How and why do people transform into brigands and pirates?
Maybe the best way to lie to others is to first lie to yourself.
When something doesn’t quite fit the script, you very rarely tear up the entire story and start from scratch. What you do, instead, is to deny or confabulate in order to make the information fit the big picture.
This does not mean that we should not pursue those guilty of fraud. But merely pursuing instances of fraud without fixing the incentive system in place will get us nowhere.
It is misguided to focus on greedy bankers and incompetent or compromised regulators. Bankers and regulators are merely adapting to the incentives presented to them by our current economic and political system.
In fact, the real question is why so few economic actors indulge in fraud or milking taxpayer guarantees when they have every incentive.
The answer is that our ethics prevent us from exploiting the situation. But our ethical standards do not remain constant. They can and will erode if a perverse system is in place for too long.