New Economic Perspectives

William K. Black
January 14, 2019     Bloomington, Mn

Kate Berry, the American Banker reporter that covers consumer financial protection, has written another important article about the continuing horror story of Trump’s increasingly successful efforts to pervert the Consumer Financial Protection Bureau (CFPB) into an agency dedicated to harming consumers and protecting our Nation’s most predatory lenders.  Unfortunately, her January 14, 2019 article is behind a paywall.

The Predatory ‘Sweet Spot’

The context is one of the CFPB’s most important and useful anti-predatory lending rules by payday lenders.  Payday lenders often charge working class Americans interest rates well above 100 percent.  (In Missouri, a hotbed of predation, they can charge more than 500 percent.)  The ‘sweet spot’ for payday lenders is borrowers who will be unable to repay promptly the initial loan (with an obscene, but vastly lower initial interest rate).  This sets off a cycle of additional borrowing and extending of payday loans that places the borrower into a debt spiral that frequently results in bankruptcy.  Payday lenders, who exist to predate on customers, make their extraordinary profits largely from borrowers who cannot repay the initial payday loan when it comes due, but have some income and will continue to reborrow and attempt to repay for months.  Predatory payday lenders optimize by finding this ‘sweet spot’ of those who have enough income and a compelling intent to repay – but not enough income to pay off the entire series of loans.

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William K. Black
December 17, 2018     Bloomington, MN

In 1983, Federal Home Loan Bank Board Chairman Richard (Dick) Pratt published his Agenda for Reform about how to deal with the savings and loan debacle.  He had just made that debacle inevitable by deregulating and desupervising the industry.  In his Agenda, he called for some protective steps (none of which he took or even proposed as rules), but overwhelmingly called for more deregulation and desupervision while promising that the raging fraud epidemic he had super-charged could not occur.

Pratt put three quotations on the front and back covers of his Agenda.  Two of the passages admitted his knowledge that deregulating and desupervising the industry at a time when it was endemically insolvent could greatly increase losses.  Both of those quotations went on to explain Pratt’s real concern about those increased losses to the public – they might discredit deregulation.  The greatly increased losses to the public did not horrify him.  The fact that that deregulation would trigger those losses did not horrify him.  The thing that horrified him was that the public might realize that deregulation and desupervision caused widespread fraud and losses and this could lead the public to block, or even roll back, dangerous deregulation and desupervision.

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William K. Black
December 18, 2018     Bloomington, MN

On December 13, 2018, the Wall Street Journal published an interesting op ed by Jesse M. Fried, a famous law professor in multiple areas of corporate law, and Matthew Schoenfeld, who works at a hedge fund that is the leading funder of civil lawsuits, primarily fraud and tort suits.  The title is “Will China Cheat American Investors?  The answer, of course, is yes – it will continue to cheat American (and non-American) investors.  Fried also has a strong background in economics, which is relevant to his op ed and my blog article.

The op ed is interesting in part because it was published just after a documentary on Chinese stock fraud (“The China Hustle”) had its general video release.  The China Hustle explores the pervasive defrauding of primarily U.S. investors by those that control Chinese corporations.  Though the documentary does not make the point, it is describing “accounting control fraud.”  A ‘control fraud’ is a seemingly legitimate entity used by the person that controls it as a “weapon” to defraud or predate.  For the sake of brevity, I use “CEO” rather than “the person that controls the corporation.”

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William K. Black
December 13, 2018     Bloomington, MN

The Wall Street Journal published an article on December 12, 2018 that should warn us of coming disaster:  “Banks Get Kinder, Gentler Treatment Under Trump.”  The last time a regulatory head lamented that regulators were not “kinder and gentler” promptly ushered in the Enron-era fraud epidemic.  President Bush made Harvey Pitt his Securities and Exchange Commission (SEC) Chair in August 2001 and, in one of his early major addresses, he spoke on October 22, 2001 to a group of accounting leaders.

Pitt, as a private counsel, represented all the top tier audit firms, and they had successfully pushed Bush to appoint him to run the SEC.  The second sentence of Pitt’s speech bemoaned the fact that the SEC had not been “a kinder and gentler place for accountants.”  He concluded his first paragraph with the statement that the SEC and the auditors needed to work “in partnership.”  He soon reiterated that point:  “we view the accounting profession as our partner” and amped it up by calling accountants the SEC’s “critical partner.”

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William K. Black
December 8, 2018      Bloomington, MN

The funeral services for President George HW Bush triggered Ross Douthat’s nostalgia for the “aristocratic virtues of the old WASP establishment, and a disappointment with the meritocracy that has risen in its place.”  This column ignores his nostalgia and alleged virtues and discusses briefly his bizarre assumption that a “meritocracy” runs America.  Given the 2008 Great Financial Crisis (GFC) and President Trump, I thought that the meritocracy fantasy was dead.  We are far closer to anti-meritocracy (a kakistocracy).    Continue reading →

William K. Black
Associate Professor of Economics and Law, UMKC
December 5, 2018     Bloomington, MN  55437

I cannot write many blogs during the fall semesters because I teach four classes (I co-teach one of them).  The fall term of instruction at UMKC is now over so I am writing one piece before turning to grading.  I have recently done additional research on a topic I know is of great interest – the prosecution of elite white-collar criminals.  I have organized it in the form of a game in which the reader guesses who authored the quoted passage. Continue reading →

Executives of Sears stand to gain up to $1 million in bonuses, should Sears be liquidated, and $500,000 if it’s restructured. Meanwhile, ordinary workers at Sears are being laid off without severance payments. NEP’s Bill Black appears on the Real News Network and talks about how US bankruptcy law is rigged to favor executives. You can view with transcript here.

The contest for Amazon’s HQ2 prompted hundreds of cities to put in tax break and subsidy bids. NEP’s Bill Black appears on the Real News Network and says these deals never pay off for the communities involved. You can view with a transcript here.