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By William K. Black

(via the Huffington Post)

I get President Obama’s “regulatory review” plan, I really do. His game plan is a straight steal from President Clinton’s strategy after the Republican’s 1994 congressional triumph. Clinton’s strategy was to steal the Republican Party’s play book. I know that Clinton’s strategy was considered brilliant politics (particularly by the Clintonites), but the Republican financial playbook produces recurrent, intensifying fraud epidemics and financial crises. Rubin and Summers were Clinton’s offensive coordinators. They planned and implemented the Republican game plan on finance. Rubin and Summers were good choices for this role because they were, and remain, reflexively anti-regulatory. They led the deregulation and attack on supervision that began to create the criminogenic environment that produced the financial crisis.

The zeal, crude threats, and arrogance they displayed in leading the attacks on SEC Chair Levitt and CFTC Chair Born’s efforts to adopt regulations that would have reduced the risks of fraud and financial crises were exceptional. Just one problem — they were wrong and Levitt and Born were right. Rubin and Summers weren’t slightly wrong; they put us on the path to the Great Recession. Obama knows that Clinton’s brilliant political strategy, stealing the Republican play book, was a disaster for the nation, but he has picked politics over substance.

I explained in a prior column how the anti-regulators made the crisis possible and caused the loss of over 10 million jobs. 

Anti-regulation proved to be a profoundly negative sum “game” in the financial sphere. Both principals — the home borrower and the lender — lost (negative Pareto optimality). The unfaithful “agents,” however, made out like bandits. 

Effective financial regulation is essential to protect honest firms and consumers from the frauds — it is distinctly positive sum. The primary purpose of financial regulation is to limit fraud. President Obama, Summers, and OMB do not understand this fundamental aspect of financial regulation — limiting fraud. Consider this portion of the President’s letter:

This is the lesson of our history: Our economy is not a zero-sum game. Regulations do have costs; often, as a country, we have to make tough decisions about whether those costs are necessary.
Voluntary transactions should be positive sum — both parties are typically made better off. Fraud causes negative sum transactions. Regulators are the “cops on the beat” in finance. If cheaters prosper, then “private market discipline” drives honest firms and officers out of the marketplace. Vigorous financial regulation is essential to the effective prosecution of elite criminals. Many of the best financial regulations impose virtually no cost. The traditional underwriting rules, for example, would have been exceeded by any honest, competent bank. Indeed, the rules reduced costs to honest firms. The rules imposed material costs only on dishonest managers — and that reduces costs to hones firms and managers. Net, underwriting rules produce enormous net-benefits. That is equivalent to saying that they have a negative cost. The underwriting rules designed primarily to reduce fraud also reduce losses from incompetence, unrecognized risk, and mistake. This means that financial rules designed primarily to reduce fraud are essential to convert the negative sum (fraudulent) transactions that would prevail absent regulation into positive sum (honest) transactions. Because fraud can impose severe “negative externalities,” this transaction-based analysis dramatically understates the net cost savings of effective safety and soundness regulation.

Obama’s proposal and the accompanying OMB releases do not mention the word or the concept of fraud. Despite an “epidemic” of fraud led by the bank CEOs (which caused the greatest crisis of his life), Obama cannot bring itself to use the “f” word. The administration wants the banks’ senior officers to fund its reelection campaign. I’ve never raised political contributions, but I’m certain that pointing out that a large number of senior bank officers were frauds would make fundraising from them awkward.

President Obama’s explanation for his regulatory review program warrants detailed analysis in multiple columns. He decided to place it in the Wall Street Journal as a symbol of his efforts to placate Wall Street (only two sentence of his letter refer to small businesses).

My first column discussing his regulatory review program focuses on gaps in financial “safety and soundness” regulation. This is an area I lived, research, write about, and teach. (If you look at my bio you will see that public administration experts write about my experiences as a regulator.) Obama entitled his letter: “Toward a 21st-Century Regulatory System.” Where have we heard that mantra before? When President Clinton signed the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 Larry Summers proclaimed that the GLB Act was “a major step forward to the 21st century.”

Clinton’s two great deregulatory failures were the GLB Act and the Commodities Futures Modernization Act of 2000 (CFMA). The CFMA deliberately created a regulatory “black hole” for credit default swaps (CDS) by removing the CFTC’s authority to regulate CDS and a regulatory black hole in the trading of energy derivatives that helped Enron’s cartel produce the California energy crisis of 2001. The titles of both of these deregulatory acts included the word “modernization” and the great lie was that the acts they were repealing were archaic. The claim was that we needed a regulatory system designed for the 21st-Century. Summers, Obama’s principal economic advisor, framed Obama’s latest deregulatory foray.

Summers and Rubin remain unwilling to admit that their anti-regulatory financial policies were disastrous. Here’s what Obama said in late 2008 about the decisive role that anti-regulatory dogma played in causing the ongoing financial crisis.

“John McCain has spent decades in Washington supporting financial institutions instead of their customers,” [Obama] told a crowd of about 2,100 at the Colorado School of Mines. “So let’s be clear: What we’ve seen the last few days is nothing less than the final verdict on an economic philosophy that has completely failed.”

Obama’s subtitle is designed to illustrate stupid regulation: “If the FDA deems saccharin safe enough for coffee, then the EPA should not treat it as hazardous waste.” The example is supposed to be self-evident, clearly only regulators could do something so stupid. But the facts are inconvenient to Obama’s scorn — and this is his shining example, the best that the scores of OMB staff that review thousands of regulations could come up with to support this major administration initiative. This is the dumbest rule they found. Obama’s statement about saccharin may seem logical, but it is not. Animal studies originally showed that saccharine was carcinogenic in doses that a heavy consumer might experience. The EPA, therefore, classified the disposal of large amounts of saccharine as toxic. Subsequent studies are now interpreted as showing that saccharine is unlikely to be carcinogenic at such dosage levels. The EPA’s classification of saccharine as a hazardous substance for waste disposal purposes based on its carcinogenic effects in small doses was logical. The logic does not work automatically in reverse. An ingredient can be safe to consume by an individual consumer in extremely low doses yet hazardous in far larger doses. To sum it up, the supposedly dumb rule Obama chose as his lead example did not kill any meaningful number of jobs, was based on the best science then available, and wasn’t dumb.

Consider the overall logic of Obama’s approach to regulation. Under his logic during the campaign, the imperative need was to end the anti-regulatory dogma that was the disastrous product of “an economic philosophy that has completely failed.” When he became President, however, Obama placed Summers and Rubin, the leading Democratic Party purveyors of that completely failed philosophy, in charge of the administration’s financial regulatory policies. The administration’s policies are largely anti-regulatory. The most important indicators of this point are the things not in the President’s regulatory review program. Obama says that the lack of financial regulation made possible the financial crisis, but his regulatory review program does not require the administration to search out areas of inadequate regulation. Here is the closest Obama comes: “Where necessary, we won’t shy away from addressing obvious gaps….” Huh? The vital task is to find the non-obvious gaps. Why, two years into his presidency, has the administration failed to address “obvious gaps”? The administration does not need Republican approval to fill obvious gaps in regulation. Even when Obama finds “obvious gaps” in regulatory protection he does not promise to act. He will act only “where necessary.” We know that Summers, Rubin, and Geithner rarely believe that financial regulation is “necessary.” Even if Obama decides it is “necessary” to act he only promises to “address” “obvious gaps” — not “end” or “fill” them.

In the financial sphere, Obama has allowed “obvious gaps” to persist and, by listening to Summers’ continued embrace of an “economic philosophy that has completely failed” he has even made the gaps worse. Obama’s regulatory review program does not promise to fix any of the anti-regulatory actions taken or allowed to fester and grow under his administration. I provide twelve specific examples of these obvious gaps in financial regulation which have persisted and grown during this Obama’s first two years in office. (There are more than a dozen gaps, but it is premature to address some of them, e.g., Basel III, the Volcker rule, and the new consumer financial protection agency, because there is so much uncertainty about the rules that will emerge.) The gaps addressed here are those where Obama has not even proposed to take an action that could prove effective.

The “Dirty Dozen”

1. Executive compensation is so profoundly perverse that it is intensely criminogenic, but the administration has opposed the FDIC’s modest efforts to reduce the problem. (Both Treasury officials on the FDIC Board voted against the FDIC proposed rule to limit the perverse incentives of modern executive compensation.
2. Professional compensation is equally perverse. Bank CEOs created the perverse incentives that produced “echo” epidemics of fraud by appraisers, loan brokers, and mortgage bankers. Bank CEOs deliberately create a “Gresham’s” dynamic in order to create the perverse incentives that have routinely allowed them to suborn successfully “independent” professionals and turn them into fraud allies. As long as the CEO can hire and fire the independent professional he can succeed in suborning some of the professionals — and “some” is ample. Then Attorney General Cuomo’s investigation, for example, found that Washington Mutual kept a black list of appraisers — but appraisers were black listed if they refused to inflate the appraisals. (It is critical that the reader understand the significance of this finding. Only the lender and its agents can extort the appraiser in order to secure an inflated value. No honest lender would inflate, or permit the inflation of, appraised values. Appraisal fraud is a superb “marker” of accounting control fraud.) Dodd-Frank has some provisions seeking to improve appraisals and credit rating agencies, but the essential “gap” that must be closed now is the ability of the CEO to pick the independent professionals.
3. Honest accounting is the prerequisite effective financial regulation. The administration stood by while Bernanke, the Chamber of Commerce, and the specialized bank lobbyists used Congress to extort the Financial Accounting Standards Board (FASB) to pervert the accounting rules so that banks would not have to recognize their losses. The administration knows that perverting the accounting rules in this manner harms the public in many ways. Not recognizing losses creates fictional bank income and capital. Banks that are deeply insolvent and unprofitable are able to claim to be solvent and profitable. This allows the banks to evade the Prompt Corrective Action law and makes it more difficult for regulators to prevent expensive bank failures. It also allows the controlling officers to pay the officers tens of billions of dollars in bonuses that the officers have not earned. The same accounting scam makes the administration’s (self) vaunted “stress tests” a sham. Obama can end the banks’ accounting scams and end these anti-regulatory disasters at any time because banking regulators have the power to impose regulatory accounting principles that would restore honest accounting and restore effective bank regulation. I shouldn’t have to keep emphasizing this, but honesty in accounting is also essential to integrity – and integrity is essential to everything.
4. The accounting scams combined with the Fed’s secret bailouts of insolvent U.S. and foreign banks also allowed the administration to enter into a cynical gambit on TARP. The continuing Fed’s subsidies are far larger than TARP. Bank CEOs were eager to get out of the TARP restrictions on executive compensation. The administration was eager to claim (A) that it had resolved the banking crisis, and (B) that it did so for a pittance. The accounting cover up of bank losses combined with the Fed subsidies were the perfect (political) answer that met the banks’ and the administration’s greatest desires. The combination allowed the banks to repay TARP. The banks got to hide their losses, receive large subsidies and cheap liquidity from the Fed, and report fictional profits that allowed them to repay the TARP funds and pay large bonuses to their officers. The administration got to make the absurd claim that it had resolved the largest banking crisis in U.S. (measured in absolute dollars) for a pittance (roughly20 billion). (The real economy and real estate losses in the many trillions of dollars produced20 billion in bank losses. “Too good to be true” hardly does justice to the absurdity of Geithner’s claims that he “resolved” the failures virtually without cost.) The combination of covering up and secretly subsidizing the SDI’s losses also explains the SDIs’ unwillingness to lend to the real economy. It’s safer to borrow funds from the Fed at next to nothing, buy bonds, and clip coupons. This perverse dynamic is one of the important factors, along with fraud, that has made the economic recovery so weak. We are following the failed Japanese strategy.
5. The Fed is an “obvious gap” in regulation. The Fed has consistently sought to prevent the Congress and the public from learning the disgraceful facts of its bailouts and subsidies of the most undeserving rich in modern history. TARP did not resolve failures. The failures have been covered up and subsidized by the Fed. There is an urgent need to regulate the Fed. The Fed has a consistent record of regulatory failure and is actively hostile to transparency. During Obama’s term in office, Bernanke appointed as the head of all Fed examination and supervision an economist with no experience as an examiner or regulator. The economist is a strong proponent of the anti-regulatory economic philosophy that completely failed. Greenspan used him as the agency spokesman before Congress supporting the passage of the Commodities Futures Modernization Act of 2000 – the Act that created the multiple regulatory black holes that allowed the frauds that caused the California energy crisis of 2001 and contributed to the frauds that drove the ongoing financial crisis.
6. The Fed’s regional banks have private directors with untenable conflicts of interest. The U.S. has already reached the policy decision in 1989 that such conflicts pose an unacceptable danger of producing ineffective regulation when it enacted FIRREA, which removed any conceivable authority of the private directors over the regulatory process.
7. The administration could end the obvious gap in regulation known as the “too big to fail” doctrine at any time by adopting regulations that would stop the systemically dangerous institutions (SDIs) from growing and shrink them to the scale they would no longer pose a systemic risk within five years. (These regulatory gaps interact – many of the SDIs are insolvent yet are paying extraordinary bonuses to the officers that caused their massive, unrecognized, losses.) Instead, of shrinking the SDIs, the administration encouraged the SDIs to grow even larger and pose greater systemic risk. The administration opposed efforts to amend the Dodd-Frank bill to require the end of the SDIs. Remember, it is the administration that is telling us that there are 20 U.S. banks so large that as soon as the next one fails it is likely to trigger a systemic crisis. It is insane to roll the dice twenty times a day waiting for the next world crisis. The SDIs are one of those “obvious gaps” that the administration doesn’t find it politically correct to “address.” Effectively regulating the SDIs would be the antithesis of the administration’s campaign to ingratiate themselves with the SDIs.
8. The administration could end the scandal of the lack of prosecution of the accounting control frauds that created the epidemic of mortgage fraud that hyper-inflated the largest bubble in history and drove the financial crisis and the Great Recession. Effective prosecutions against elite bank frauds are possible only with effective regulation and supervision. We know that the banking regulatory agencies – which made well over 10,000 criminal referrals in response to the far smaller S&L debacle (producing over 1000 felony convictions in “major” cases against elites – made no, or a handful of criminal referrals in response to this crisis. The Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) made zero criminal referrals during the crisis. The FDIC apparently made a very small number of criminal referrals, probably not against elites. It is unknown whether the Fed made any criminal referrals. There is no evidence it made any significant criminal referrals. The banking regulators’ dereliction of their duties to make criminal referrals is so complete that the FBI formed a “partnership” with the Mortgage Bankers Association (MBA) – the trade association of the perps – rather than with the banking regulators. Unsurprisingly, the MBA claimed that the banks were the victims of borrowers and junior officers rather than the CEOs who knowingly created the perverse incentives that drove the epidemic of mortgage fraud.
9. Only 25 banks – during an “epidemic” of mortgage fraud – made any significant number of criminal referrals, and none of those referrals appear to have been made against the senior bank officers that caused those frauds. Federal rules mandate that the banks file criminal referrals against suspected mortgage fraud, so the data demonstrate endemic regulatory violations by banks. The data also demonstrate that the banks overwhelmingly did not want the FBI to prosecute the mortgage frauds. There is one obvious reason why the banks’ CEOs would be willing to violate a legal mandate to file criminal referrals. I have not found any evidence that the banking regulatory actions have brought enforcement actions against the banks committing these obvious, endemic violations of the law. The mortgage bankers and brokers were not federally insured and therefore were not subject to the rules mandating that they file criminal referrals when they found suspicious activities likely indicating mortgage fraud. The mortgage bankers and brokers, however, were permitted to file criminal referrals. Their nearly universal failure to do so was irrational for honest lenders and brokers – but optimal for control frauds. The administration has allowed the collapse of the criminal referral system within the regulatory agencies, and almost all lenders to continue on its watch. It could fix the scandal of elite bankers being able to loot with impunity without adopting any rules. Each collapse constitutes an “obvious gap” that urgently requires Obama’s attention.
10. The Mortgage Electronic Registration Service (MERS) is unregulated. MERS, at best, was a system designed to evade county recorder fees. No one – and that includes MERS’ controlling officials – knows the true condition of the mortgage instruments that MERS is supposed to be registering. At best, it is a scandal that threatens the stability of homeowners and holders of instruments that are supposed to be secured by mortgages. MERS is an “obvious gap” in regulatory protections that demonstrates once more the wealth and job destroying consequences of the “completely failed” anti-regulatory philosophy that Obama promised to root out.
11. The foreclosure scandal revealed an “obvious gap” in regulatory protections – no one regulates the foreclosure process. (The underlying epidemic of accounting control fraud by the nonprime mortgage lenders generated the “echo” epidemic of foreclosure fraud.) Bank of America, the second largest financial institution in America, acquired Countrywide in order to secure its personnel and its mortgage servicing portfolio. Countrywide was notorious for its fraudulent and predatory mortgage lending practices. Placing its employees in charge of servicing – the banking operation that controls the foreclosure process – guaranteed epic abuses. (Bank of America also managed to generate pervasive foreclosure abuses out of the staff it had prior to acquiring Countrywide.) Bank of America personnel, and personnel of other major servicers, eventually confessed that their foreclosure actions relied on massive, universal perjury (a felony). These “robo signing” crimes occurred at a frequency of roughly 10,000 monthly at more than one large servicer. Our most elite banks have confessed to committing hundreds of thousands of felonies.
12. Fannie and Freddie. These entities are twisting slowly in the wind. Private and regulatory leadership have been ineffective and have lacked courage. I’ll mention only two areas. Fannie and Freddie used some of the most abusive foreclosure law firms in existence. Citicorp’s key mortgage credit guy testified many months ago before the Financial Crisis Inquiry Commission (FCIC) that 80% of Citi’s mortgages sold to Fannie and Freddie were sold under false “reps and warranties.” The Citicorp official’s warnings to his superiors about this extreme incidence of fraud did not lead to corrective action, so the official cc’d Rubin on key correspondence. Naturally, Citi responded by firing the whistleblower rather than the frauds. If Fannie and Freddie put the bad paper back to Citi, then Citi would be insolvent and Rubin would face serious risks. Fannie and Freddie have put only relatively small amounts of Citi’s paper back to Citi. (Note that the extreme incidence of fraud, and a similar incidence has been shown in Countrwide mortgage paper, again demonstrates how completely failed the anti-regulatory model is.) I have explained previously why Fannie and Freddie, because of their large holdings of nonprime paper from many originators and their dealings with credit rating agencies, offer unique data bases and opportunities for research to document exactly what wrong and how the fraud epidemic, bubble, and financial crisis grew and spread. This is a more subtle, but enormously important and dangerous regulatory gap.

L. Randall Wray and William K. Black were interviewed for NPR’s report, “Faulty Paperwork May Slow Millions of Foreclosures.”

http://www.npr.org/v2/?i=132930409&m=133012333&t=audio

By William K. Black

(via Huffington Post)

The new mantra of the Republican Party is the old mantra — regulation is a “job killer.” It is certainly possible to have regulations kill jobs, and when I was a financial regulator I was a leader in cutting away many dumb requirements. But we have just experienced the epic ability of the anti-regulators to kill well over ten million jobs. Why then is there not a single word from the new House leadership about investigations to determine how the anti-regulators did their damage? Why is there no plan to investigate the fields in which inadequate regulation most endangers jobs? While we’re at it, why not investigate the areas in which inadequate regulation allows firms to maim and kill. This column addresses only financial regulation.

Deregulation, desupervision, and de facto decriminalization (the three “des”) created the criminogenic environment that drove the modern U.S. financial crises. The three “des” were essential to create the epidemics of accounting control fraud that hyper-inflated the bubble that triggered the Great Recession. “Job killing” is a combination of two factors — increased job losses and decreased job creation. I’ll focus solely on private sector jobs — but the recession has also been devastating in terms of the loss of state and local governmental jobs.

From 1996-2000, for example, annual private sector gross job increases rose from roughly 14 million to 16 million while annual private sector gross job losses increased from 12 to 13 million. The annual net job increases in those years, therefore, rose from two million to three million. Over that five year period, the net increase in private sector jobs was over 10 million. One common rule of thumb is that the economy needs to produce an annual net increase of about 1.5 million jobs to employ new entrants to our workforce, so the growth rate in this era was large enough to make the unemployment and poverty rates fall significantly.

The Great Recession (which officially began in the third quarter of 2007) shows why the anti-regulators are the premier job killers in America. Annual private sector gross job losses rose from roughly 12.5 to a peak of 16 million and gross private sector job gains fell from approximately 13 to 10 million. As late as March 2010, after the official end of the Great Recession, the annualized net job loss in the private sector was approximately three million (that job loss has now turned around, but the increases are far too small).

Again, we need net gains of roughly 1.5 million jobs to accommodate new workers, so the total net job losses plus the loss of essential job growth was well over 10 million during the Great Recession. These numbers, again, do not include the large job losses of state and local government workers, the dramatic rise in underemployment, the sharp rise in far longer-term unemployment, and the salary/wage (and job satisfaction) losses that many workers had to take to find a new, typically inferior, job after they lost their job. It also ignores the rise in poverty, particularly the scandalous increase in children living in poverty.

The Great Recession was triggered by the collapse of the real estate bubble epidemic of mortgage fraud by lenders that hyper-inflated that bubble. That epidemic could not have happened without the appointment of anti-regulators to key leadership positions. The epidemic of mortgage fraud was centered on loans that the lending industry (behind closed doors) referred to as “liar’s” loans — so any regulatory leader who was not an anti-regulatory ideologue would (as we did in the early 1990s during the first wave of liar’s loans in California) have ordered banks not to make these pervasively fraudulent loans.

One of the problems was the existence of a “regulatory black hole” — most of the nonprime loans were made by lenders not regulated by the federal government. That black hole, however, conceals two broader federal anti-regulatory problems. The federal regulators actively made the black hole more severe by preempting state efforts to protect the public from predatory and fraudulent loans. Greenspan and Bernanke are particularly culpable. In addition to joining the jihad state regulation, the Fed had unique federal regulatory authority under HOEPA (enacted in 1994) to fill the black hole and regulate any housing lender (authority that Bernanke finally used, after liar’s loans had ended, in response to Congressional criticism). The Fed also had direct evidence of the frauds and abuses in nonprime lending because Congress mandated that the Fed hold hearings on predatory lending.

The S&L debacle, the Enron era frauds, and the current crisis were all driven by accounting control fraud. The three “des” are critical factors in creating the criminogenic environments that drive these epidemics of accounting control fraud. The regulators are the “cops on the beat” when it comes to stopping accounting control fraud. If they are made ineffective by the three “des” then cheaters gain a competitive advantage over honest firms. This makes markets perverse and causes recurrent crises.

From roughly 1999 to the present, three administrations have displayed hostility to vigorous regulation and have appointed regulatory leaders largely on the basis of their opposition to vigorous regulation. When these administrations occasionally blundered and appointed, or inherited, regulatory leaders that believed in regulating the administration attacked the regulators. In the financial regulatory sphere, recent examples include Arthur Levitt and William Donaldson (SEC), Brooksley Born (CFTC), and Sheila Bair (FDIC).

Similarly, the bankers used Congress to extort the Financial Accounting Standards Board (FASB) into trashing the accounting rules so that the banks no longer had to recognize their losses. The twin purposes of that bit of successful thuggery were to evade the mandate of the Prompt Corrective Action (PCA) law and to allow banks to pretend that they were solvent and profitable so that they could continue to pay enormous bonuses to their senior officials based on the fictional “income” and “net worth” produced by the scam accounting. (Not recognizing one’s losses increases dollar-for-dollar reported, but fictional, net worth and gross income.)

When members of Congress (mostly Democrats) sought to intimidate us into not taking enforcement actions against the fraudulent S&Ls we blew the whistle. Congress investigated Speaker Wright and the “Keating Five” in response. I testified in both investigations. Why is the new House leadership announcing its intent to give a free pass to the accounting control frauds, their political patrons, and the anti-regulators that created the criminogenic environment that hyper-inflated the financial bubble that triggered the Great Recession and caused such a loss of integrity?

The anti-regulators subverted the rule of law and allowed elite frauds to loot with impunity. Why isn’t the new House leadership investigating that disgrace as one of their top priorities? Why is the new House leadership so eager to repeat the job killing mistakes of taking the regulatory cops off their beat?

L. Randall Wray and Warren Mosler participated in a round table discussion for George Jarkesy’s “New Captains of Industry” show on blogtalkradio.com. The complete broadcast can be heard here.

William Black was interviewed yesterday on Bloomberg.  The full interview is available via youtube.com here.

William K. Black

Like the Sirens reputed to lure sailors onto rocks, a series of columnists who want President Obama to fail are praising Obama’s capitulation on extending the Bush tax cuts for the wealthy. The motif of these comments has three common characteristics – all designed to destroy the Obama presidency. First, and the chutzpah of this aspect is wondrous, those that hate Obama’s policies are telling Obama he is demonstrating his strength by surrendering on the Bush tax cuts to the wealthy. Second, they claim that Obama “moved to the center” by agreeing to support tax cuts for the wealthy. Third, they claim that Obama’s attacks on his strongest supporters are brilliant politics essential to saving his Presidency.

Dana Milbank’s recent column is one example of the three-part motif. The title of the column captures the first aspect: “Obama finally stands his ground.” What he means of course is that Obama failed to stand his ground, repudiating his promises to end the Bush tax cuts for the wealthy. Milbank also said that while extending the Bush tax cuts for the wealthy was “dumb,” Obama’s agreement to extend those tax cuts was the first thing that Obama had ever done that made Milbank “proud.” Milbank is finally “proud” because Obama is excoriating his strongest political supporters – the “liberals” who Milbank detests. Milbank’s explanation of why he detests liberals parrots conservative Republicans.

Monday, we were treated to the triple motif from another commentator who desperately wants Obama to fail. Mark Penn, the CEO of Burson-Marsteller, claims in a column entitled “Democrats need to back Obama” that:

By becoming reverse tax protesters (chanting “raise taxes”), the liberals are sending out all the wrong messages to a country that overwhelmingly backs the key elements of the bipartisan deal the president struck.

[T]he Democrats have got to stop returning to class warfare.

Obama took the first step this week in seeking to save his floundering presidency by moving to the center. His execution was far from perfect but his actions were sound.

Obama has now gone down a path he cannot and should not retreat from — governing from the center.

In a series of untruthful sentences, Penn hits each of the elements of the motif. Supporting the Bush tax cuts for the wealthy constitutes “moving to the center.” “Liberals” are the demons whose desire to raise taxes would doom the Obama Presidency. Bush doesn’t engage in “class warfare” when he cuts tax rates for the wealthiest Americans – anyone who opposes Bush’s tax cuts for the wealthy, however, is engaged in “class warfare.” Obama’s capitulation on Bush tax cuts for the wealthy is not a retreat from his campaign promises – repudiating his capitulation to the Republicans on those tax cuts would constitute a “retreat” and demonstrate weakness.

None of Penn’s claims are true. The folks pushing for tax increases, during a severe recession, are financial conservatives in both parties. They were the deficit hawks, and Obama appointed many of them to the deficit commission. It was the Republicans who were holding tax cuts for 98% of U.S. taxpayers hostage. By calling the Republican bluff on taxes the House caused the Republicans to make this clear to the American people. The Republicans’ strategy would have compelled them to raise taxes on nearly all Americans, which is why their strategy was a bluff. 

Obama’s promise to end the Bush tax cuts for the wealthy was supported by a strong majority of Americans. That means that Obama’s capitulation on those tax cuts constitutes a move away from the center toward the far right. This makes perfect sense. The people who want Obama to fail consistently push him to abandon policies that are desirable and broadly supported by the public because they want Obama to fail. Obama cannot seem to grasp that straight forward concept. Milbank, for example, attacks liberals’ support for the public option because it was both substantively critical to an effective health care plan (because it would contain costs) and politically popular.

Penn’s claim that Obama must not “retreat” on his capitulation on Bush tax cuts for the wealthy because that would demonstrate weakness is so obviously backwards that one is in awe of his willingness to spin fables that are the opposite of the truth. Penn comes by his willingness to spin professionally – it’s what he does for a living. He gets paid enormous sums to spin absurdities that have no basis in reality. Penn is the CEO of Burson-Marsteller, a PR firm. BM goes well beyond the typical PR firm. As Rachel Maddow has said, “When Evil needs public relations, Evil has Burson-Marsteller on speed-dial.” There is an entire web site devoted to BM’s penchant for putting a happy face on mass murderers.

There are three questions that we need to ask about the campaign by those who want Obama to fail to encourage him to support the Bush tax cuts for the wealthy by advancing this three-part motif. First, why would those who want Obama to fail suddenly offer him good, sincere advice on how to succeed? Second, why would any Obama supporter believe that they were offering him advice on how to succeed rather than suckering him into political suicide? Third, given the facial absurdity of the motif and the obvious incentive of the commentators to harm Obama, why wouldn’t Obama treat their comments as conclusive evidence that his capitulation on the Bush tax cuts for the wealthy was a disastrous mistake?

Cumulatively, these questions lead to a disturbing inference. The Milbanks and Penns of the world invest the time to spin these fables because they think that senior members of the administration hate liberals so badly, and are so desperate for compliments, that they will fall for praise from people that hate them and want them to fail. They hope that the administration will take their advice and destroy itself and the Democratic Party by adopting policies that harm the nation (by making already record income inequality even worse) and require Obama to betray his campaign promises. It’s hard to conceive of a nastier insult to the administration – they’re convinced that Obama and his senior staff are uniformly incompetent.

The ideal result for supporters of the Bush tax cuts for the wealthy is to get them extended in a manner that allows Republicans to escape from the suicidal bargaining position they were in on holding taxes for 98% of American taxpayers hostage and blocking the extension of unemployment benefits, in a fashion in which the Republicans get to take primary credit for all of the tax cuts, and while causing the President to betray his campaign promises and launch an attack on his strongest supporters – an attack taken word-for-word out of the Republican playbook. That is precisely what they’ve achieved. They did not achieve the result through brilliance and they cannot achieve it without cowardice and ineptitude on the part of the Democrats.

Bill Black is an associate professor of economics and law at the University of Missouri-Kansas City. He is a white-collar criminologist, former senior financial regulator, and author of The Best Way to Rob a Bank is to Own One.

By Marshall Auerback and L. Randall Wray

The commentary in the aftermath of President Obama’s announced tax deal with the GOP has been both predictable and, for the most part, misconceived. Leaving aside the issues of income inequality (which we discussed in a previous post), the more predominant critique (especially from the “deficit dove Left”) focuses on the proposed temporary payroll tax cut and the adverse implications that such a cut implies for budget deficits and for Social Security’s longer term “solvency”. Payroll tax cuts are seen by many as part of a bigger plot by Republicans to destroy Social Security’s finances or permanently fund it with general revenues rather than allowing the payroll tax to be re-imposed at the end of the tax “holiday”. One staffer in Congress expressed the concern that funding Social Security with general revenues was part of a bigger plan to destroy it by converting Social Security into a welfare program, rather than an earned benefit.

A related concern deals with the overall solvency issue and is best expressed by Robert Kuttner, who has argued: “The deficit commission appointed by the President has called for an increase in the retirement age, as well as other cuts in benefits over time. And the deal that Obama made with the Republicans just gave deficit hawks new ammunition by increasing the projected deficit by nearly $900 billion over a decade. Social Security will be in the cross-hairs.”

Kuttner’s views reflect a fairly typical concern of deficit doves, who worry relentlessly about the public debt to GDP ratio because they assume that the “credibility” of the government debt will be compromised as we lose the “confidence” of the markets.   Even President Obama has argued that deficits today leave our grandchildren with a heavy burden, which is why he is already proposing budget freezes for the federal employees next year. Other deficit doves are somewhat more tolerant of near-term budget shortfalls than our President, but they still worry about long term pain. That pain is said to be compounded by the imminent retirement of baby-boomers, which will threaten the “solvency” of Social Security. Thus, it is all the more necessary to get the budget “under control” as quickly as possible and payroll tax cuts which, according to this view, “fund” Social Security, cannot and should not be cut, even though these kinds of tax cuts would constitute a highly effective form of fiscal stimulus and mitigate the aggregate demand shortfall which is the core of the problem in the first place.

Yet again, we see the dangers of accepting the neo-liberal paradigm, which holds that government spending is limited by tax collections or bond sales.  It represents a form of fiscal chastity in which (much like St. Augustine), we acknowledge the need to become “fiscally chaste, but not yet”. To which the Right has a legitimate rejoinder:  if deficits are bad long term, then why not start to deal with them in the short term, to mitigate the longer term damage?

The truth of the matter is that payroll taxes do not fund the program. Social Security was constructed this way to buttress its political legitimacy against widespread charges of “socialism” in the 1930s, but the reality is that the federal government has been (since the inception of the program and well before) the sole issuer of our currency, and the dollar, which is nothing more than the government’s IOU, is always accepted in payment as such. Government actually spends by crediting bank deposits (and simultaneously crediting the reserves of those banks). For more on this see here.

The “government as household” analogy, which persistently interposes itself on the deficit dove or hawk paradigm, is fundamentally flawed because no household (or firm) is able to spend by crediting bank deposits and reserves, or by issuing currency. Households and firms can spend by going into debt, but the debt must be serviced with the debt of another—usually a bank debt. Sovereign government only makes payments—including interest payments on its debt—by issuing its own IOU. This is why it is ludicrous to speak of Social Security as some sort of “Ponzi scheme”, because unlike private debtors the sovereign government can always make payments and service debt by crediting bank accounts.

The Social Security program has run large budget surpluses since the early 1980s; Treasury then matches those surpluses with an equivalent amount of treasury debt—and then credits interest to the Social Security Trust Fund account. In the future, the program will turn the bonds back to the treasury when Social Security revenues are less than its benefit payments. Social Security’s treasury holdings in reality amount to no more than an internal record keeping—a sort of reminder that someday the treasury will cover Social Security’s shortfall. It will do that the same way it pays retirement benefits now—by crediting the bank accounts of recipients.

Even by Federal Reserve Chairman Ben Bernanke’s own admission, neither taxes nor bonds should impose any technical constraints to spending.   Yet many of the same figures who acknowledge this reality, such as Bernanke, still insist on discussing issues such as the budget deficit (or, more specifically, Social Security “shortfalls”) within the constructs of a financing constraint.  They seem to recognize that the Treasury/Federal Reserve finances spending or purchases by electronically injecting reserves into the system and that there is no limit to its ability to do so. On the other hand, most (including Bernanke) still argue that somehow taxes are necessary to fill the government’s coffers, and that any shortfall in revenue collections would cause the government to deplete private savings through borrowing (domestically or abroad) to finance the expenditures of something like Social Security.  In so doing, Bernanke misstates (perhaps purposely) the reality of how a government actually spends and feeds the myth that our taxes fund our federal government’s spending programs.

In response to this fear, ironically, the reality is that government spending cuts proposed to “ensure” Social Security’s “solvency” in the future, work in exactly the opposite way to what the mainstream neo-liberals claim. Today’s budget cuts actually generate higher unemployment, poorer educational facilities, increased malnutrition, etc.  They will impose real burdens on our children, who will be less educated, less skilled, less experienced, and have lower income as a whole as a result of the fiscal austerity and will have less real income later, which of course is no means to solve a solvency issue if that is in fact the real issue.  In any case, government cannot financially provision in advance for future benefit payments.  Indeed, attempts to do so via the encouragement of deficit cuts today will simply exacerbate the “dependency” problem implied by ageing demographics.  

In that regard, it is worthwhile reading Don Peck’s story in a recent Atlantic Magazine: “How a New Jobless Era will Transform America” as well as Edward Luce’s recent account of the crisis of middle class America in the Financial Times.  Both recount what are undoubtedly the real intergenerational issues which affect demand, future economic growth and employment. The retired and retiring baby boomers want their high nominal fixed incomes plus purchasing power preservation (if not deflation) now and until the day they die. 

The youth want jobs and the prospects of a life worth living. The fiscal rectitude wing is literally strangling the baby in the crib today by denying a sensible fiscal response for the current generation’s plight, while hyperventilating that fiscal deficits will do the strangulation of the next generation tomorrow.  All of which exacerbates a problem of economies facing intense global headwinds from private sector deleveraging.
Maximizing employment and output in each period is a necessary condition for maximizing long-term growth. The emphasis in the fiscal hawk intergenerational debate is on the adverse demographics and they suggest that we have to lift labor force participation by older workers—for example by postponing retirement. Perhaps, but this is contrary to current government policies which reduces job opportunities for older male workers by refusing to deal with the rising unemployment. To us, it makes far more sense to eliminate unemployment of the pre-retirement crowd—to produce the goods and services our retirees need. If it turns out that is not enough—that it does not produce enough goods and services for the retired as well as the pre-retired—then at that point it will be useful to encourage older people to remain in the labor force.

What is required is an aggressive fiscal policy today to establish effective demand (as well as facilitating ongoing private sector financial deleveraging).  Constraints should be viewed from an inflationary perspective, rather than through the “solvency” paradigm.  If total spending in the economy including the rising pension and health care spending exceeds the real capacity of the economy to meet this demand by supplying output then inflation becomes the issue, not national insolvency.  

By the same token, the purpose of the payroll tax is NOT to “fund” a “pay as you go” scheme, but to prevent wage earners from consuming all the output, so something is left for those who do not work. But at less than full employment, we do not need to do that since all we need to do is put more people to work to produce Winnebagos (etc) for the elderly. If we should ever get to full employment, then we will need a tax. But all the evidence is that the US fiscal stance is set far too tight–anytime we get nearer to full employment, tax revenue literally explodes, growing above 15% per year.

And that is why we do not fear a payroll tax holiday—we need to further loosen the fiscal stance. And once Americans get used to that holiday we certainly do hope that they will insist on making it permanent. Goodbye and good riddance to the payroll tax—a poorly designed tax by any measure. Why discourage hiring and employment by imposing a “tax wedge” (as supply-siders call it), increasing the cost of hiring a worker and reducing take-home pay? Further, the tax is regressive—lower rates for those at the top. For the vast majority of Americans, the payroll tax takes far more income than the federal income tax. And why should only wage earners “share the burden” of supporting retirees? Remember, the purpose of the tax is to reduce consumption by income earners, to leave more goods and services for retirees. If that is the case, why exempt the rentier class (that lives on interest, rent, and profits) from this burden? Especially as the wage share has fallen substantially (and is projected to continue to fall for decades—which accounts for much of the future Social Security “shortfall” that intergenerational warriors are so concerned about). If we need to reduce consumption of income earners to leave more for retirees, then we should tax all forms of income.

A Social Security retirement benefit is not welfare; retirees have earned their benefits. Not by paying taxes but rather by working, contributing to the production of the goods and services needed by past and present generations of retirees. Those retiring today and tomorrow should be proud of the contributions they made. And those contributions take the form of the accumulated annual produce of American workers. Many of their contributions are still in evidence and are still being enjoyed: our housing, our schools, our bridges, our educated population, our arts and literature, our justice system (Ouch! It is mostly on holiday right now, although it used to be the envy of much of the world.) and our financial system (Double ouch!—unfortunately, a monument to excess and fraud.). You get the picture. 

The fact that retirees paid payroll taxes is the least of their contribution. Note that we do agree that taxes are one of the two unpleasant inevitabilities (death, unfortunately, is the other)—but the purpose is not to raise revenue to fund a government program. From inception, taxes create a demand for our sovereign currency. Working hard for money gives money its value; retirees have worked hard over their careers, giving value to the money that we award them in their retirement. They pass the burden of work on to the next generation of workers, who keep money strong—and provide the goods and services the retired generation needs. Social Security is really a social compact among generations. This is something the intergenerational warriors wish to deny. 

So let us have a permanent payroll tax holiday, but meanwhile we need to strengthen our social compact—not by legislating future benefit cuts (which reduce the willingness of today’s workers to join the compact) but rather by legislating more generous retirements!

By William K. Black

This the third column in a series about President Obama’s decision to agree to support the extension of Bush’s tax cuts for the wealthiest Americans. The first column explained why the President folded on a winning hand on taxes. The second column showed that four of the five economists the administration was citing as supporting its plan were virulent opponents who were delighted that the President was capitulating to the Republicans and making them and their wealthy clients far richer. This column analyses Obama’s claim that he got the better of the Republicans in the negotiations.

The administration claims that it negotiated a winning deal with the Republicans on taxes because the Republicans gave up more than did the Democrats in the deal — a better deal than Obama thought possible. Austan Goolsbee’s (Chairman of Obama’s Council of Economic Advisors) white board presentation claims that the administration received concessions by the Republicans that are over twice as large as the concessions that the administration made on reducing taxes for the wealthiest two percent of Americans ($238 v. $114 billion in 2011). The administration (implicitly) argues that its claim of extraordinary negotiating success represents a miraculous accomplishment given the facts that the Republicans were holding all legislation hostage to their non-negotiable demand that the Bush tax cuts for the wealthiest of Americans be extended and the administration’s irrevocable decision that it could not call the Republican’s bluff because the economy would likely sink back into recession unless tax cuts for the middle class were immediately passed.

The first problem with Obama’s claimed tax miracle is that if you accept Goolsbee’s claims, then it takes a political miracle in America for a political party, pledged to ending the tax cuts for the wealthy, controlling the Presidency and with strong majorities in both Houses to get 98% of the citizens 67% of the benefits while giving the wealthiest two percent of the citizens 33% of the benefits. If Goolsbee is correct, then Obama’s tax miracle vastly increased America’s already record income inequality and ensures that the ultra wealthy will have even more dominant political power in the future to ensure that there are no new miracles. If Goolsbee is right, then things are so bad that our miracles are now disasters that further imperil our democracy.

The second problem with Obama’s claimed tax miracle is that it is too good to be true. If the Republicans really had total negotiating leverage and really opposed Obama’s plans then they would not have made any meaningful concessions to Obama. The material tax reductions for the non-wealthy and modest increased spending that the Republicans were willing to agree to prove that the Republicans could not have had total negotiating leverage and have been opposed to Obama’s proposals.

The third problem is that no element of the claimed miracle is true. The Democrats had overwhelming negotiating leverage, the Republicans did not oppose, and often strongly favored, Obama’s proposals on taxes compared to their alternative — no tax cuts. Obama capitulated to Republican demands and negotiated a deal that harmed the nation. He capitulated in a manner than guarantees that the Republicans (and the surviving Blue Dogs) will increase their tactics of bullying and holding Americans hostage to their political demands. The Republicans have confirmed (again) that Obama can be bluffed even where the bluff is taken right out of the movie Blazing Saddles (because it is facially absurd). The President compounded his failure by folding his winning hand when he would have been on the cusp of victory had he not undercut through secret surrender negotiations his Party’s big win in the House. Obama then engaged in his characteristic attack on his strongest supporters, channeling Republicans’ favorite diatribes about progressive Democrats. As my second column explained, the administration descended so low that while it was excoriating its supporters it gloried in the praise it received for capitulating on tax reductions for the wealthy from the banks representing (and the bankers who are among) the wealthiest two percent of Americans.

David Cay Johnston explained in his article urging the President to “call their bluff” why the Democrats held a winning hand with regard to taxes for the rich. The Republicans were in a Blazing Saddles bluff — where the sheriff takes out his gun, aims it at his head, and threatens to shoot. The Republicans’ position on taxes and unemployment was political suicide and there was no chance that they could maintain Party discipline on a joint suicide pact if Obama called their bluff. The Republicans would have had to block tax reductions for 98% of American taxpayers and thrown well over one million unemployed under the bus before Christmas — six million of them by Spring. Here’s rule one about responding to elected officials who threaten to commit suicide en masse — “make my day.” Think of what President Clinton did when the Republicans threatened to “shut down the government.” The threat to the nation of a complete shutdown of the federal government was far worse than the Republicans’ threat about taxes, yet Clinton did not hesitate to call their bluff and no one accused him of being irresponsible. Clinton discredited the Republican Party and their Blazing Saddles strategy so badly by calling their bluff that the Republicans did not dare to repeat the tactics.

The suicidal nature of the announced Republican position on taxes and unemployment explains why the Republicans were overjoyed to support so many provisions that the administration is claiming represent miraculous accomplishments. The reality (obvious to anyone that didn’t fall for the Republicans’ Blazing Saddles propaganda) was that Obama had broad Republican support for extending unemployment benefits, tax breaks for businesses, tax breaks for the 98% of taxpayers, and some form of special tax reduction for working class Americans — regardless of whether he capitulated on tax breaks for the wealthy. None of the things that the administration claims as miracles represented concessions by the Republican Party. (Some individual Republicans opposed particular provisions, but most Republicans and Democrats supported these provisions and Obama needed to pick up less than a handful of Republican votes in the Senate.) That means that the relevant comparison is not the dollar value of the provisions that the Republicans and Democrats both support, but rather the cost in terms of increased inequality and lost services caused by Obama’s unnecessary capitulation on extending Bush’s tax cuts for the wealthiest of Americans.

It is not too late for Obama to call the Republicans’ bluff, but that can only occur if House Democrats call Obama’s “take it or leave it” bluff. Obama adopted the Republicans’ Blazing Saddles bluff. Obama’s bluff is expected to work easily against Senate Democrats. We’ll see whether the House will save Obama from himself. The political class is predicting that Obama’s bluff and attacks on House Democrats will cause them to “surrender.”

Here’s a hint. When Dana Milbank writes a column stating that you (Obama) have never done anything in your life that made him proud until you (A) capitulated on the Bush tax cuts for the wealthy and (B) attacked liberals for opposing your capitulation that means you have fouled up so profoundly that you have brought joy to folks like Milbank that have never respected you and want you to fail. Here’s a further hint: the title of his article is “Obama finally stands his ground.” Milbank is either mocking you or he has perfected unintentional self-parody. The reason Democrats are criticizing you is that you failed to stand your ground on tax breaks for the wealthy. You promised to end the Bush tax cuts for the wealthy. You had the majorities to do so long ago. Your promise had overwhelming support from the American people. Even Milbank concedes that extending the Bush tax cuts for the wealthy is “dumb.”

Bill Black is an Associate Professor of Economics and Law at the University of Missouri-Kansas City. He is a white-collar criminologist, former senior financial regulator, and author of The Best Way to Rob a Bank is to Own One.

By William K. Black*
You know the administration is desperate when it creates a web page citing economists who support its capitulation on taxes.

The web page cites the support of five economists. Peter Cardillo, the Bank of America, Greg Mankiw, and Wells Fargo (are the second through fifth economists on Obama’s list). Who are these supporters and why is the administration proud of their support? Cardillo is an economist for an investment firm, Avalon Partners. Avalon’s web site states that it specializes in “wealth management” for “affluent investors” “to meet the unique needs of high net worth individuals….” Yes, the wealthiest one-hundredth of one percent of Americans – the truly, uniquely needy.

The administration’s web site gives pride of placement to Avalon Partners’ support of Obama’s decision to support the extension of Bush’s dramatic reduction in the taxes its ultra wealthy clients will pay. That tax reduction will make Cardillo and his senior colleagues at Avalon Partners, themselves among the wealthiest Americans, even wealthier. Obama’s capitulation on tax breaks for the richest one percent of Americans is worth tens of thousands of dollars personally to Cardillo and hundreds of millions of dollars to Avalon’s clients. Mr. Cardillo does not support Obama’s capitulation – he rejoices in it. Indeed, he has said in a recent interview that the reduction in taxes for the elites has helped fuel a “Santa Claus” rally in stocks. Obama played St. Nick for the wealthiest of Americans to the tune of tens of billions of dollars. The reasons that Cardillo supports the bill are obvious. The mystery is why Obama fails to realize that his support demonstrates why Obama’s capitulation is so harmful to the nation. At a time when income inequality has reached record levels in modern America and crippled our democracy Obama has given in to bullies who made increased inequality their central goal.

Obama claims that he capitulated to the Republicans on taxes for the wealthiest in order to reduce unemployment. Here’s what Cardillo said about Obama and unemployment just before the midterm elections.

“As far as corporate America hiring again it’s basically dependent on what happens in Washington,” says Peter Cardillo, chief economist at Avalon Partners in
New York. “If the opposition party should gain enough seats to perhaps reverse the present administration’s policies somewhat, then I think you’ll see a big
pickup in employment.”

Obama has promoted the views of one of his virulent opponents, who gloried in and profited from Obama’s and the Democrats’ recent electoral and legislative defeats. Simultaneously, Obama launched another petulant attack on his strongest supporters. The administration’s daily floggings will continue until morale improves among progressives. Generations of political scientists will marvel at this administration’s self-destructive reflexes.
The Bank of America (BoA) is next on the administration’s list of supporters. BoA’s senior leadership will personally save millions of dollars in taxes and its wealthy clients will save billions of dollars in taxes because of Obama’s decision to support the continuation of the Bush tax cuts for the wealthiest Americans. Their support for Obama’s agreement to support extended tax cuts for the wealth should have warned Obama that he was making a mistake.

The Bank of America is one on the major funders of the Chamber of Commerce’s war on financial regulation, the administration, and Democrats. The Bank of America is a perfect example of why the “three strike” laws never apply to corporations. The Bank of America has run a massively unlawful foreclosure system based on perjured affidavits. It purchased two notorious financial institutions (Countrywide and Merrill Lynch) that were destroyed by policies of deliberately making and purchasing fraudulent “liar’s” loans. The Bank of America has recently admitted to a widespread policy of defrauding states and localities. It even has an openly racist senior advisor in Germany who claims that the U.S. mortgage crisis was caused by outlawing “red lining” – refusing to loan to blacks. It’s not often that senior bank officials openly stress their nostalgia for the good ole’ days of open racism. I’ve repeatedly brought this racist to the attention of the administration and BoA in the U.S. and in Germany without ever prompting even a response. My colleague Randy Wray and I have explained why BoA should be placed in receivership for its serial crimes and unsafe and unsound practices. Instead, the Obama administration prominently displays its endorsement.

Professor Mankiw, Chairman of George W. Bush’s Council of Economic Advisors, is the next supporter that the Obama administration highlights. Mankiw was a leading apologist for the Bush tax cuts for the wealthy. He even defends the wealthy when they become wealthy through fraud. He infamously responded to George Akerlof and Paul Romer’s paper demonstrating the dominant role that “looting” by S&L CEOs (accounting control fraud) played in causing the debacle, by opining that “it would be irrational for operators of the savings and loans not to loot.” Looting: the Economic Underworld of Bankruptcy for Profit (1993). Mankiw blamed the S&L debacle on excessive regulation and was one of the architects of the desupervision that permitted the current crisis to occur.

The administration thinks it says good things that the Bush administration’s principal apologist for its tax cuts for the wealthy supports Obama’s agreement to extend those tax cuts. The mind boggles.

Wells Fargo is next on Obama’s roll of honor. Wells Fargo’s senior leaders, like BoA and Avalon Partners’ senior leaders, have personal and professional interests in supporting tax cuts for the wealthy. Wells Fargo is overjoyed by Obama’s agreement to extend tax cuts for the wealthy. All of these endorsements simply emphasize the extent to which Obama was taken to the cleaners. It’s bad to be bullied, but it’s pathetic to cite the testimonials of those that got even wealthier through the bullies’ triumph as evidence of your success.
Bill Black is an associate professor of economics and law at the University of Missouri-Kansas City. He is a white-collar criminologist, a former senior financial regulator and the author of The Best Way to Rob a Bank is to Own One.

* This post originally appeared in the Huffington Post