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Are Sanders’ proposals to rein in the excesses of Wall St. meaningful, is public banking possible? Bill Black and Leo Panitch discuss and debate

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to the Real News Network. I’m Paul Jay in Baltimore. We’re in the midst of a conversation about, started with Bernie Sanders’ proposals on what to do about Wall Street and the big banks. We’ve kind of moved forward from that to what would effective policy look like, both what might be realizable politically now and what, in this segment I want to talk about, what if we didn’t have such political restraints or constraints? What would effective policy look like then? So please, now, joining us us again first of all from Toronto, Leo Panitch. He’s a Distinguished Research Professor at York University, and the author with Sam Gindin of The Making of Global Capitalism: The Political Economy of American Empire. And joining us from Kansas City, Missouri, is Bill Black. He’s an associate professor of economics and law at the University of Missouri Kansas City, and author of the book The Best Way to Rob a Bank is to Own One. Gentlemen. So Bill, we ended the last segment, Leo was talking about Glass-Steagall, and let me just focus that again before we move into another territory. Bill, just one more time, if you want to just respond to what Leo said on the Glass-Steagall issue, and then I kind of want to move into another area. BILL BLACK: Okay. So the question that a number of people had that Leo I think indicated support for the view, is Glass-Steagall may have been a very good law but the economy changed and it’s no longer a sensible law. I disagree. And indeed, I have an odd source that agrees with me. His name is Sandy Weill. And Sandy Weill was the CEO of Citicorp who had a four foot long plaque made up in wood that he was the shatterer of Glass-Steagall. He was so proud that he got Glass-Steagall destroyed. And he has recently come out–and yes, we checked, it was not in the Onion–and said, you know, that was a terrible mistake. We should bring back Glass-Steagall. So even the guy that was the, as Leo said, certainly not the sole or even remotely the sole shatterer, but the ultimate shatterer through the Travelers merger, of Glass-Steagall, thinks it’s actually still a good policy. So how did things change? Well, things changed because the United States and the United Kingdom, and to a lesser extent Germany, embraced the regulatory race to the bottom. And so this idea was only one city can really be ultimately the dominant place in financial derivatives. Financial derivatives are vastly larger than the real economy. Maybe in the order of $600 trillion in derivatives. How you count derivatives is a question that economists never have a good answer for. And so for example we were told that we had to destroy Glass-Steagall so that Citicorp and places like that could compete with [inaud.]–. JAY: And just very, very quickly for people that didn’t watch the last segment, or don’t know. The Glass-Steagall legislation, if I understand it correctly, separates commercial, consumer, normal business activity, from investment, more speculative activities. [The same]–. BLACK: Where the bank would own, have an ownership interest in a business. And so the model that we were supposed to have to compete with and supposedly was impossible to compete with, unless we got rid of Glass-Steagall was the German universal banks. And in particular that would be Deutsche Bank. And Deutsche Bank has had a series of catastrophes, and its investment banking arms, self-created catastrophes brought on not through speculation but through fraud. So that didn’t prove to be a very good model that we had to out-compete Deutsche Bank. And we would have been far better off, and Deutsche Bank would have been far better off if we had not gone down that investment banking road. The other one, of course, was the city of London. And the city of London won the race to the bottom. And it is the result, is even more than Wall Street, the financial cesspool of the world. We have to get rid of that dynamic. I don’t know of, how many of your viewers remember the movie War Games, but the computer is, thinks it’s playing this game called Thermonuclear War and it’s about to blow up the world. And then the humans intervene and say, you know, you might consider the consequences of winning this game. And the computer goes through lots of iterations and realizes they all result in thermonuclear war, and vast losses. And says, so the last line is, the only way to win this game is not to play it. And that’s what’s true. We should be so lucky that Citicorp and Bank of America flee Wall Street and go to the city of London, if the city of London wants to allow them to do investment banking as well. Because then the Brits can pick up the catastrophic losses. Except the losses will be so big there will be no UK economy, advanced economy. LEO PANITCH: I agree with this. And I think if the political horses are there that would be great. I, on the other hand, think that we need to understand that sure, Deutsche Bank ends up finding that all kinds of its activities have blown up in its face. But it has been part of, for the last 30 years, the creation of a very dominant and dynamic German capitalism, integrated of course with the transatlantic economy and increasingly the trans-Pacific one. That’s the nature of capitalists, big and small. They don’t think in terms of, well, this is eventually 25 years from now going to yield a crisis that will not be of the kind that will be contained. They think in terms of, you know, we make as much money, create as many financial products as we can, and indeed manufacturing ones the world doesn’t [inaud.]. And you know, we’ll salt that away and leave people like Bill to clean up the mess. That’s the nature of the beast. If we really want to solve this, I come back to this, we need to think of–especially in the case of finance. We need to think about a way of, as Bill was saying, democratizing the powers that control where our incomes go and what is done with them. JAY: Okay. Just–to end up the segment, we have maybe about ten minutes left. If you could write–assuming Bernie Sanders is willing to adopt anything that seems effective, what would you say should be his plan? Bill, what would you write for him as a plan? BLACK: So, first, I’m supposed to write up these things for their consideration. I would get rid of the systemically dangerous institutions. I would give them five years to shrink to the size that they would no longer pose a global systemic risk, which is ballpark $50 billion. They can do the sell-offs. I heard Leo about which families. That’s actually not a particularly big U.S. problem in terms of banking. It most assuredly is in Sweden. It most assuredly is in a number of other countries. But in terms of the U.S., the Pritzkers are a problem, most assuredly, and their ties to Obama and Clinton are most disturbing. But that’s actually an anomaly. The really big banks in the United States are not controlled by particular families. So I give them five years to shrink, and in the interim five years I subject them to ultra-intensive regulation and high capital requirements to give them the incentives to shrink even more rapidly than the five years. I would bring back Glass-Steagall, but I would bring back Glass-Steagall with the rules in place 35 years ago, not the rules at the time that they finally killed Glass-Steagall in 1999. I would get, I would go directly at executive compensation and professional compensation. These are related but different issues. The professional compensation is how you suborn the auditors. So these top-tier audit firms, which again have shrunk to this tiny level where there’s no real competition. And the way you make partner, become a powerful partner, is to bring in a whale of new client, and that’s why you see routinely that even the most fraudulent firms are able to give clean opinions from the most prestigious audit firms in the country. In the world. So I would not allow you to pick your audit firm. I would assign your audit firm from the government. And then I would track how accurate those audit firms were, and then I, like soccer in the United Kingdom and other places, I’d have relegation. If you screwed up too badly you’d be relegated to the second ranks of auditing smaller companies, and only until you established a strong track record for years would you be promoted again to the big leagues. In terms of executive compensation, that’s where not only it’s become the means to defraud and loot the corporation, it becomes the strong incentive and it allows you to create the perverse incentives that enlist the broad members of the corporation to assist you. And you can do this without ever having the conversation. In other words you can use executive compensation to get people to do the wrong thing without ever having the conversation, hi, I want you to cheat on the accounting. And if you cheat on the accounting I will pay you $50,000. All of that’s communicated through how that executive compensation works. So I would put a cap on compensation, probably in the U.S. context of somewhere around $300,000, and say 25 years from now if these record profits turn out to be real, and sustained for 25 years, have at it. We’ll be happy to make you multimillionaires, right. But until you’ve demonstrated that over a very long time period, we’ll simply make you someone that can send all your kids to the best schools and live a very nice life, but you ain’t going to get rich ripping off the place anymore. On prosecutions–well, I would also bring back true partnerships in places like the audit firms. In the old days you were, if you were general partner, you had joint and several liability for all the debts of a place, like an investment bank, all right? Now that’s, that concentrates the mind wondrously, right? None of this limited liability stuff like a shareholder. And so you’re very careful in who you make a partner, and you are very careful in monitoring your partners. You sit literally in the same room and listen to each others’ conversations, and such. I want to emphasize what Leo’s been emphasizing. That doesn’t solve a broad range of things involving financialization. But it does solve a lot of things with regard to certain kinds of frauds and abuses that risk the entire financial system. I would bring postal banks for regular human beings, and I would use them to deliberately put the predatory practices of payday lending out of business throughout the United States. I would extend the same protections to the general public that we have for the armed forces, and spouses of the armed forces, where we have capped payday lending interest maximum, I think it’s at 36 percent. Whereas in Missouri, for example, it’s over 500 percent rate of interest that you’re allowed to charge once there’ve been delays in payday lending. And I would bring back an effective criminal justice system. I’d do that by reestablishing the criminal referral system, which was eliminated under George Bush, and which had been so effective in getting over 1,000 savings and loan executives and senior business people convicted just in cases designated as major, where we made over 30,000 criminal referrals, to the current era where there were zero criminal referrals by the same regulatory agencies. Unless you fix that, you will never fix the prosecution. I would quadruple the number of FBI white-collar specialists by new hires. I would prioritize the cases. I’d bring in new senior leadership at all of the banking regulatory agencies and the FBI and the Department of Justice. I would change–. JAY: And you’re writing this all up for Bernie, is that right? BLACK: That is correct. JAY: All right. Well, we’ll see whether we start hearing some of this on the stump. Leo, what–. PANITCH: I think that’s all great. And I wish Bill would put his mind, as very few even socialists have done, and his knowledge, to trying to outline what a public utility banking system would be that would replace the power of these giants. I think that’s all well and good. I think antitrust of this stuff has happened before in the United States, and we’ve returned to inevitably a capitalism that is of the kind that he’s now trying to rein in again. I think it’s riding a tiger, but I have no objection to this kind of stuff being proposed at all. I would only say, and I think Bill was even addressing this at the end, that it’s not just a matter of coming in, getting elected, and doing this to the banks or the bankers or the financiers. In order to do this you would fundamentally need to change the modus operandi of the Federal Reserve, the Treasury, et cetera. You know, in that they are structured in their very nature now to reproduce and reinforce and protect the system. That’s their function in the world. And they often protect it in a way that involves Robert Rubin coming from Goldman Sachs and then going back to the principals of Wall Street and saying hey, you guys, you’re going to bring everything down unless you put some restraints–and, or bail each other out. Which worked a number of times through the very large financial crises of the 1990s that didn’t blow up, into the crisis of 2007-2008, which finally did. But I don’t think Bill will disagree with this. JAY: So–but let’s go a little further, Leo. If, I don’t know whether Bernie Sanders wants to do this, but if he wanted or if you were to write for him a set of proposals that are not so constrained by what’s politically possible under today’s current politics, but imagining a politics–for example, there’s a very big mass movement. You could even have a united front of sort of progressive candidates. Or a broad front, not necessarily progressive. A lot of people who want to really have effective solutions. What would that look like? I mean, I guess somewhat on the federal level, although to be a little more realistic it’s probably more likely to happen at a state level before it could ever happen federally. PANITCH: The trouble with it happening at a state level, as with the Bank of North Dakota, is that it’s itself recycling nightly to, back to Wall Street. It’s embedded in a system of banking which is centered around Wall Street and the large banks. So it looks to you, and to some extent of course you do get some controls and inputs when you have a public bank of North Dakota. But it’s not as if that Bank of North Dakota can exist out there in the aether outside of the financial system. I want to say very honestly that repeatedly since the financial crisis exploded, I think exploded in 2007, not 2008, but since it exploded I have organized panels at conferences in which I brought together very knowledgeable people. Some of them appear every so often on the Real News. And said to them, what would a public utility banking system look like? And they’re all very enthusiastic until we sit down together at a panel in the room, and then there are very, very few concrete ideas, plans, schemes of the kind that Bill was laying out with regard to regulation that come forward. So I was saying before, the only really detailed one I’ve seen comes from the chief advisor to the financial spokesman in parliament of the Left party, Die Linke, in Germany. And it’s easier to imagine in Germany because the foundation of that system is the Sparkassen, which would–perhaps the American postal system could turn into eventually. So you could imagine that there is a base there of community banking large enough, et cetera. And then you could begin to imagine transforming the regional banks, which have semi-public functions, although they were heavily stuck into the American mortgage market, looking for higher profits themselves in the early part of this millennium. But he’s the only person who’s laid this out. And you can find this if you go to the Rosa Luxemburg site on the internet, the Rosa Luxemburg Institute site on the internet, you’ll find that paper. But it is very disappointing to me to not see progressive economists try to think through what public utility banking would be, what it would be structured like, and whether it is even possible to imagine it being at the center of a system of democratic, economic planning. Which, if we’re going to resolve not only the tendency to financial crises but the road to hell in terms of the ecological crisis we’re on, we’re very badly going to need. No one serious can imagine that we can address this without having a system of economic planning. Hopefully not a, in any sense emulating one like the Stalinist one. But a system of democratic economic planning where the democratic decisions about what’s invested, where, and how, could be taken. JAY: All right, thank you very much for joining us. Clearly this is just the beginning of a conversation, and this issue of public interest banking and what would an effective set of solutions look like if one actually wanted to curtail Wall Street, or actually change the center of power and actually make finance something in the public interest. All right, thank you very much for joining us. PANITCH: All right. So long. Nice to meet you, Bill. BLACK: Nice to meet you, Leo. It’s been fun. JAY: And thank you for joining us on the Real News Network.


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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.