Introduction
We continually see stories of white-collar crimes or financial crimes in recent times. The lists of financial institution crimes, mortgage frauds, and Ponzi schemes have only grown with time. It cannot be ignored that Bernard Madoff was successful in defrauding thousands of investors in one of the largest frauds in US history. Like the stories of white-collar crime, the media are also filled with the headlines on the troubled economy. Even though the areas of white-collar crime, as well as the financial downfall, are both important concerns, the relationship between this phenomenon is not very much clear. Often analysts consider the ignorance of the white-collar crime by the Justice Department with its focus on terrorism as one of the causes of the economic downturn. In some scenarios, there is truth in these allegations. A perfect example is the Penza scheme which was not noticed until serious harm was done. Furthermore, corporate crimes and their negative influence on the financial markets are often undetected with not much prosecution.
Economic Recession & Financial Crisis
The public has been quite outraged with these white-collar crimes and has applauded the stricter sentences as compared to the past. With the increasing list of the companies who have been witnessed entering into the deferred and the non-prosecution agreements with the state has caused the issue to rise significantly challenging their minimal exposure (Podgor, 2010).
Massive financial fraud schemes might attract a lot of headlines. However, the influence of the economic recession wears on the small-time crimes which are increasingly growing. Identity theft, mortgage frauds, and employee-related schemes have become increasingly more in existence. During the financial recession of 2008-9, it has been reported that companies have seen a spike in the low-level garden-gravity schemes which altogether has a profound effect on the companies. These include frauds like employee embezzlement, insurance frauds, and credit card frauds (Whitelaw, 2009).
It is evident that the risk of smaller-level financial crimes increases during the recession times, the large-scale frauds probabilities drop significantly. These types of high risk and high-level frauds are even harder to pull off in good economic times when the government and states are overlooking the indications of misconduct because of higher returns. The Madoff case is the perfect example, which happened during the good times, but was exposed when the economy had tanked. The financial recession certainly does not cause these big financial crimes, but it exposes them. During these times, not only the government and regulators are watching closely, but the companies themselves are also scrutinizing their bottom lines. Economic desperation can be considered as one of the driving forces for these crimes. But there is also the reason that people believe that these giant companies are part of the problem which has caused them to go in an economic recession. It drives them to take a little extra from these companies.
An article looking at the causal relationship between the recession and white-collar crime with a focus on the ramifications of the detection and prosecution of the white-collar crime as the result of the economic recession has been reviewed. The article focuses on accountability and as well as on the lack of accountability as aspects of depression. Furthermore, transparency, print media, and increased funding for monitoring by the government are also considered as factors. The article concludes that even though there is uncertainty about the relationship, it is clear that as a result of the recession, the ramifications in this area of the law are going to be present. The recession affects print media influencing the discovery of white-collar crime (Podgor, 2010).
Another article shows that the interplay between the American legal system and the economic cycles has a regular pattern with two phases. In the first phase, economic growth causes a breakdown in the regulatory oversight caused by the pressure of not hindering economic prosperity. The better times are, the fewer people see the need for regulations. The second phase starts with the economic recession with a wave of white-collar prosecutions and tighter regulations. In these bad times, all people who made money by dubious means during the good times are held responsible for the crises. However, the real problem which is always ignored is the righting of the practices of sound regulation during the times of economic prosperity (Valukas, 2010). It is also emphasized by another article by Michael Levi, who concluded that generally the longer-running frauds are misattributed to the financial crises which are mostly responsible for smoking them out of the woodwork only (Levi, 2011).
The Preventive Measures were taken by Regulators and Government
The Great Recession is the name which has been given to the financial crisis of the years 2008-09 which affected millions of Americans. Part of the reason given for this crisis lies in the deregulation which started in 1980 and culminated in 1999 in which year, the Glass-Steagall Act was repealed. This act was responsible for separating the commercial and investment banking powers, making sure that banks would not risk much of the deposited money. And this is exactly what happened after its deregulations. Greed won over prudence and risk was taken at higher stakes on the deposited money. The financial reform bill that has been put forward by the Obama administration is about preventing the collapse of Wall Street companies and for regulating the financial industry to some extent. Before the Great Recession, large home mortgages were awarded in a package of derivatives to individuals who could not afford it. As the derivative market was not regulated, the banks used these in any way they liked. In 2000, Senator Gramm added the provision in the legislation of the Commodity Futures Modernization Act which exempted these swaps from regulations. It shows how everyone was preparing for the perfect storm of the Great Recession.
The emergency responses to end the panic included the implementation of the TARF fund of the Treasury. It also included various programs that were put into practice by the Federal Reserves as per the discount authority for the banks. Furthermore, the FDIC’s use of the Deposit Insurance Fund for providing that the support to the banking systems increases their insurance exposure temporarily to $ 250,000 per individual per institute and the TLGP is included in these steps. The saving of Fannie Mae as well as Freddie Mac granted by the Act of 08 for Housing Recovery is also included in this (Guynn and Polk, 2010).
Afterward, the US enacted the Dodd-Frank Reform and the Consumer Protection Act. The endorsement of the Dodd-Frank Reform and the Consumer Protection Act is some of the aggressive steps that have been taken towards this problem. The treasury department website of US claims that with enactment of these Acts, Americans have a devoted consumer financial protection supervisory body, the administration has now a greater number of tools to identify risk, financial markets are increasingly visible, and administration is better capable of resolving firms whose breakdown could make threats to the government financial system entirely (Reyes, 2013). It marked the greatest change regarding regulatory legislation in the US financial sector. The proponents of the Act consider it as marker considering it would diminish the probability of a future financial crisis and finish the bailouts of the Wall-Street firms and also improve customer protection. However, opponents disagree with it by claiming that the Act is too feeble as it did not discipline Wall Street for originating the alarm last time. They thought that it increased the Governmental power over the financial division, while not addressing the actual reasons of the economic disaster which were to address the continual assistance of the companies like Freddie Mac and Fannie Mae. While other things that it has complicated the regulatory infrastructure of the US as per the outline of 2008 blueprint. One thing is clear that even though the regulations have expanded, the number of implementable regulations, has increased, causing uncertainty (Guynn and Polk, 2010).
Three shifts majorly can be seen in the thinking after the financial crises. Firstly, the macroeconomists have realized that it was a huge blunder to give no concentration to finance. Secondly, the economists are starting to fight against several general consequences of our learning on the market misbehaviors. Lastly, the economists have realized that their enormously significant grip on one main constituent of the economic globe, that is the corporation, has may be lessened (Fox, 2013).
Conclusion
In the end, it can be concluded that this discussion shows that even though we have learned so much from our experience of financial crises, we have not learned everything. The finance scholars and macroeconomists have forgotten the lessons that we learned in our way. The success of the bailouts of 2008 may have diluted the lesions of the crisis. Even if the financial recession is not responsible for the rise in financial crimes, it certainly is the time when most of these crimes are uncovered because of the strict regulations. After the 1930 and 1940 crisis, the system was built completely new with stricter restrictions and regulations which had its costs. However, it aided in lasting decades before having another panic. This time, after the 2008 crisis, the system survived, which is a good thing, however, it also means that maybe we are going to have more learning experiences soon.
References:
Fox, J. (2013) What We’ve Learned from the Financial Crisis, November, [Online], Available: https://hbr.org/2013/11/what-weve-learned-from-the-financial-crisis [7 November 2018].
Guynn, R.D. and Polk, D. (2010) The Financial Panic of 2008 and Financial Regulatory Reform, [Online], Available: https://corpgov.law.harvard.edu/2010/11/20/the-financial-panic-of-2008-and-financial-regulatory-reform/ [6 November 2018].
Levi, M. (2011) ‘Social Reactions to White-Collar Crimes and their Relationship to Economic Crises’, in Deflem, M. Economic Crisis and Crime (Sociology of Crime, Law and Deviance, Volume 16), Emerald Group Publishing.
Podgor, E.S. (2010) ‘White-Collar Crime and the Recession: Was the Chicken or Egg First?’, University of Chicago Legal Forum, vol. 2010, no. 8, pp. 205-222.
Reyes, A. (2013) The Financial Crisis Five Years Later: Response, Reform, and Progress In Charts, [Online], Available: https://www.treasury.gov/connect/blog/Pages/The-Financial-Crisis-Five-Years-Later.aspx [6 November 2018].
Valukas, A.R. (2010) ‘White-Collar Crime and Economic Recession’, University of Chicago Legal Forum, vol. 2010, no. 2, pp. 1-21.
Whitelaw, K. (2009) Is Recession Causing Rise in Financial Crimes? [Online], Available: https://www.npr.org/templates/story/story.php?storyId=120096862 [6 November 2018].
