Bill Black: The Fraud Recipe for CEO’s, Why Banks Hate Free Markets and Love Crony Capitalism, and the Dysmal Legacy of Mainstream Economists
The selected notes below are from William K. Black’s presentation at the Modern Monetary Theory Summit in Rimini, Italy, in Febuary of this year. The audio is embedded in this post following the text.
On the “technocrats” running the show in Europe: There are no ‘technocrats,’ especially ‘genius’ technocrats. I suggest a new rule of thumb for judging a ‘genius technocrat.’ They have to be right at least two out of ten times. There is not a single economist in Europe, who calls himself a technocrat, that could do the equivalent of making two penalty kicks out of ten.
What we learned from the Savings & Loan crisis: George Santayana famously said that, “those who cannot remember the past are condemned to repeat it.” But, even if we remember the mistakes we have made, the new policy we pick could be another mistake. Here is what we learned about the incidence of fraud leading up to the savings and loan crisis, according to the national commission that investigated the causes of that crisis:
On the danger Control Frauds pose to society: When many of these frauds occur in the same area, they hyperinflate financial bubbles, which is what causes financial crises and mass unemployment. It makes the CEOs wealthy, produces Balzac scandals, and destroys democracy.
Bill Black’s Recipe for Bankers to become Billionaires: 1. Grow massively, 2. By making very poor quality loans at high rates of interest, 3. Use extreme leverage (high corporate debt), and 4. Set aside virtually no loss reserves for the massive losses that will be coming. If you do these four things, you are mathematically guaranteed to report record short-term income. Akerlof and Romer referred to it as a sure thing – it is guaranteed.
Why bankers hate free markets and effective market competition, and adore crony capitalism: If you are a banker and wish to grow your bank (lending) at 50% per year – as was happening in Iceland, Ireland and much of Europe, for example – you would have to beat your competition – as in charge a lower interest rate. But if markets are working properly, your competition will try to match your rates – and you wouldn’t end up making more loans, and your income would fall. All bankers would lose. That’s why banks are the biggest proponents of crony capitalism – and are the world leaders in crony capitalism.
Black provides examples of three individuals who wield(ed) enormous influence but got everything wrong:
On the predictions that Neoclassical (theoclassical) Economists got wrong: This is the short list. Neoclassical economists predicted that because markets were efficient they were self-correcting, fraud was automatically excluded, and financial bubbles could not occur. They assured us that because of bankers’ interest in their reputations and auditors and appraisers, that they would never commit a fraud and never assist a fraud. They predicted that massive financial derivatives would stabilize the economic system. They told us, even when the bubble had reached proportions larger than any in the history of the world, that there was no housing bubble in the United States, that there was no housing bubble in Ireland, that there was no housing bubble in Japan, that there was no housing bubble in Spain. They told us that if we paid CEOs massive amounts of money based on short-term performance, it would align the interests of the CEO with the shareholders and the public and be the best possible thing.