October 25, 2011

Bill Black: What I'd Demand of the Fed

Bill Black: If I marched with Occupy Wall St. to the New York Fed, this is what I would demand
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William K. Black, author of The Best Way to Rob a Bank is to Own One, teaches economics and law at the University of Missouri Kansas City (UMKC). He was the Executive Director of the Institute for Fraud Prevention from 2005-2007. He has taught previously at the LBJ School of Public Affairs at the University of Texas at Austin and at Santa Clara University, where he was also the distinguished scholar in residence for insurance law and a visiting scholar at the Markkula Center for Applied Ethics.

Black was litigation director of the Federal Home Loan Bank Board, deputy director of the FSLIC, SVP and general counsel of the Federal Home Loan Bank of San Francisco, and senior deputy chief counsel, Office of Thrift Supervision. He was deputy director of the National Commission on Financial Institution Reform, Recovery and Enforcement.

Black developed the concept of "control fraud" frauds in which the CEO or head of state uses the entity as a "weapon." Control frauds cause greater financial losses than all other forms of property crime combined. He recently helped the World Bank develop anti-corruption initiatives and served as an expert for OFHEO in its enforcement action against Fannie Mae's former senior management.


Bill Black: What I'd Demand of the FedPAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Washington. A few days ago I was in New York City at Liberty Plaza talking to some of the people that were occupying the square there. And we were talking about demands, what should the Occupy movement demand. And I said to them, you know, just over here is the New York Fed. Maybe you guys should be discussing some demands of the Fed and maybe go pay a visit there when you've got several thousand people. And so someone said, well, what would you demand of the New York Fed? And I said, well, I have some ideas, but better, I'll ask someone who knows. So now joining us is someone who knows, Bill Black. Bill is an associate professor of economics and law at the University of Missouri-Kansas City. He's a former financial regulator and author of the book The Best Way to Rob a Bank Is to Own One. Thanks for joining us again, Bill.


JAY: So if you were part of this march from Liberty Plaza over a couple of blocks to the New York Fed, what would you demand of them?

BLACK: Well, I would have demands in two different areas. One is how to prevent the next crisis, and the second is how to respond to the disaster that is ongoing in this crisis. So I'll start with preventing the next crisis, because we cannot afford another one like this, much less a bigger one, and right now we're building towards exactly that. First, get rid of the systemically dangerous institutions. These are the roughly 20 largest banks in America. And the administration (and the administration before it, and the administration before that) told us, as soon as the next one of these fails, you will produce a global financial crisis. Well, that's insane. We are rolling the dice just in the United States--and there are, you know, about 20 of these abroad as well--20 times a day, to see when the next global crisis is going to occur. So shrink them. Shrink them to the point where they will not create a global risk of failure. And here's the really good news from economics. These SDIs, systemically dangerous institutions, are so over-bloated that they would actually be much more efficient operations if they were shrunk to the size that they no longer posed a danger. So that's a win-win for the world. Second area: deal with the three D's. The three D's are deregulation, desupervision, and a de facto decriminalization. This is what's--a large part of driving our crises and lead to the failures of those systemically dangerous institutions. Deregulation. It is absurd that after we ran this real-world experiment and it ended disastrously that we didn't simply pass two one-sentence laws. The first one-sentence law would say: the law repealing Glass-Steagall is repealed. The second would say: the law that created the Commodities Futures Modernization Act of 2000 is repealed. These are two atrocities that helped produce this crisis, and we should get rid of them. Desupervision. We have top regulatory leaders who were picked because they despise regulation and do everything possible to destroy it. So get rid of them and bring in real regulators. This means fire the failed regulators, the Bernankes and Geithners of the world. You can't fire Bernanke, but you can certainly ask him to resign. And get a new attorney general. Holder has to go to be able to do this. That leads to the de facto decriminalization: instead of having the FBI spend virtually all their time on the little folks, instead of the outrage that the Justice Department is pressuring the state attorney generals to give immunity to the banks for massive fraud--not just the foreclosure fraud, mind you; according to the recent Reuters story, they are trying for and are about to get immunity for all of the massive fraudulent making of liars loans. That is a national travesty and a disgrace. Get rid of it. Along those lines, the GAO issued a report yesterday that said that the Federal Reserve system is shot through with conflicts of interest, and that people act on these conflicts of interest. You can also, your viewers, look at the testimony of the former head of supervision of the Fed in front of the Financial Crisis Inquiry Commission, in which he confirmed that it was common for the regional banks to gut efforts at supervision and enforcement because of undue political pressure from the people that control those banks, which is the industry, which is why the Fed operates for the 1 percent instead of the 99 percent. [crosstalk] Third major area: executive and professional compensation. Yes, this produces grotesque inequality. But far worse than that, this is what creates the perverse incentives to engage in fraudulent behavior, and it is the mechanism by which the corrupt CEOs loot the companies. It is completely contrary to every theory of how compensation is supposed to work. So I would change all of those things. More broadly, Citicorp calls the United States of America a plutonomy, in other words, a country controlled by the ultra-wealthy and run for the benefit of the ultra-wealthy. That's what it tells its own investors. That has to stop. And Citizens United is a big part of the problem. That was a 5-4 decision. We need new Supreme Court justice that would--as soon as we get the next appointment, who will do the law properly and end this absurdity of treating corporations as persons. So, going forward, those are the most important things to protect--prevent the next financial crisis. Dealing with this financial crisis is what comes next.

JAY: Now, a lot of what you've said takes place as laws in Congress. Some of it takes place, in theory, that the Fed could do, but as you mentioned, the conflicts of interest at the Fed and the whole role of private banks in the Fed do not make it very likely that the Fed's going to do any of--follow any of your suggestions. So in terms of the Fed itself, what sort of demands should be made, in terms of changing who controls the Fed?

BLACK: Well, let me start slightly elsewhere. The president has less power over the Fed then he does over the other banking regulatory agencies. So tomorrow he could change the people in charge of those agencies who are actually running it on an acting basis, and they could adopt the rules that could be effective in preventing the next crisis, and they could do that with no additional legislation. So that's where my first priority would be. Now, my second priority, as I said, would be calling on Bernanke to resign and to replace him with someone who is an actual believer in regulation. If you look at the other members of the Federal Reserve right now, they are often excellent, absolutely excellent, and many of them are actually believers in regulation. But here's the sad truth: the chair of the Fed is immensely more powerful than all the other members of the Fed and completely dominates policy, and of course completely dominates how it's implemented in practice. So get rid of Bernanke, call for his resignation, appoint one of the existing members who has good supervisory experience and instincts to be the acting head at the Fed. And you can adopt--in many cases the Fed doesn't even need new rules. And obviously one of the new rules it has to have in the interim is ethics rules that are much stronger, including a rule that says it is absolutely illegitimate for the board of directors to have anything to do with examination, supervision, and enforcement. But, again, all of that could be done on day two if you got rid of Bernanke on day one.

JAY: That's assuming President Obama and his administration want to solve this problem.

BLACK: Well, yes. And, you know, no one should paper over the abject failure there. After all, the president came in with a perfect opportunity to change things. Geithner had been in charge as the president of the Federal Reserve Bank of New York of regulating the largest bank holding companies in the world. He was a total failure at that. Instead, the president promoted him and put him in charge of virtually all economic things. That's a travesty. Ben Bernanke was not only the failed regulator--anti-regulator, really--at the Federal Reserve, the one who refused to use the Fed's statutory authority to do anything to stop the massive wave of fraudulent loans. He was also President Bush's president of the Council of Economic Advisers. He is a lifelong Republican partisan. So it is shocking that a Democratic president would appoint--reappoint as head of the most prestigious and powerful regulatory entity in the world someone who was (A) a failure and (B) a complete political opponent to him. So you would hope from Obama, if he couldn't get the economics right, he could at least get the politics right, but he got both of them wrong.

JAY: Thanks for joining us, Bill.

BLACK: Thank you.

JAY: And thank you for joining us on The Real News Network.

End of Transcript

DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.


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