Monthly Archives: April 2014

Why Does Refusing to Put Fraudulent Banks into Receivership Help the Economy?

By William K. Black

Conservative economists love “creative destruction.” They can’t wait to “get their Schumpeter on” when a business fails and thousands of workers lose their jobs. There is no more “creative destruction” conceivable than when we put a bank that has become a fraudulent enterprise into receivership, remove the controlling officers leading the fraud, and sell the bank through an FDIC-assisted acquisition. Indeed, the pinnacle of creative destruction would be doing this with a systemically dangerous institution (SDI) through a process that split the supposedly “too big to fail” bank into smaller components that (1) were no longer large enough to pose a systemic risk, (2) were more efficient than the bloated SDI, (3) no longer extorted a large (implicit) government subsidy that made real competition impossible, and (4) no longer had dominant political power via crony capitalism. Unlike the situation in which an SDI collapses suddenly in the midst of causing a global crisis when its frauds cause a liquidity crisis, it is vastly easier to put fraudulent SDIs in receivership in today’s circumstances. Unlike Arthur Anderson, the receivership power allows us to keep the enterprise alive and create more competitors rather than fewer.

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Piketty’s Regressive Views on Public Debt and the Potential Impact of His Book

By Philip Pilkington
(Cross posted from Fixing The Economists)

uncle_sam_brokePiketty’s Wikipedia page says that he’s a Keynesian. Well, I don’t see it at all. His book contains a section on the public debt in historical perspective and it is desperately misinformed.

A caveat first though: I actually like Piketty’s book in a lot of ways. While not extremely well written, it is highly readable (if you are an historical data sort of person). And it is very nice to see what is effectively a work of economic history get so much play. Because economists should be far more interested in reality than in modelling and this book could spur that interest.

But the history presented in Piketty’s book is selective and, I think, ultimately untrustworthy. Even the way he chooses to present data — both in terms of the averaging of the time periods and aggregates used — is often quite misleading. I don’t want to get too far into this here but I’m pretty concerned that people who are broadly ignorant about economic history are reading this book and coming away, in many ways, misinformed.

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It’s Good – no – Great to be the CEO Running a Huge Criminal Bank

By William K. Black

Every day brings multiple new scandals.  At least they used to be scandals.  Now they’re simply news items strained of ethical content by business journalists who see no evil, hear no evil, and speak not about evil.  The Wall Street Journal, our principal U.S. financial journal ran two such stories today.  The first story deals with tax evasion, and begins with this cheery (and tellingly inaccurate) headline: “U.S. Banks to Help Authorities With Tax Evasion Probe.”  Here’s an alternative headline, drawn from the facts of the article: “Senior Officers of Goldman Sachs and Morgan Stanley Aided and Abetted Tax Fraud by Wealthiest Americans, Failed to Make Required Criminal Referrals, and Demanded Immunity from Prosecution for Themselves and the Banks before Complying with the U.S. Subpoenas: U.S. Department of Justice Caves in to Banker’s Demands Continuing its Practice of Effectively Immunizing Fraud by Most Financial Elites.”

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Are We An Oligarchy Yet?

By Joe Firestone

Matt Stoller believes that the recent pre-publication release of a study by Martin Gilens and Benjamin I. Page doesn’t support the idea that the United States is an oligarchy yet. He says:

A lot of people are misreading this Princeton study on the political influence of the wealthy and business groups versus ordinary citizens. The study does not say that the US is an oligarchy, wherein the wealthy control politics with an iron fist. If it were, then things like Social Security, Medicare, food stamps, veterans programs, housing finance programs, etc wouldn’t exist.

What the study actually says is that American voters are disorganized and their individualized preferences don’t matter unless voters group themselves into mass membership organizations. Then, if people belong to mass membership organizations, their preferences do matter, but less so than business groups and the wealthy.

Well, it’s true that Gilens and Page never say that United States is an oligarchy, and perhaps it’s also true that they don’t believe it. But they do say this:

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Stephanie Kelton Talks with Randy Wray

Stephanie’s latest podcast. This episode is a broad-ranging discussion of conventional economics and the heterodox alternatives to IS/LM, Ricardian equivalence, among others.


The New Book on Regulation I Just Decided to Write: Blame it on Monaco

By William K. Black

This is the third article in a series of columns devoted to financial regulation prompted by the comments of a Swiss academic at the XIIth Annual CIFA Forum in Monaco. (See first here and second here.)

Having spent 20 years as a non-academic professional, I still find it odd the directions in which a single speaker or writer can start an academic on a convoluted path of research that spans multiple disciplines and eras and produces a series of “light bulb” analytical moments. And that prompts a digression into a symptom of the problem illuminated by that series of moments that has led me to decide to write a book on regulation.

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Why Did George Kaufman, the Father of “Prompt Corrective Action” (PCA), Hate Ed Gray so Much that He Opposed Gray’s Embrace of PCA?

By William K. Black

This is the second installment of a series arising from my recent participation in CIFA’s XIIth Annual International Forum in Monaco.  The series was prompted by Dr. Hans Geiger’s rage at financial regulation in Europe – not at its pathetic weakness that produced the criminogenic environments through much of the Eurozone, but at the proposal that Swiss banks be required to make criminal referrals when they found evidence of likely criminality by their customers.  This inspired me to wonder why a requirement that has existed in the U.S. for over 30 years would lead to such raw animus against “bureaucrats” serving “big brother” (i.e., the democratically elected Swiss government).

Geiger is a member of the European Shadow Financial Regulation Commission, which I will call the “EU Shadow” for the sake of brevity.  I am familiar with the US Shadow.  There are interesting (if you are a fellow wonk) articles by members of the EU Shadow about its creation and its conception of what it intends to achieve and how it will do so.  I will refer to the 2004 article by the EU Shadow’s chairman, Harald A. Benink.

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By J.D. Alt

Recently I came across a passage from John Steinbeck’s Grapes of Wrath: One of the Joad-clan migrant farmer characters, upon learning that “there’s a newspaper fella near the coast, got a million acres,” replies—“If he needs a million acres to make him feel rich, seems to me he needs it ‘cause he feels awful poor inside hisself.”

I don’t think I’ve ever heard or read a more succinct description of the underlying reality of the income-inequity issue that has moved to the front page of our national dialog. As part of that dialog, I keep trying to frame a case for radical change that the status quo will actively embrace—for the simple reason that if that were to happen, the radical change itself would be more likely to occur—but also, I realize now, because the status quo “feels so awful poor inside hisself”, it will never embrace radical change unless it believes the change will make it feel richer—and, finally, because from my perspective MMT uniquely makes this paradoxical set of relationships possible.

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Corporate CEOs Demand that they be Tipped Off When a Whistleblower Reports their Crimes

By William K. Black

I’m writing on the flight returning from the XIIth International CIFA Forum in Monaco. CIFA is an NGO.  It is a confederation of independent financial advisor organizations that works with the UN in promoting the protection of investors.  This means that their clients are often very wealthy and that many of the participants are speakers are very conservative or libertarians (or an admixture).  One of the speakers, Dr. Hans Geiger, gave an impassioned denunciation of “bureaucrats” (which turned out to mean anyone who worked for the government) and the imposition of a duty on bankers to file criminal referrals when they had a “reasonable suspicion” that their clients had committed certain crimes.  The official U.S. jargon for a criminal referral is “Suspicious Activity Reports” (SARS).  Geiger was particularly distressed that the banker would not be allowed to inform his client that he was making the criminal referral (which FATF terms “Suspicious Transaction Reports” (STRs)) under the standard 21 proposed by the Financial Action Task Force in 2012.

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Did Canada’s Middle Class Just Get More Affluent Than the US’s, or Did that Happen Long Ago?

The New York Times and Dave Leonhardt’s Upshot section made a big splash a few days ago by reporting on a study showing that the Canadian middle class had caught the US middle class in median income and likely surpassed it since. The study is based on an effort to measure median income per capita after taxes, and its results are presented as something truly significant.

However, I think the study is biased in that in median income per capita after taxes, it selected the wrong measure. What is needed is a measure of income or affluence that takes account of the value of cross-national variations in Government benefits delivered to the middle classes. Since the United States has lower taxes than most comparable nations, but delivers much less in safety net and entitlement benefits, it’s pretty clear that the measure used in the study reported on by The Times overestimates the real median income of the US middle class in comparison with the middle classes of other comparable nations and provides a misleading impression of the relative affluence of the American middle class.

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