Needless to say, doing what is required to maintain financial stability is much, much, much more difficult than saying it.

Fraud, defined in simple terms as the use of two measures, was banned by the Jews about 4,000 years ago. Two millennia later, high priests of the Temple in Jerusalem helped fund their work by the fraud of manipulating two currencies (Roman and Temple money) for gain, at the expense of religious pilgrims. A rabbi that founded a new religion sought to expose that fraud by forcing open competition that would relieve pilgrims from that burden of financial manipulation. The priests and Roman authorities, with consent of some of the very people Jesus sought to help (and silence from His closest friends), ordered His execution.

None of them understood how to change course. Few had any idea why Christ sought to push money changers into an open market. Most pilgrims did not see that fraudulent profits on lambs sold for their Passover sacrifices were hidden in the duplicity of controlled exchange rates.

The money changers could not do business in Temple currency on the streets of a Roman city. The Temple priests had families to raise and a Temple to run using their share of the money changers’ profits. Moving the exchange process outside the Temple would have at least brought competition and, at worst, arrest for undermining Rome’s taxation to support an occupying army.

Nobody understood how the transparency of an open market would have helped, and fear of change is an almost universal human reaction.

Forty years later Rome destroyed the Temple that protected the high priests’ exchange fraud. A similar result occurred after Renaissance popes used duplicity to manipulate Christ’s teachings for political and personal gain. Rome was sacked in 1527 by troops of Holy Roman Emperor Charles V, soon after the Protestant Reformation was born.

Kings abused financial systems and revolts followed, most notably in England, the United States, and France. Yet each nation’s political leaders still abuse finance today. Nearly 500 years have passed since the sacking of Rome and we still fight the same battles over the ultimate questions of how to achieve open financial markets, financial fairness, and productive sector efficiency.

In Ukraine, for example, western banks helped to finance real estate development that enriched “self-made” billionaire kleptocrats and left thousands saddled with odious mortgage debt. Only when corruption reached extreme levels did the free markets respond and displace the wrongdoers.

We now have proof, by observing credit spreads, that the solution of free markets works, and the mathematics to precisely measure the impact of investors’ responses to policy changes. Yet leaders of the world’s most populous nation still circulate memoranda explicitly rejecting Western notions about the freedom, rule of law, individual rights, and transparency that prevent financial crises. Notwithstanding proof of error, nations still seek to rule by authoritarian direction and economic monopoly.

Ironically, rejection of the obvious truth of free markets is occurring even as a growing body of statistics and analysis proves that all crises are caused by the collapse of bubbles. The latest example is that of mercantilist nations such as China, which generated vast amounts of bad debt during several decades of excesses. China’s leaders and bankers now seek to hide errors of financial judgment beneath authoritarian controls. The markets will ultimately win.

In the United States, despite lessons of the Great Depression, Congress continues to block the means for reconciliation of mortgage market errors that continue to block recovery from the 2007–2009 financial crisis. Congress alone has authority to enact uniform laws on bankruptcies throughout the United States. The United States needs a uniform process for reconciling unrecoverable mortgage balances and millions of lost and destroyed mortgage records.

In what may be the ultimate blunder, we now know that some of the largest banks in the United States cannot sell or resolve loans currently held on their books because they cannot locate the records needed to document claims. Many lenders voluntarily destroyed documents that recorded changes in title and replaced them with electronic files that proved entirely unreliable. Without proof, it is impossible for anyone to identify the actual rights and obligations of deceived borrowers and lenders.

In that morass, even a perfectly structured debt-trading market cannot function. Debtors have a right to insist on protection from double payment by insisting creditors prove that promissory notes debtors signed were not delivered to others who can later present those notes and collect again. Eight years after the start of the crisis, unresolved issues in the housing sector remain a dead weight around the neck of consumers, lenders, taxpayers, and markets. That is why at the end of 2013 nearly a quarter-trillion dollars’ worth of distressed single-family mortgage loans remained on the books of U.S. banks. There are hundreds of billions more owned by REMIC trusts that cannot be restructured.

Human folly precludes most people from reconciling their own financial errors—that is why the U.S. Constitution explicitly directed Congress to create processes for bankruptcy to do that for them. The power to establish uniform laws for bankruptcies was given to elected officials so that past abuses by priests and kings (with similar human failings) would not be repeated to the benefit of a few and detriment of many. Article I of the U.S. Constitution gave Congress power to create bankruptcy courts because the Founders recognized that prompt resolution of insolvency was necessary for a healthy and prosperous society. So far in this crisis, however, their wisdom seems lost on a generation of officials worried alternatively about pleasing the largest financial institutions and political radicals that might cause them to lose elections.

There are followers of Christ who still don’t understand the admonition against the duplicity of fraud. Financiers and the appraisers, auditors, and attorneys who serve them still seek to deploy different measures so as to benefit themselves over disadvantaged customers, shareholders, and fellow citizens. The use of different accounting regimes for investors, regulators, and tax authorities in the United States is an example of such muddled thinking.

Unlike the money changers of first century Jerusalem, there is no risk of punishment today for taking actions to minimize a fraudulent exchange rate mark-up. The church that charged Fred a 67 percent currency exchange mark-up in May 2013 did not face Roman soldiers ordered to impose Rome’s monopoly on coinage. It only needed to accept credit cards.

Europe, the source of more wars generated by financial manipulation than any other area of the world, has a unified currency, and, as a result of the recent crisis, seems to be on a path to reforming its banking system. To date, however, it has taken few steps to create an open market for trading bonds or making financial information more readily available to the public. Such reforms would give Europe the type of credit-spread data that now allows the United States to track the impact of daily investor responses to financial policy changes that affect the cost of Adam Smith’s great wheel of circulation.

At least for now, England trades in the unified economic area of the euro, but it continues to reject participation in the currency, generating the duplicity of Fred’s recent exchange experience. Nobody has any idea if and when Europe will create a central governance structure that provides support for both the needs of individual sovereign states and the unified economic needs of Europe as a whole.

The United States has learned (and continues to learn) that errors in the features of market structuring are what trigger crises. Both the crash that led to the Great Depression and the crisis of 2008 were triggered by events that events that forced recognition of a massive and systemic accounting fraud—off-balance sheet liabilities.

Solutions for panics that the United Kingdom used long before the Great Depression failed in the United States after the 1929 crash because we did not pay attention to the state-by-state elements needed to prevent abuses of our financial system. Those failed structures are what led the U.S. Supreme Court to correctly declare that an imperfect pledge of collateral “imputes fraud conclusively.”

Before such reforms as the Uniform Commercial Code, the U.S. Bankruptcy Code, and the Uniform Fraudulent Transfer Act, pledging collateral in the 1930s created a secret second measure of credit. As noted earlier, while the Supreme Court’s ruling in 1925 was correct in principle given the laws of that day, the decision by Louis Brandeis in the Benedict case precluded the lender-of-last-resort application of Bagehot’s dictum to prevent the Great Depression.

In response to the collapse of private credit creation in the late 1920s, we had to nationalize our financial system in 1933, but we imposed draconian rules that nearly strangled the global economy before we generated new laws that opened markets to both growth and crises. In the latest crisis, the Fed did a remarkable job managing and creating the necessary financial bridge that restored equilibrium. But Congress, in a natural political reaction, has placed new restraints on growth and credit creation that may constrain a full recovery for years to come. This time the United States must do a much better job implementing the features of new reforms that will allow the United States to unwind what the Fed created and restore effective private-sector bond trading markets.

When the authors speak to groups at home and abroad, the history of decades of U.S. financial market errors is quite helpful. It allows the U.S. mistakes of experience to generate humor that helps both our citizens and other nations gain wisdom that avoids similar folly. Unfortunately, folly is a universal human frailty and one that repeats itself with great regularity. The best advice of leaders rarely works.

The United States helped Japan create a corporate reorganization law in the early 1950s. As applied there, however, the law only worked during inflationary periods. It was not useful when Japan slipped into deflation for more than a decade after its real estate bubble burst in the late 1980s. Starting in 1998, U.S. experts offered Japan new reorganization techniques that allowed it to unwind mistakes of the 1980s that produced a lost decade in the 1990s. Within a few years, however, those lessons were too often ignored in both Japan and the United States.

Perhaps it is only extended life expectancy that can bring about financial stability. In different form, the problems that caused the Great Depression of the 1930s were the problems that caused the Great Recession of 2007–2009. The facts common to both financial crises are separated by more than 70 years—not a particularly long period of time. Yet it was enough time for several generations of Americans to forget the lessons learned by their parents in the years following the 1930s.

For financial stability and economic prosperity to be the rule rather than the rare exception, we need people with sufficient experience to avoid repetition of errors and to punish acts of fraud effectively. It is only recently that life expectancy has increased to a point where the world can hope to sustain financial stability. Perhaps that fact alone offers the world hope for success despite 4,000 years of experience to the contrary. And yet there have been few prosecutions for fraud resulting from the subprime financial crisis and subsequent recession.

Marty Robins argues that there are not sufficient laws in place to prosecute the frauds committed before the financial crisis (Robins 2014). But that is clearly not the case. Starting from the Brandeis decision in 1925 and moving forward, past generations of leaders in the United States have put in place more than sufficient legal tools to punish fraud and related misdeeds, and thereby give financial stability a real chance. What has been lacking is the political will to punish duplicity in the financial markets. Judge Jed S. Rakoff of the Southern District of New York notes in response to Robins,

The reason cannot be, as Mr. Robins suggests, that there is no state or federal statute covering such behavior. On the contrary, at the federal level alone, there are numerous statutes that criminalize the intentional making of false statements regarding the creditworthiness of mortgage-backed securities, including the mail fraud statute (18 U.S.C. §1341), the wire fraud statute (18 U.S.C. §1343), the bank fraud statute (18 U.S.C. §1344), the securities fraud statute (15 U.S.C. §78ff), and many more. Thus, I respectfully disagree with Mr. Robins’s ultimate suggestion that we need more laws “to deter this problematic behavior.” So far as criminal prosecutions are concerned, the legal weapons are already there. The question is, who will use them?

Contrary to the popular view that the frauds committed prior to the subprime crisis could not be pursued because of a deficiency in the law, in fact the legal framework existed decades before 2008. When a financial institution is injured, the civil and criminal remedies under existing federal banking laws are quite effective when prosecuted correctly. As we learned in the 1930s, it takes judges and prosecutors time to recall old principles (and advise other officers of the court).

Take the case of the convicted defrauder Allen Stanford. Initial ineptness led to a near-wipeout of investors, largely because the offshore jurisdiction that housed most of his Ponzi scheme refused to prosecute the fraud. Once the Texas case got going, however, Stanford had all his directors’ and officers’ liability insurance cut off because the insurer convinced the U.S. court there was probable evidence of a crime. A receiver was appointed and Stanford is now rather permanently in jail. The case of the Madoff fraud is another illustration of how justice is served when resolute lawyers and prosecutors move with purpose to punish fraud using existing civil and criminal statutes.

But the trouble with the vast majority of fraudulent transactions committed prior to the subprime debacle is that they involve a universal class of assets—namely residential mortgages—which flowed through the largest financial institutions in the country. Many of the mortgage-backed securities issued between 1998 and 2008 were not created using true sales. They were secured borrowings instead. The duplicitous reporting of such transactions as sales “imputes fraud conclusively.” Citigroup; Bear Stearns; Lehman Brothers; Countywide; and Washington Mutual—just to name a few cases—provide rich opportunities to research the issue of fraud using the guidelines in this volume.

But the fact is that the political will simply did not exist to pursue these frauds because doing so would have brought the system itself to its knees—this at the very time that the Fed and other agencies were attempting to save it. But that does not lessen the need to understand and recognize frauds committed in the future. That, at the end of the day, is why we have written this book.