Change we can believe in – if only!

A funny thing has happened almost by stealth sometime in the last two weeks or so.  Progressives, who might be excused for thinking that Obama’s election would indeed lead to “change we can believe in”, have had to admit that he’s getting it wrong, badly wrong as far as the financial crisis is concerned.

Now an excellent interview with William Black on Bill Moyers Journal provides much of the context and moreover shed an uncomfortable light on developments on this side of the pond.  (The video is about 30 minute long but well worth it.  A transcript is provided if you prefer).

William K Black is now professor of Economics and Law at the University of Missouri, Kansas City and was formerly a regulator during the savings and loan crisis of the late 80s. 

Black’s thesis is simple; the financial crisis is driven by fraud on an epic scale.   He explains to Moyers how it works:

WILLIAM K. BLACK: Well, the way that you do it is to make really bad loans, because they pay better. Then you grow extremely rapidly, in other words, you’re a Ponzi-like scheme. And the third thing you do is we call it leverage. That just means borrowing a lot of money, and the combination creates a situation where you have guaranteed record profits in the early years. That makes you rich, through the bonuses that modern executive compensation has produced. It also makes it inevitable that there’s going to be a disaster down the road.

BILL MOYERS: So you’re suggesting, saying that CEOs of some of these banks and mortgage firms in order to increase their own personal income, deliberately set out to make bad loans?

WILLIAM K. BLACK: Yes.

He goes on to explain that the big banks knoew perfectly well that the liar loans and the like were fraudulent, but that complex financial instruments were deliberately created so that swindlers could exploit them.  The fraud became widespread.

BILL MOYERS: And was this happening exclusively in this sub-prime mortgage business?

WILLIAM K. BLACK: No, and that’s a big part of the story as well. Even prime loans began to have non-verification. Even Ronald Reagan, you know, said, “Trust, but verify.” They just gutted the verification process. We know that will produce enormous fraud, under economic theory, criminology theory, and two thousand years of life experience.

And now there’s a cover up.

BILL MOYERS: Yeah. Are you saying that Timothy Geithner, the Secretary of the Treasury, and others in the administration, with the banks, are engaged in a cover up to keep us from knowing what went wrong?

WILLIAM K. BLACK: Absolutely.

But the whole thing tracks back to a small number of individuals.

BILL MOYERS: This wound that you say has been inflicted on American life. The loss of worker’s income. And security and pensions and future happened, because of the misconduct of a relatively few, very well-heeled people, in very well-decorated corporate suites, right?

WILLIAM K. BLACK: Right.

BILL MOYERS: It was relatively a handful of people.

WILLIAM K. BLACK: And their ideologies, which swept away regulation. So, in the example, regulation means that cheaters don’t prosper. So, instead of being bad for capitalism, it’s what saves capitalism. “Honest purveyors prosper” is what we want. And you need regulation and law enforcement to be able to do this. The tragedy of this crisis is it didn’t need to happen at all.

Which brings us back to the beginning.  How is a highly intelligent man like Obama getting it so badly wrong?   Ditto Gordon Brown?

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2 responses to this post.

  1. Posted by tom langley on 23 April 2009 at 10:10 am

    Listened to the entire Moyers/Black clip in vain waiting for them to mention the culpability of the Federal government in the crisis, that is Fannie Mae and Freddie Mac. The usual mantra. “The private sector is evil and central planning is our savior.” Ignorance truly is the most expensive commodity in America.

    Reply

  2. Posted by liberaleye on 24 April 2009 at 11:44 am

    On the basis of this interview (and other stuff), I’m very sure that William Black is NOT a supporter of “central planning” nor someone who thinks the private sector “evil”.

    What he is against is fraud; so am I. It is wrong to frame this as some sort of conflict between the public and private sectors.

    Reply

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