Review & Outlook: Where Are the Criminals? – WSJ.com

Caveat emptor and no bailouts of bondholders (if in need of bailouts being by definition buyers that did not beware) are two excellent policies.

Critics are also blaming incompetence at the SEC or the Department of Justice, as if the quality of prosecutors has suddenly deteriorated. They are no better or worse than ever. The prosecutors have simply been given a difficult assignment trying to find criminality among bankers who were doing what everyone else was doing in a financial mania fueled by government policy.

The Federal Reserve created negative real interest rates and a net subsidy for credit expansion. Washington programs to encourage every American to own a home ensured that the bubble would be concentrated in residential real estate. Government-approved credit-raters, convinced that the U.S. housing market would never suffer a sharp decline, slapped triple-A ratings on bundles of risky mortgages. Federal rules encouraged banks, money-market funds, stock brokerages and other institutions to buy this junk.

The zeal to prosecute bankers is part of the politically convenient narrative that the financial crisis was all created on Wall Street. Bankers were greedy as ever and their risk management was faulty. But the fact that Washington can’t find a real criminal should focus public attention back on the real crime. That was Beltway policy.

via Review & Outlook: Where Are the Criminals? – WSJ.com.

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