its gigantic fiscal and monetary stimulus delivered a giant boost to both its national economy and those who export to it. No swap line was ever seriously contemplated between the Fed and the People’s Bank of China (PBC). Since then, the PBC has established its own swap network. But that supplies renminbi, not dollars. Faced with a crisis that has forced the shutdown of a large part of the Chinese economy and will likely induce a dramatic contraction in global trade, the question is how large the demand might be for dollar funding on the part of China’s globalized businesses. Since 2008, their activities abroad have expanded dramatically and, like other emerging market businesses, they borrow heavily in the American currency. China’s official reserve managers have a large stock of dollars. But like other great reserve stockpiles, they are held not in cash but in U.S. Treasurys.

The last thing the world needs right now, given the uncertainty in Treasury markets, is for Beijing to be forced to liquidate that stockpile. That could offset all of the Fed’s efforts to stabilize the U.S. government funding market. On the other hand, is it not easy to imagine the Fed taking Chinese currency as collateral for a large dollar swap. The Fed would not want to risk the ire of anti-China hawks in Congress.

Faced with a global health emergency and the common interest in maintaining economic stability, one can only hope that the technocratic imagination trumps the evident temptation on both sides to politicize the crisis.

Adam Tooze is a history professor and director of the European Institute at Columbia University. His latest book is Crashed: How a Decade of Financial Crises Changed the World, and he is currently working on a history of the climate crisis. Twitter: @adam_tooze

Coronavirus shock vs. global financial crisis — the worse economic disaster?

The coronavirus outbreak, which has put the global economy under a lockdown, is being compared to the 2008-09 downturn. But in some industries, the virus may have already caused the biggest meltdown in history.


The economic upheaval caused by the COVID-19 outbreak has revived memories of the 2008-09 global financial crisis (GFC): recession chatter, bloodbath on global stock markets, governments and central banks loosening the purse strings.

The pandemic, which has claimed thousands of lives across continents, has virtually brought the world economy to a standstill with millions of people placed under lockdown and global supply chains thrown into disarray due to the virus wreaking maximum havoc in China — the world's factory.

While many are already comparing the current crisis to the 2008-09 recession, most experts do not expect it to be as bleak and are forecasting the global economy to swiftly recover in the second half of the year, provided the outbreak fizzles out by then. Yet, the novel coronavirus has dealt historic blows to the airline industry and oil markets. DW asked experts to compare the economic damage caused by the two crises.

Aviation industry

The aviation industry, suffering from cut-throat competition, price wars and poor financial health, has been clobbered hardest by the pandemic, which has virtually ground air travel to a halt and threatens to bankrupt most airlines. British Airways CEO Alex Cruz described the situation as a "crisis of global proportions like no other we have known."

"Some of us have worked in aviation through the global financial crisis, the SARS outbreak and 9/11. What is happening right now as a result of COVID-19 is more serious than any of these events," he said in a memo to staff.

Several prominent airlines are seeking state relief to help them weather the current turbulence.

"When we see well-capitalized airlines like Lufthansa making statements about the need for state support, then we know things must be bad," Rob Morris, global head of consultancy at Ascend by Cirium, told DW. "Clearly, for every airline globally the objective for 2020 will be to survive through this crisis. I fear there are many who will not be able to achieve that, and we will almost certainly start to see some significant airline failures shortly."

Oil industry

The oil markets are in no better shape. Global oil consumption is expected to witness its biggest fall in history, hurt by a temporary ban on travel, factory shutdowns and other measures to contain the virus. The fall in oil demand could easily outstrip the loss of almost 1 million barrels a day during the 2008-09 recession, Bloomberg reported. Compounding problems is an ongoing price war launched by Saudi Arabia which has pledged to flood an already oversupplied market with cheap crude. Oil prices have fallen by more than 50% this year.

"In 2008-09 we had a demand shock, and inventories built. This [current crisis] looks likely to have a bigger impact, partly because there is a lot of uncertainty still around and partly because it is both a demand and supply story," Philip Jones-Lux, energy market analyst at JBC Energy, told DW. "The industry has been supposedly readying itself for a 'lower for longer' scenario, but the current market and outlook are beyond anything that could be reasonably prepared for and we are likely to see some real pain inflicted if prices remain in the $30-a-barrel range."

Financial sector

The housing market, which was propped up by cheap loans offered to households by banks, was the epicenter of the 2008-09 crisis. The bursting of housing bubbles in the US and in other countries such as the UK, Spain and Ireland brought major global banks, which did not have enough capital to withstand the shock, to their knees. The banks paid a price among other things for bundling subprime mortgages into complex, opaque derivatives to maximize profits. This time, the banks are in a much better position thanks to increased regulation.

"The 2008-09 crisis was far more severe because the global financial system was far more fragile. Banks were not as well-capitalized as they are today particularly in the United States," Sara Johnson, IHS Markit executive director, told DW. "While today there are concerns with rising nonfinancial corporate debt, I'd say the magnitude is not as severe as in 2008-09."

But banks, especially the European ones which have been struggling to boost profits at a time in an ultra-low interest rate environment, are nevertheless feeling the heat. They are bracing for further interest rate cuts and loan defaults. Experts are also flagging a possible sovereign debt default by Italy, which is in a state of lockdown to contain the spread of the virus. European banks are holding more than €446 billions ($497 billions) of sovereign and private Italian debt, according to Bloomberg.

Global economy

The collapse of US lender Lehman Brothers in 2008 fueled the most painful global economic downturn since the Wall Street Crash of 1929. The sustained, severe recession saw global output contract by 1.8% in 2009 compared with an expansion of 4.3% in 2007. Millions of jobs were lost, hurting global consumer spending. While the current crisis could cost the global economy up to $2 trillion this year, according to UN estimates, it's still not expected to push the world into a contraction.

"Our view is that this is a much more temporary shock that is going to have less significant and longstanding negative impacts on the global economy than the global financial crisis," Ben May, director of global macro research at Oxford Economics, told DW. "It's not that as if you don't go out today because you're worried about catching the virus, the money that you didn't spend today will be saved forever, it's more likely to be spent in the future unless something dramatic changes...When you look at past episodes of virus outbreaks or natural disasters, you know typically discretionary spending returns at a later point."

International trade

The coronavirus shock could not have come at a worse time for global trade which has been reeling from trade tensions between the US and China, the world's biggest economies. But the current blow is still not a severe as the one dealt by the crisis 10 years back.

"The global financial crisis was kind of endogenous in the economic system meaning that there was a strong capital stock distortion in some countries and there was a problem of over-indebtedness. These two roots of a crisis are much harder to cure than the situation that we are facing today where we have an interruption of production structures, which in principle are fundamentally sound," Stefan Kooths, head of forecasting at the Kiel Institute for the World Economy, told DW.

"So, even if the coronavirus crisis leads to a deep meltdown in terms of production, the chances of getting out of this recession rather sooner than later are much better than in the global financial crisis."