William Black is a former senior bank regulator, now associate professor of economics and law at the University of Missouri – Kansas City (UMKC), who writes for New Deal 2.0.
The first decade of this century proved how essential effective regulators are to prevent economic catastrophe and epidemics of fraud. The most severe failure was at the Federal Reserve. The Fed’s failure was the most harmful because it had unique authority to prevent the fraud epidemic and the resulting economic crisis. The Fed refused to exercise that authority despite knowing of the fraud epidemic and potential for crisis.
The Fed’s failures were legion, but five are worthy of particular note.
1. Greenspan believed that the Fed should not regulate v. fraud
2. Bernanke believed that the Fed should rely on self-regulation by “the market”
3. (Former) Federal Reserve Bank of New York President Geithner testified that he had never been a regulator (a true statement, but not one he’s supposed to admit)
4. Bernanke gave the key support to the Chamber of Commerce’s effort to gimmick bank accounting rules to cover up their massive losses — allowing them to report fictional profits and “earn” tens of billions of dollars of bonuses
5. Bernanke recently appointed Dr. Patrick Parkinson as the Fed’s top supervisor. He is an economist that has never examined or supervised. He is known for claiming that credit default swaps (CDS, a.k.a the financial derivatives that destroyed AIG) should be unregulated because fraud was impossible among sophisticated parties.
Each error arises from the intersection of ideology and bad economics.
The Fed’s regulatory failures pose severe risks today. Three of the key failed anti-regulators occupy some of the most important regulatory positions in the world. Each was a serial failure as regulator. Each has failed to take accountability for their failures. Last week, Dr. Bernanke asserted that bad regulation caused the crisis — yet he was one of the most senior bad regulators that failed to respond to the fraud epidemic and prevent the crisis. As Dr. Bernanke’s appointment of Dr. Parkinson as the Fed’s top supervisor demonstrates, the Fed’s senior leadership has failed, despite the Great Recession, to learn from the crisis and abandon their faith in the theories and policies that caused the crisis. Worst of all, the Fed is an imperial anti-regulatory seeking vastly greater regulatory scope at the expense of (modestly) more effective sister regulatory agencies. The Fed’s failed leadership is setting us up for repeated, more severe financial crises.
Dr. Parkinson as Anti-Regulator
This essay focuses on Chairman Bernanke recent appointment of Dr. Parkinson to lead the Fed’s examination and supervision. My central point is that Dr. Bernanke appointed Dr. Parkinson because he shared Dr. Bernanke’s anti-regulatory ideology and has never changed those views, even in the face of the Great Recession. The anti-regulator policies that Bernanke and Parkinson championed were the principal drivers of the fraud epidemic that have produced recurrent, intensifying crises.
Bernanke’s appointment as the Fed’s top supervisor of an individual that had no experience in regulation, in the midst of the greatest crisis of our lifetime, is irresponsible and dangerous on its face. No ideology has proven more disabling in this crisis than neoclassical economics. Dr. Parkinson is a neoclassical economist. The “skills” an economist would purportedly bring to supervision have proven to be disabilities in identifying and understanding fraud and risk.
We need not rely on generalities — Dr. Parkinson has a record relevant to supervision that we can evaluate. The most revealing aspects of that record fall into three categories. First, Dr. Parkinson was a leading proponent of the obscene (and successful) effort to prevent Commodity Futures Trading Commission Chair Brooksley Born from taking regulatory action to prevent destructive credit default swaps (CDS). Second, Dr. Parkinson, like Greenspan and Bernanke, subscribed to the naïve view that fraud was impossible in sophisticated financial markets and that credit rating agencies were reliable.
Third, Dr. Parkinson endorsed the international “competition in regulatory laxity” that Dr. Bernanke (belatedly) warned has degraded regulation on a global basis. Here are the key passages from Dr. Parkinson’s congressional testimony:
Professional counterparties to privately negotiated contracts also have demonstrated their ability to protect themselves from losses from counterparty insolvencies and from fraud. In particular, they have insisted that dealers have financial strength sufficient to warrant a credit rating of A or higher. This, in turn, provides substantial protection against losses from fraud.
If this opportunity is lost, the Board is concerned that market participants will abandon hope for regulatory reform in the United States and take critical steps to shift their activity to jurisdictions that provide more appropriate legal and regulatory frameworks.
The “opportunity” Dr. Parkinson feared would be “lost” was to remove the CFTC’s ability to regulate CDS. Anti-regulation would “win” the international competition in laxity. His policies made possible the catastrophe that is AIG. Dr. Bernanke is aware of Dr. Parkinson’s record of anti-regulatory failure. He chose Dr. Parkinson because of that record in order to ensure that the Fed would not take regulatory actions that would upset the biggest banks, particularly the systemically dangerous institutions (SDIs) that are the real governors of the Fed’s anti-regulatory policies.
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We all know of the corruption and collusion, so what is our plan to make changes? Writing and blogging about this, watching it on TV or listening to NPR has done nothing, so what happens now — more stories about the bullshit? Is there an election coming or a revolution? I doubt if anyone really cares about this stuff anymore to be honest … it’s just another story about Bernanke being a conartist/pirate and no one cares that trillions and trillions were ripped off — and no one cares about the next leg of the recession … it seems hopeless! This seems like Russia.
I have the same attitude. There’s enough evidence already, has been for years. Until the ship goes down and people start starving in once rich neighborhoods, there will be no action. We have sold our courage and souls to material comfort. Only tragedy can wake us. And that’s the real tragedy.
Nobody does care, everyone has battle fatigue. Bread (foodstamps) and circuses (avatar tickets/palin does fox). Only hunger or lack of cable will rouse the mob.
But Doc, we need brave sharpshooters like you for the coming showdown at the corral.
To an economic outsider, it is all so surreal—a conspiracist’s nightmare. Determined opponents of reform are planted in every key office, police forces protect war criminals and assist pirates, and lawmakers create bills to accelerate the cancer and kill the patient. It’s hard to avoid a sense of determined evil toward deadly ends, but in the end it may be “only” elitist megalomania suffering extraordinary blindness.
It seems hopeless, but this too shall pass. I see this a crucial period where visionaries like the luminaries of NC do the thankless work of building an exhaustive record of charges, teach Paine’s ‘Common Sense’ to the commoners, and help prepare a new Declaration of Independence toward constituional reform.
More people than ever do care, and a critical mass is building. When the next crisis hits the fan (2012?), it will surely be the tipping point when the townfolk rise up en masse to back the heroic reformers. Let’s keep faith in the power of our collective imagination to effect wondrous change.
Doc, first of all, this WmBlack article is already on Bernie Sanders’ desk. The fixing of this problem can begin there, which raises the question nobody wants to ask, then WHO ?
But the systemic problem is monetarily systemic.
It is the debt-money system problem.
The debt-money system is broke – as in insolvent.
We need a new money system, debt-free at government issue, and we need for the banks to go back to banking.
Like lending real money.
When Kucinich surfaces this proposal, let’s all give it a good look.
Cause that ain’t peepeedickin’, my friend.
I’m sorry to be late in commenting here and it’s very nice to see people that do care enough to respond to the topics here. I used to thank Yves for hanging in here to report on all this stuff, then I burned out — thus, this is a good point in time to realize that blogging efforts may seem small, but these are the steps that are needed to make progress for us little shits.
Thanks Yves and thanks fellow bloggers!
The Federal Reserve is run by the banks and for the banks.
————————————————————
I’ve heard former Federal Reserve heads argue that the role of regulator and that of setting monetary policy need to work hand in hand, but this does not ring true. Having Someone like Patrick Paterson at the Fed regulating after all we have seen should speak volumes about not allowing the Fed to have the regulator role. Add to this the fact that the Fed does not believe in accountability as seen in their actions with regards to the Freedom of Information Act request by Bloomberg and other news organizations.
grist for the mill –– the latest in the department of official lawlessness from Reuters via Clusterstock:
SEC order helps maintain AIG bailout mystery
Mon Jan 11, 2010 4:43pm EST
http://www.reuters.com/article/idUSN1116982020100111
By Matthew Goldstein
NEW YORK, Jan 11 (Reuters) – It could take until November 2018 to get the full story behind the U.S. bailout of insurance giant American International Group (AIG.N) because of an action taken last year by the Securities and Exchange Commission.
President Barack “Obusha” is now the problem.
It is not just Bernanke and Geithner, it seems to me that the entire economics profession seems to think of regulation as uninteresting. They simply want to build models about monetary and fiscal policy.
I have posted comments many times on blogs like Econbrowser Krugman, and Economist’s View when they post blogs about the Fed performance that completely ignore to comment on their regulatory responses and attracted zero comments.
Bernanke is facing mounting criticism. His reconfirmation is on hold in the Senate, and he continues with business as usual. But let’s remember this is a man who did not see an $8 trillion housing bubble, failed to manage its aftermath, got a wake up call with Bear Stearns that he proceeded to sleep through, not only didn’t see the meltdown coming but was one of the major participants in precipating it, then threw trillions with no conditions at the banksters, and proceeded to anoint himself the savior of the financial universe.
Bernanke is so epically incompetent and arrogant that he not only doesn’t learn from his mistakes he never realizes he made any. Indeed he is the hero of the age, in his own mind. You look at Bernanke in this way and you will understand why he has acted as he has and how he will act in the future. Scary, isn’t it?
I hope you are right about Bernanke’s apparent incompetence and arrogance (along with Greenspan, Geithner, Pauson, Summers, et al). It’s hard to swallow, but the alternative is worse—a great game power grab and wealth transfer with tragic global consequences.
I say it’s hard to swallow because we and others without economic training could see the grotesque bubble quite clearly. In late 2005-2006, 30% of Phoenix house sales were to investors, appreciation was 15-20% annually while other prices stayed flat, appraisals hiked monthly, every hovel got multiple above list bids, and open-house tours became the weekend pastime. We sold our house in ’05, and have seen prices fall about 50% so far with no end in sight.
It’s hard to imagine that the powers that be could really be so dismally blind, when it was their training and express mission to watch for it. It’s even more perplexing that they are re-commissioned to resolve the very mess over which they presided. Arghh!
It’s the very definition of contempt.
I was a strong Obama supporter, but I’ve come to loathe the guy. The worst thing is, his actions are probably going to put another one of those miserable, contemptable republicans in office because, you know, republicans have all the answers.
Just when you think the situation can’t get more brazen and ludicrous, you have:
-an anti-regulator regulator-
If anyone doubts this form of governing serves privilege at expense of others (whatever their faults or supposed faults), then this item of interest would correct that misconception.
/Doug Terpstra, ditto for CA.in the housing market scene, Groups of investors camped out the night before to be first in line for the goods and instant wealth.
Hard to see this as something you can base a sustainable economic policy.
Some time ago, I was a ramrod on a big construction job (they hired me because it was politically locked, with cost overruns going through the roof). One day my boss asked me to drop some steel off the side of the building. I told him no; the load was too heavy.
Of course, being a boss, he had to prove me wrong. He tied the load, and then tied the other end to HIMSELF. About the time his “helpers” got that load to the edge, I started running full speed down 2 flights of stairs. About the time I got into a position to catch the load, he was screaming my name, as he was slipping across the slab right up to the edge.
This is the same situation.
That $500 Trillion in unfundable liabilities is already over the edge, and the computerized best business practices, driven by objective-based management, and replicated globally, has tied the entire global economy to the load.
Secure that load or don’t secure that load.
I am too tired to care, labor has already moved on, and I have nothing better to do than sit on my chair, out on the porch, and watch the show.
Capitalizing the Internet was a willfully ignorant thing to do. Technology has to work for people, not the other way around. The planet did not design human beings to be efficient. It designed them to be effective.
Every individual is a regulator. When individuals choose not to take their share of the responsibility, they enter a contract, as the weaker counter-party. That can only have one ending. First the weaker counter-party goes over, balance is abruptly terminated, and then the kickback topples the stronger counter-party.
Anyone expecting government to solve this problem is going to go over the cliff with that load, along with non-performing capital.
tax receipts, tax receipts, tax receipts.
demographic demand, demographic demand, demographic demand.
Captal is just as dependent on those computers as its captives.
good luck.
January 12, 2010
Credit as a Public Utility: the Key to Monetary Reform
Review Article
by Richard C. Cook
Background: my pop was an electrician before WWII, and caught US Steel shipping steel under the wire to the Nazi Germany, which was paying for it with money printed and lended by the Bank. Later, he worked around the admirals of the pacific fleet, and they took me under their wing as a kid. Lots of individual expedient decisions, rather than responsible discretion on the margin, leads to bad outcomes, and subsidizing those outcomes exponentially escalates them. Resonance.
These jokers are still talking about the healthcare bill on TV like putting computers in charge of making decisions, based on genetic data, and adding a tax on existing insurance, which is already negated in the billing process, is a public service.
The Hospital with George C. Scott is pretty close already, those community centers are packing up fast, and the demographic wave is just starting to build.
(Obviously, the Internet censors/capitalists pissed me off today. It’s right up there with a HR Manager telling me I need a certificate to run a stupid application sitting on top of my kernel code, and the banks tying credit reports to jobs. Economic efficiency. Oxymorons.)
Back in the day, they sent their pets around to copy our code into libraries, to increase their efficiency. If we were a vengeful bunch, we would have pulled the plug a long time ago.
The healthcare workers that don’t belong to a union don’t have real healthcare insurance, because the hospitals self-insure, like GS, on all sides of the transaction. And if they miss a day due to illness, they get docked.
“a more perfect union” my ***
poof!
OK, last one:
Stimulus money to install spyware in the libraries!
This economy is moving farther down the food chain everyday.
@#$%^!
Ok, I guess my spleen is just not going to settle tonight:
The probation officers are asking the probates if they would consider an armed uprising against the US.
How stupid a question is that?
They can’t afford to keep the prisons; they can’t even afford probation.
They’ll have to change the title to “The Poor Can No Longer Be Put In Prison, But the Rich Get Richer”
… as the hft pacman gobbles up any cash flow crumbs left in the pension system, and everyone that can disengages, the $500 trillion load accelerates toward the rocks below, while the government issues reports on network tv designed to shift the reference point back from the cliff for those who have not already gone over.
Who are they going to turn to next for leadership, the tulips?
Logan’s Run?
Capt. Kirk, the computer is in charge on this planet!
Spock, you’re so emotional?
All over some stupid freaking computers … programmed to replace people.
The computer says … over the cliff for that inefficient humanoid. Next.
“you just don’t appreciate the economic situation. sometimes (all the time), we just have to make expedient decisions (another oxymoron).”
So I’m doing the consulting thing on the 7th floor of Navy headquarters in San Diego. The number one military civil servant is doing the reorg in a box thing, part of the Robert Rubin ascention, turn the military over the private sector thing. He threatens to fire everyone if they don’t tell him how they do their jobs. In particular, he threatens to fire the most productive person in the crew, a female, that tells him truthfully, that she does it by instinct.
Of course, I don’t think twice about saying what I think about all this nonsense. Next thing, brass comes out from Navy personnel. He has no idea who I am, what my background is, who I am associated with, or what’s inside my head, and tells me I don’t understand imperative.
All the real institutions have been substituted with weaker counter-party imposters.
I think it’s imperative for non-performing capital to get that rope off before it goes over the cliff, along with its objectives, but that rope is global economic voltage, from a $500T black hole.
It’s not the end of the world. In fact, for labor, it’s a whole lot easier to start from scratch. They wanted a team of computers; they got ’em. Evolution doesn’t favor instinct because it’s efficient. Democracy isn’t efficient.
A gamma burst is kickback.
You are on a circle, at reference point 0.
The circle is growing faster than your perception, with a relative radius of infinity.
You look in one direction, and then turn around an look in the other direction.
The circle appears to be a straight line.
You look in one direction and label the distance infinity.
You look in the other direction and label the distance negative infinity.
How can anyone say that the Fed is against regulations when they have and manage the monopoly on money thanks to goverment regulations? I mean, is there a heavier regulation that the one that creates a monopoly, like the Fed has on money? I dont think the Fed oposes that regulation.
For priceless commentary to lift your mood:
see Max Kaiser economist exemplar on the economics of terrorism.
Hi
are we there?
Hi guys
when we want to share the booty it will be fine enough
However
what are we doing to that effect as a collective ‘free’society?
We propose that we are noble and yet do not freely share our booty
I know we are all tryin to get by
That does not excuse us from doing what we can as we can
See you later