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Tuesday, November 8, 2011

Bill Black: The High Price of Ignorance

Posted: 07 Nov 2011 03:30 AM PST

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

I have just finished giving three talks, in three days, in three states during which I continued one of my common obsessions – doing research about financial crises. Among of the primary beliefs I’ve had reinforced over these 72 hours are my views about how incredibly harmful financial ignorance is, and how precious are the sources who combine sound information about finance with humanity. As a father, I do not play silly games about which kid I like best, so I will simply express my personal belief that Naked Capitalism is one of the preeminent sites for learning about finance, while always remembering people.
My first talk was in central Missouri to the Missouri Association for Social Welfare (MASW). MASW is made up of people who have worked, often for decades, to help those mode in need in our State. They have seen their efforts overwhelmed by the ongoing crisis and they are eager to learn why it occurred and how to prevent or reduce future crises. This is a group that combines policy wonks and boots on the ground caregivers. They are well read, but they do not find that regular media sources provide them with any comprehensive understanding of why we suffer recurrent, intensifying crises. A few of their members, however, read our blog (NewEconomicPerspectives – created and maintained by my UMKC economics colleague Stephanie Kelton) and Naked Capitalism. They learned from these sites about my work and reached out to me to keynote their conference because they have a thirst for learning about finance and the crisis.
Thursday I presented “in the belly of the beast” – the University of Chicago’s School of Law. The students on their law forum reached out to bring someone with views very different from their own faculty and the other speakers. They were not rejecting their faculty’s views ala the Harvard economics students who walked out of Professor Mankiw’s class to protest what they viewed as his unwillingness to discuss rival theories. The students simply wanted to have an opposing viewpoint expressed. They knew that I existed because of media appearances that were largely generated because many members of the financial media who read Naked Capitalism and NewEconomicPerspectives. Many of our readers learned of us and our research findings and theories by reading Naked Capitalism. Naked Capitalism is so important because it does not simply feature the views of an individual. It seeks out and gives visibility to diverse, thoughtful views from those who inhabit the reality-based world and support their theories with sound analytics and compelling data.

My reaction to the U. Chicago conference was that the students did well to reach out in this manner. On our panel (on private-sector fraud and corruption) the other panelists’ (all Chicago-school) principal concern was that we reduce the prosecution of elite white-collar criminals, reduce the incentives to blow the whistle on the CEO, and reduce the incentives to bring a qui tam civil fraud actions against corporations. We inhabit alternative universes. In our reality-based universe, the problem is elite fraud. In their faith-based theoclassical economics universe the problem is that the “mob” is seeking to murder innocent bank CEOs by bringing back the weapon of the French terror, the “guillotine.” These are the exact terms used by one of my co-panelists. We may never be able to convince the theoclassical Chicago-school faculty to cease their identification with and apologias for the one percent, but we are read by at least some of their students because of the visibility provided by Naked Capitalism.
My talk Saturday was in LA at the invitation of the “Occupy Wall Street” (OWS) participants as part of a “teach-in.” Again, the participants are eager to learn about why we suffer recurrent, intensifying financial crises. Some of the protesters are well versed on the nature of the ongoing crisis and its causes because they read Naked Capitalism and blogs such as NewEconomicPerspectives. Many of the protestors, however, are not well informed and have views about the crisis that are intense but not fact-based. They too have read
articles on blogs, but those articles and blogs are the antithesis of Naked Capitalism. They are sensational, but contrary to the facts. Many of these myths are enormously harmful – they led the speakers to view it as impossible to succeed, that no one could be trusted, and that our government had never done anything successful. Collectively, their messages were the ideal toxic blend of views that would render any effort against the “control frauds” and “systemically dangerous institutions” useless. The opponents of OWS could not have designed a more self-defeating meme. Naked Capitalism understands how grim the situation is and how difficult our tasks are, but it does not give in to hopelessness and defeatism.

The research project that reinforced my view about the crushing costs of financial ignorance was reviewing Attorney General Holder’s testimony before the Financial Crisis Inquiry Commission (FCIC). It is apparent that neither Holder nor his senior staff read Naked Capitalism (at least in that era). Attorney General Holder made two extraordinary statements at that hearing demonstrating his utter ignorance. Chairman Angelides asked Holder to explain the actions the Department of Justice (DOJ) took in response to the FBI’s warning in September 2004 that mortgage fraud was “epidemic” and its prediction that if the fraud epidemic were not contained it would cause a financial “crisis.” Holder testified: “I’m not familiar myself with that [FBI] statement.”
For those of you who have never been involved in preparing an agency head to give a major piece of testimony (something I did fairly often), let me confirm that it is a very big deal. The staff briefs the head of the agency thoroughly on the key issues and how the agency responded to them. The DOJ’s (the FBI is part of DOJ) preeminent contribution with respect to this crisis was the 2004 warning to the nation (in open House testimony picked up by the national media). (Stop and think how widely known the warning would have become if Naked Capitalism was operating in 2004 and had input from white-collar criminologists.) For Holder not to know about the most important (and most praise-worthy) action by his department requires that none of his senior staffers knew about the FBI testimony.

For none of his senior staffers to know about the FBI testimony requires that they know nothing about the department’s most important and (potentially) useful act. That depth of ignorance could not exist if his senior aides cared the least about the financial crisis and made it even a minor priority to understand, investigate, and prosecute the frauds that drove the crisis. Because Holder was testifying in January 14, 2010, the failure of anyone from Holder on down to know about the FBI’s warnings also requires that all of them failed to read any of the relevant criminology literature or Naked Capitalism. We need to reach the point where the failure of senior officials who need to be financially literate (and that includes everyone at the senior levels of DOJ) to regularly read Naked Capitalism and NewEconomicPerspectives marks one as irredeemably unprofessional.

Holder’s prepared testimony is a further testament to the costs of ignorance. In addition to claiming that the DOJ’s response to the developing crisis under President Bush was superb, Holder implicitly took the position that (without any investigation or analysis) that fraud could not and did not pose any systemic economic risk. Implicitly, he claimed that only economists had the expertise to contribute to understanding the causes of the crisis. If you don’t investigate; you don’t find. If you don’t understand “accounting control fraud”; you cannot understand why we have recurrent, intensifying financial crises. If Holder thinks we should take our policy advice from Larry Summers and Bob Rubin, leading authors’ of the crisis, then he has never read Naked Capitalism.

Now let me state at the outset what role the Department plays and does not play in addressing these challenges” [record fraud in investment banking and securities].

“The Department of Justice investigates and prosecutes federal crimes.…

As a general matter we do not have the expertise nor is it part of our mission to opine on the systemic causes of the financial crisis. Rather the Justice Department’s resources are focused on investigating and prosecuting crime. It is within this context that I am pleased to offer my testimony and to contribute to your vital review.

Two aspects of Holder’s testimony were preposterous, dishonest, and dangerous.

I’m proud that we have put in place a law enforcement response to the financial crisis that is and will continue to be is aggressive, comprehensive, and well-coordinated.

DOJ has obtained ten convictions of senior insiders of mortgage lenders (all from one obscure mortgage bank) v. over 1000 felony convictions in the S&L debacle. DOJ has not conducted an investigation worthy of the name of any of the largest accounting control frauds. DOJ is actively opposing investigating the systemically dangerous institutions (SDIs).

Holder’s most disingenuous and dangerous sentence, however, was this one:

Our efforts to fight economic crime are a vital component of our broader strategy, a strategy that seeks to foster confidence in our financial system, integrity in our markets, and prosperity for the American people.

Yes, the “confidence fairy” ruled at DOJ. It is the rationale now for DOJ’s disgraceful efforts to achieve immunity for the SDIs’ endemic frauds. The confidence fairy trumped and traduced “integrity in our markets” and “prosperity for the American people.” Prosperity is reserved for the SDIs and their senior managers – the one percent. But then you know that because you read Naked Capitalism.

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