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Sunday, June 24, 2018

John Adams famously sought to create “a government of laws and not of men.” Sadly, I suspect John Adams would be disappointed in the nation today. Increasingly, the application of the law reflects what Adams feared: It depends on who the men or women are rather than what they have, or have not, done.

A central principle that is necessary for the rule of law, as well as a successful capitalist economy, is embodied in the statues that stand outside many courthouses. They portray Lady Justice with a blindfold. Justice is blind, and every person — rich or poor, mighty or not — stands before the court on an equal basis.

Within this framework, the court applies the law without regard to the status of the defendant.  The ideal of blind justice is a pre-requisite for both a fair society and a vibrant capitalist economy.  With all treated equally, buyers and sellers can rely on the courts to enforce their agreements: Small businesses know that their agreements with large corporations and institutions of any size will ultimately be protected by the legal system.  Contracts, declared immutable in the early days of the republic under the Dartmouth College case, will be enforced. As a consequence, trade and production occur, while markets and commerce have the opportunity to flourish.

In contrast, when Lady Justice’s blindfold is in tatters, our economy loses its efficiency and ability to create real wealth. Consumers and businesses grow afraid to borrow from financial institutions knowing they will be at a disadvantage in any contract dispute. The mighty gain an unfair advantage in commerce (since crime starts to pay), knowing they can engage in profitable, but potentially illegal activities with impunity.  When this two-tiered system of justice arises, trade and productivity diminish drastically as potential wealth creators know the contracts that protect them for the risks they take will not be fairly enforced.

A central aspect of this system is the fair and equal use of prosecutorial discretion. When prosecutors treat different classes of people in vastly different ways, a system of unequal justice similarly arises. The courts never have the opportunity to enforce the law with equal vigor, as prosecutors create a two-tiered system of justice through the choices they make. For the society and a capitalist economy, there is little difference where the inequality starts: The outcome is the same.  Potential wealth creators take far fewer risks, and produce less, since they know the legal system, starting with prosecutors, will allow the rich and powerful to act in potentially criminal ways.

Let’s not kid ourselves: the portrait painted above is, in many ways, a charitable portrait of the nation today. We now live in a society where the rule of law, confidence in the judicial system, a fair capitalist economy, and an essential public respect for the law is rapidly disappearing. Indeed, our largest financial institutions seem to break the criminal laws with impunity, and a two-tiered system of justice has evolved. I believe John Adams would say he fought a revolution to prevent the type of society that is now evolving.

Here are two examples. Unfortunately, my files contain dozens more:

In the HSBC case, as Matt Taibbi recently wrote, “the U.S. Justice Department granted a total walk to executives of the British-based bank HSBC for the largest drug-and-terrorism money-laundering case ever. Yes, they issued a fine – $1.9 billion, or about five weeks’ profit.

Taibbi further notes:

“For at least half a decade, the storied British colonial banking power helped to wash hundreds of millions of dollars for drug mobs, including Mexico’s Sinaloa drug cartel, suspected in tens of thousands of murders just in the past 10 years …The bank also moved money for organizations linked to al Qaeda and Hezbollah, and for Russian gangsters; helped countries like Iran, the Sudan and North Korea evade sanctions; and, in between helping murderers and terrorists and rogue states, aided countless common tax cheats in hiding their cash.

“They violated every goddamn law in the book,” says Jack Blum, an attorney and former Senate investigator who headed a major bribery investigation against Lockheed in the 1970s that led to the passage of the Foreign Corrupt Practices Act. “They took every imaginable form of illegal and illicit business.”

That nobody from the bank went to jail or paid a dollar in individual fines is nothing new in this era of financial crisis. What is different about this settlement is that the Justice Department, for the first time, admitted why it decided to go soft on this particular kind of criminal. It was worried that anything more than a wrist-slap for HSBC might undermine the world economy. “Had the U.S. authorities decided to press criminal charges,” said Assistant Attorney General Lanny Breuer at a press conference to announce the settlement, “HSBC would almost certainly have lost its banking license in the U.S., the future of the institution would have been under threat and the entire banking system would have been destabilized.”

There seems to be little question that the executives involved knew they were breaking the law. These executives assisted in the system that distributes massive quantities of prohibited drugs, which is also inevitably accompanied by violence and murders. The harm to our society was inestimable.

Yet, no criminal prosecutions arose. No accountability (which is fundamental to a fair society and a capitalist system) was demanded. Instead, prosecutors used their discretion to settle for a fine.