Fiscal Cliff Debate: Austerity One Way or Austerity Another Way
Bill Black's Financial and Fraud Report on the current choices offered by President Obama and Congress - November 29, 2012
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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.
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Baltimore. And welcome to this week's edition of Bill Black's Financial and Fraud Report. He now joins us.Bill is an associate professor of economics and law at the University of MissouriâKansas City, a white-collar criminologist, 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.BILL BLACK, ASSOC. PROF. ECONOMICS AND LAW, UMKC: Thank you.JAY: So what do you got this week?BLACK: Well, we have the continuing efforts to arrange the great betrayal of the social safety net and call it a massive victory. So what we have is actually a recruit to the struggle against this insanity. And that is, Paul Krugman's column is now very clearly endorsing key principles that modern monetary theory has been arguing for a long time, that in nations that have their own sovereign currency like the United States, the United Kingdom, and Japan, that running these deficits doesn't lead to disastrous inflation or ruinous interest rates, that all three countries can borrow for virtually zero, and Krugman is warning of what we've been saying, the central insanity of this thrust for the so-called grand bargain. And here's the logic the administration is telling us in all of the Beltway, that there's this thing that they call the fiscal cliffâwhich, by the way, they'd created deliberatelyâand it's about to destroy the economy. There was just a press release, as we're talking, from the Obama administration that said if the taxes on the middle class kick in for a full year, we'll lose $200Â billion in demand, and this will at a minimum completely derail the recovery and quite possibly will throw the nation into recession. So we got it? Fiscal cliff bad because it's austerity. And therefore what we must do instead is adopt a program of much larger cuts to budgets and much increased taxationâin other words, much greater austerityâas our grand bargain. And on top of that, we have to begin gutting Social Security, Medicare, and Medicaid.JAY: Yeah. I mean, they're notâthey don't seem to be worried about the loss of demand as a result of the cuts to these various social safety net programs, so they're very selective about which things affect demand are they going to speak about.BLACK: Yeah. And it's exactly the opposite of what economics says, which is another point that Krugman is making as well that we've been making for some time. You're cutting exactly the programs that have the greatest multiplier effects and can take you most swiftly out of recession. And so conservatives, for example, are terrified by the budget cuts that the so-called fiscal cliff would engineer in military spending, saying that that would be terrible; it would cost 1Â million jobs by reducing defense spending. But if you use the same logic, then the proposal of the administration, which is for even greater austerity, is insane. It will, under their own logic, guarantee that we will be thrust back into recession. Austerity is something that we've done a real-world experiment with. Europe adopted austerity. The United States did not. Euro zone was thrown back into an utterly gratuitous recession. The U.S. has had a steady but relatively weak recovery, because it's had relatively weak stimulus. But compared to Europe, at least it's had stimulus and wasn't thrown back into recession. And on top of that, a Democratic presidentâand this can only come from a Democrat, because it's toxic for any national-level Republican candidateâonly a Democrat can begin the process of unraveling the social safety netâSocial Security, Medicare, Medicaid, food stamps, all those kinds of programs. It won't be done all at once, of course. They'll take more modest steps at the beginning. But by accepting the Republican argument, which is falseâ.JAY: So it seems there's aâI don't know if it's quite a shell game, but it's close to oneâover here, in this hand, let's fight about whether there's a small increase in taxes, but over on this hand, let's actually agree the real problem is cuts to the social safety net. So if President Obama gets a small victory on the tax side, it's going to make the cuts look acceptable. But given that, if there was going to be a significant increase on the tax of the wealthy, it might make a difference. But how much is President Obama really proposing? I see Warren Buffet just proposedâ$1-10Â million, he wants a 30Â percent tax, and over $10Â million, he wants a 35Â percent tax. But even that seems rather low by historical standards. I think ordinary people, if you put their taxes together, are already paying around 31,Â 32Â percent. BLACK: Yeah. I mean, the tax rate is going to be rough for the wealthiest Americansâif the most extreme suggestions are adopted, would be about half of what it was under President Eisenhower, to give you some idea of comparison. But as you say, the tax stuff is overwhelmingly watch my left hand, watch my left hand, while all the magic is taking place in the right hand. It's quite a distraction that is supposed to make the liberals feel better that they got this teeny, tiny, maybe increase in revenues from the wealthiest Americans. But the giveaways are massive in return. And the combination is worse, right, because the combination adds to austerity and throws the nation potentially back into recession. JAY: It also gives President Obama an interesting cover, the way this thing's playing out. It's as if these cuts to the safety net he's doing under duress, being forced or pushed by the Republicans, when it's something he actually told the world, and in particular a group of conservative columnists, that he intended to do within days of being first elected president.BLACK: Yes. This is something that he's wanted from the beginning and something the Treasury secretary, Geithner, in particular has been pushing. And the White House has just announced that Geithner's big last task in office that we're all supposed to rally to is to produce this great betrayal of the entitlements led by Geithner. So, you know, I agree that it should be blamed on Obama, not on Geithner, but the reason that Geithner and Obama have formed such a close relationship is their felt need and felt desire to be the ones that began to cut the entitlements. Now, what Wall Street wants, of course, is the privatization of Social Security, 'cause that would give them hundreds of billions of dollarsâactually, trillions of dollars of funds that would be invested through them that they would earn commissions on. So that would be hundreds of billions of dollars in additional revenues and all kinds of political power. And, of course, if you want to talk about too-big-to-fail, can you imagine the banks that had the savings, the life savings of 10Â million Americans then that were not federally insured by deposit insuranceâwhat that would do for too-big-to-fail? So all of that is the great wishlist. But for this stage, the real problem is ego, right? Even President Obama's greatest supporters don't believe that he did anything to deserve the Nobel Prize. So when Obama thinks in terms of legacy as a public leader, he has consistently come back to I'm going to be the one that reached across party lines and began to (he would phrase it) save the safety net. I would say that what he's actually doing is opening the door politically to destroying the safety net.JAY: Which is sort of the way Bill Clinton was so proud of having reformed welfare.BLACK: That's absolutely correct. That is the perfect analogy. And they were open about it. The Obama people, when they talk to The Washington Post after the failure of the JulyÂ 2011 attempt to do exactly the same thing, where they sought to betray the safety net, all of the language to The Washington Post was this was how Obama saw his legacy, his place in history. And, you know, you have to remember how bizarre that was, 'cause if Obama had succeeded in JulyÂ 2011 (and he came very close to it) in reaching the great betrayal with Speaker Boehner, unemployment was already 9.1Â percent in JulyÂ 2011âthe austerity of that plan that Obama wanted would have thrown the United States immediately back into recession, unemployment would have gone well above 10Â percent, and every month during 2012 in the run-up to the election, unemployment would have gone up.JAY: Well, I guess now that he's in his second term and doesn't have to worry about being reelected, if he wants that to be his legacy, I guess he's in position to do it. BLACK: Yes. Now, the real legacy, of course, is destroying U.S. growth, and perhaps even throwing us into recession, and betraying the entitlement programs, and not randomly giving up the Democratic Party's most attractive policy options. Even a majority of Republicans agree that we should not be cutting Social Security. And the percentage of Democrats and independents who oppose it is enormous. So this is being done against the will of the American people, and this is why they have to panic him. And so the bizarreness of this all is that who is Obama's big ally? Pete Peterson. You can read the Krugman column and other columns we've done about Pete Peterson, but basically this is a Republican billionaire who ran a big hedge fund and who has said that he will dedicate $1Â billion of his own wealthâwhich tells you something about his wealthâto attacking the entitlement programs, what he calls entitlementsâSocial Security, Medicare, and Medicaid. And this is the kind of person that President Obama is working hand-in-glove with. And who is the other big ally now? The CEOs of these major corporations, especially the Wall Street guys that are funding and driving the Chamber of Commerce in this, you know, unholy war against Obama, are now his leading allies in trying to gut the safety net.JAY: Alright. Thanks for joining us, Bill.BLACK: Thank you.JAY: Thanks for joining us on The Real News Network. Don't forget we're in our year-end fundraising campaign. If you like watching Bill Black's financial and fraud reports, we need your support to keep doing this in 2013. There's a donate button somewhere over here. If you click on that, we can keep doing this.
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