Bizarre Republican Arguments Detaching Debt Problem From Real Economy
William K. Black is an Associate Professor of 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.
In April 2009 Black alleged in an explosive interview with Bill Moyers that American banks and credit agencies had conspired to create a system in which so-called "liars loans" could receive AAA ratings and zero oversight, amounting to a massive "fraud" at the epicenter of US finance, equated the entire US financial system to a giant "ponzi scheme" and charged Treasury Secretary Timothy Geithner, like Secretary Henry Paulson before him, of "covering up" the "truth".
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's 2005 book, The Best Way to Rob a Bank is to Own One is a classic insider's account of how financial super predators brought down the S&L industry with massive accounting fraud. Paul Volcker praised its analysis of the critical role of Bank Board Chairman Gray’s leadership in reregulating and resupervising the industry:
Bill Black has detailed an alarming story about financial - and political - corruption. The specifics go back twenty years, but the lessons are as fresh as the morning newspaper. One of those lessons really sticks out: one brave man with a conscience could stand up for us all.
Robert Kuttner in his Business Week column proclaimed that:
Black's book is partly the definitive history of the savings-and-loan industry scandals of the early 1980s. More important, it is a general theory of how dishonest CEOs, crony directors, and corrupt middlemen can systematically defeat market discipline and conceal deliberate fraud for a long time -- enough to create massive damage.
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 and kill and maim thousands. 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, and he now teaches White-Collar Crime, Public Finance, Antitrust, Law & Economics.
In the video interview below, published this morning, Black talks here with The Real News Network's Paul Jay about ways that President Obama can address and deal with the current bizarre republican arguments detaching the debt problem from the real economy that Obama raised in his speech Wednesday, saying that:
The economy has stopped delivering for anybody other than the ultra-rich. That's what needs to be fixed. So what happened that the economy stopped delivering?
Because we bought into this thing... about we're a nation of can-do folks that don't believe in government intervention, you know, like it's not appropriate for the government to do anything, and if we just got it out of the way, private business would be so efficient that we would all get rich.
Well, we did that, we tried that for 20-plus years--actually, 30 years. And the answer is: yeah, the top 0.1 percent gets staggeringly rich; the bottom 90 percent get nothing.
That's what we've got to fix. And to fix that, you do need active government intervention. Where do you need it? You need it in regulation to prevent these waves of financial fraud. You need it in terms of antitrust, because now we have incredible accumulation of monopoly power throughout our economy. And guess what? It's completely inefficient.
You need it to protect the rights of working people. Instead of destroying union rights, you need more effective unions. You need to reevaluate the entire trade policies, where the government, after all, does act, acts on the behest of big business, and it--what our leading export is is we export American jobs abroad. So, yes, we need to act.
Obama Delivers Republican Arguments
Bill Black: Obama detaches the debt problem from the real economy
BARACK OBAMA: America's finances were in great shape by the year 2000. We went from deficit to surplus. America was actually on track to becoming completely debt-free, and we were prepared for the retirement of the baby boomers. But after Democrats and Republicans committed to fiscal discipline during the 1990s, we lost our way in the decade that followed. We increased spending dramatically for two wars and an expensive prescription drug program. But we didn't pay for any of this new spending. Instead, we made the problem worse with trillions of dollars in unpaid-for tax cuts, tax cuts that went to every millionaire and billionaire in the country, tax cuts that will force us to borrow an average of $500 billion every year over the next decade.
JAY: Now joining us from Kansas City to give his views of President Obama's views is Bill Black. He teaches economics and law at the University of Missouri-Kansas City. He's also the author of the book The Best Way to Rob a Bank Is to Own One. Thanks for joining us again, Bill.
BLACK:: Thank you.
JAY: So, first of all, what do you think of President Obama's analysis of how we got into this crisis?
BLACK:: Well, it's like the Great Recession disappeared--and that's the primary cause of the deficit. So it's kind of weird. And there's a reason he's not talking about it, of course, and that is most all of this debate, this deficit hysteria, has nothing to do with anything. It's the real economy that matters. And let's take what the president said. The president correctly says that we ran budget surpluses near the end of the Clinton administration. Did that lead to good things economically? Well, no. It was followed promptly by a recession that, again, disappeared in his telling of the tale. But we had a sharp recession in 1991. And by the way, we have seven times in the United States substantially reduced deficits, often producing budget surpluses, and those seven cases where we've done that have been followed by seven depressions, if you count this one as a depression as well. And, of course, the jury's still out, but it's certainly the Great Recession at a minimum. So you can, quote-unquote, "put your federal deficit in order", and it doesn't translate to having a good economy. And it doesn't even translate to having a sustainable low deficit, because if you produce the recessions--and we've produced two massive recessions--then it's guaranteed that you're going to have very large deficits. And those disappear from the president's taking. And, of course, it also raises the question that largely disappears from the president's speech, and that is, wait a minute, we're in a great recession--or, you know, maybe hypertechnically it's ended, but we still have the 25 million people unemployed or underemployed who want to work full time. Our crisis has nothing to do with deficits or debt and everything to do with wasting the resources of 25 million Americans.
JAY: So let me just make sure I'm getting this clear. What you're saying is the reasons for these deep and profound recessions is not because there's too much government debt; it's because of essential--the fundamentals of how this economy works and the things that cause unemployment, where President Obama seems to be picking up the discourse of the Republicans that the problem isn't what's causing unemployment, just picking up the issue of debt all by itself.
BLACK:: Yeah, and picking up, as you say, every major Republican theme, all of which are false economically, and treating them as if they were real. And this is bizarre, and it leads to fundamental incoherence of his message. Look, we are in the Great Recession, or if you want to get hypertechnical, we're just starting to come out of the Great Recession and we could easily go back into the double dip. And in these circumstances you want to have a very substantial deficit. That is a good thing. That's called an automatic stabilizer. And it means that the recession lasts less long and that it is far less severe. And that means, if you care about budget deficits, that the budget deficit will be smaller because you ran a deficit. Now, that may seem strange to people, but that's what economists have understood. And we try the alternative periodically. Of course, most famously, we did back in 1936 and 1937, when President Roosevelt's very conservative economic advisors said, oh, you must balance the budget or terrible things will happen. Well, he did, and the economy, which had substantially improved, went sharply back into Great Depression, and only the war helped bring us out of that, with again, of course, massive deficits, which is what brought the recovery.
JAY: But doesn't the president have a point, that there is an issue of how much revenue does the government have and how much it spends, and that during the Bush years, as he relates, there were two wars, there was a massive tax cut, and this pharma program, and there was no measures on the revenue side to pay for it? So there is an issue in terms of the debt of the government in that way. Doesn't he make a point here?
BLACK:: But none of that had anything to do with causing the Great Recession, and it's the Great Recession which overwhelmingly creates deficits, because when you have a great recession, 10 million Americans lose their jobs, lose their incomes. And that means revenue falls precipitously, as it should, because the alternative is even worse. The alternative is you make the recession ever deeper, as was done in 1936 and 1937, and the results were disastrous. Now, we're supposed to be able to learn some lessons from history, and that whole process, the whole Great Recession, disappears from President Obama's tale. And it's--he acts like, oh, well, you know, because we had budget deficits, we had a crisis. That's not true at all.
JAY: Well, the other thing that he doesn't mention when he says the finances were in good order in the year 2000 is that much of the deregulation that led to the finance sector crashing and then triggering this depression actually happened in the late 1990s.
BLACK:: Yes, and that's the real point. So what really happened, as you say, it started definitely in the latter years in the Clinton administration, but it went massively bigger. The deregulation, the desupervision, the de facto criminalization--what I call the three D's--got vastly worse under the Bush administration, and that produced the mother of all financial bubbles. When that collapsed, it created the Great Recession, and it created all of the--you know, the great bulk of the budget deficits. So that's--.
JAY: Okay. Let me play another clip for you a little further. Here's what President Obama had to say.
OBAMA: By 2025, the amount of taxes we currently pay will only be enough to finance our health-care programs Medicare and Medicaid, social security, and the interest we owe on our debt. That's it. Every other national priority--education, transportation, even our national security--will have to be paid for with borrowed money. So, ultimately, all this rising debt will cost us jobs and damage our economy.
JAY: President Obama says by 2025 the amount of taxes we're currently paying will only be enough to finance health-care programs, social security, and the interest on the debt, and there'll be no money for anything else. So what do you make of that as a prediction? 'Cause he seems again to be taking on the basic argument that the problem is government debt and there won't be any revenues.
BLACK:: Yeah. It's just plain wrong economically. Economically the president is incorrect. I mean, what he's adopting is this budget commission that he created, which was from start to finish--you know, the two chairs of it were picked because everybody knew what they were going to say. They've said for, you know, last two decades of their lives, the sky is falling, the sky is falling, there's deficits, da-da, da-da, da-da, and they ignored the Great Recession, they ignored the things that caused the Great Recession. All of the things that could have been done successfully from the government disappear from their story. Right? The government--.
JAY: For example?
BLACK:: For example, the government could have said, you know, liar's loans, bad idea; we're not going to allow them. Had it done that, there would be no Great Recession. And only the government can do that. So if you want to deal with deficits, if you want to deal with the job-killing of 10 million American jobs, then you need effective financial regulation. And that means you need to spend more. And what the Republicans are proposing is dramatic cuts in all of the key regulatory agencies. This goes well beyond finance. They want to slash all the agencies that protect us against pollution as well. All of these things, the president is acting like the key issue is deficit. It isn't.
JAY: And the other side of the equation of how this argument gets detached from the real economy is certainly one of the fundamental underlying reasons for the recession is the fact that people's wages have barely moved since the early 1970s. There hasn't--during this whole supposed boom years, so much of it was fueled by credit card and other forms of debt. And so by looking at this issue of revenues and debt as if it's completely isolated from the real economy, the one word that never gets talked about is wages.
BLACK:: Well, wages don't get talked about, and government effectiveness doesn't get talked about. So--and there used to--for those who are old enough, you may remember the commercials "pay me now or pay me later". And you can pay now to have effective regulation, in which case it's going to cost you, you know, hundreds of millions of dollars, or you can try not regulating, in which case it's going to cost you a great recession, it's going to cost you 10 million jobs, it's going to cost you a loss of wealth of $10 trillion--a trillion is a thousand billion.
JAY: Well, when it came to taxes, President Obama actually drew a line in the sand. And he hasn't been drawing many lines in the sand in this presidency. Here's what he had to say about the issue of the extension, further extension of Bush tax cuts. Here it is.
OBAMA: We can somehow afford more than $1 trillion in new tax breaks for the wealthy. Think about that. In the last decade, the average income of the bottom 90 percent of all working Americans actually declined. Meanwhile, the top 1 percent saw their income rise by an average of more than a quarter of a million dollars each. That's who needs to pay less taxes?
JAY: So, you know, he's drawing a line saying he--further on, he says he's simply not going to allow the extension of tax cuts any further. So, first of all, I'll ask you what you think of that. But there's another side to it. He acknowledges the fact that the incomes of the lower 90 percent have actually gone down. But one hears nothing in any of the policies that might lead to those incomes going up.
BLACK:: Yes. I mean, that's the key, isn't it? I mean, he's mentioned as almost a casual fact, as a sub-subset of an argument on taxes, the massive thing, and that is the economy doesn't work. The economy has stopped delivering for anybody other than the ultra-rich. That's what needs to be fixed. So what happened that the economy stopped delivering? Because we bought into this thing that's [inaudible] front of the president's speech about we're a nation of can-do folks that don't believe in government intervention, you know, like it's not appropriate for the government to do anything, and if we just got it out of the way, private business would be so efficient that we would all get rich. Well, we did that, we tried that for 20-plus years--actually, 30 years. And the answer is: yeah, the top 0.1 percent gets staggeringly rich; the bottom 90 percent get nothing. That's what we've got to fix. And to fix that, you do need active government intervention. Where do you need it? You need it in regulation to prevent these waves of financial fraud. You need it in terms of antitrust, because now we have incredible accumulation of monopoly power throughout our economy. And guess what? It's completely inefficient. You need it to protect the rights of working people. Instead of destroying union rights, you need more effective unions. You need to reevaluate the entire trade policies, where the government, after all, does act, acts on the behest of big business, and it--what our leading export is is we export American jobs abroad. So, yes, we need to act. Now, the president, no one--you know, the tax breaks for the wealthy are just as bad today as they were last year when the president caved on them, when he could have stopped them. So who's going to believe that he isn't going to cave now? After all, last week he caved--. People start out saying, we want $36 billion in budget cuts, and you give them every dollar that they want, and they say, well, good, that's the--you know, bullying works; I'll up my demands. And what did the president get in return? Did he get a single dollar of increased taxes on the wealthy? Did he push for it? No, and no. So does anyone really believe that he's going to get these tax cuts for the wealthy through the House?
JAY: Thanks very much for joining us, Bill.
BLACK:: Thank you.
JAY: Thank you for joining us on The Real News Network. And don't forget the donate buttons, 'cause if you don't do that, we can't do this.