Monday, April 18, 2011

William Black on the Financial Crisis

From Marketplace:
RYSSDAL: Well then to the question I think a lot of people have, and especially after reading the piece in The Times today: Why hasn't anybody gone to jail?

BLACK: Well little people have gone to jail. And of course the answer is they haven't looked.

RYSSDAL: They, regulators?

BLACK: Well, good point. They, the regulators and they, the FBI, have not investigated, which is why this trifecta was necessary. If you go back to the savings and loan crisis, when we had the inevitable national commission to look at the causes, they had available to them in the public records, a thousand successful felony prosecutions, several thousand successful enforcement actions, and about 800 successful civil suits. And that provided all kinds of facts. Nothing like that exists

RYSSDAL: What about the argument, though, that the financial system is so fragile still, and these cases so complicated, that we can't really tear things apart with substantive investigations and prosecutions because it will all fall apart again?

BLACK: Yeah, that's an excellent point. We should leave felons in charge of our largest financial institutions as a means of achieving financial stability.

RYSSDAL: See, that's funny because I was expecting you to come back with -- I don't know, JPMorgan earned $5 billion last quarter. How shaky can they be?

BLACK: Well, they didn't earn $5 billion. What we did was change the accounting rules to hide the losses and then we did an amazing amount of off-budget sheet stuff through the Fed. But if you note, you'll see that most of the recent earnings were because they reduced their loss reserves, which is exactly how they created fictional income during the run up to the crisis.

RYSSDAL: What do you think, though, of the Dodd-Frank financial reform regulations out there?

BLACK: Well it wasn't designed to deal with the causes of the crisis. It doesn't deal with causes of the crisis. It won't prevent future crises.

RYSSDAL: So have we wasted this crisis?

BLACK: Yes, in the sense that you're supposed to learn from them. We're not learning the right lessons. In fact, we're learning the wrong lessons. And that kind of failure to learn is almost always due to ideology getting in the way of facts. We've got to get back to American pragmatism, use what works. And boy, this current system does not work.

RYSSDAL: William Black teaches law and economics at the University of Missouri, Kansas City. Thanks a lot.