Most states act to protect the “safety, prosperity, and happiness of the people” against the depredations of financial crises in some or all of the following ways: regulation; provision of a safety net to protect individuals and key institutions from being irreparably damaged by crises; and, finally, punishment of those responsible in order to prevent crises in future. All three measures are intended to sustain public trust in financial systems. This is essential because, as former Federal Reserve Bank Chairman Alan Greenspan put it, “Trust is at the root of any economic system based on mutually beneficial exchange … If a significant number of businesspeople violated the trust upon which our interactions are based, our court system and our economy would be swamped into immobility” (Greenspan, 1999). These claims were borne out by the global financial crisis of 2008, during which trust was so depleted that banks stopped lending to one another and consumer credit became nearly unattainable (Mollenkamp et al., 2008). Since then, evidence has come to light suggesting that governments not only failed to prevent or adequately respond to the financial crisis but were also complicit in its creation (Burns, 2009; Vinocur, 2009; Alderman, 2010; Stiglitz, 2010). This chapter will review the circumstances surrounding that crisis and show that such complicity is consistent with the past 300 years of economic history: since the first known financial crisis occurred in 1720, states have betrayed their core obligation to protect the interests of their citizens. This conflict will be the focus of the chapter.
- financial history; fraud; financial crisis; complicity of the state