The Thom Hartmann Show: Extreme Vetting for People, but Not for Banks
Thom Hartmann: Welcome back. Thom Hartmann here with you, and I'm very pleased to have on the line with us Professor William Black. He's a Professor of Economics and Law at the University of Missouri, Kansas City, the author of The Best Way to Rob a Bank is to Own One. Professor Black is a former bank regulator who led investigations into the Savings and Loan crisis in the eighties. He blogs or writes for neweconomicperspectives.org and you can tweet him at WilliamKBlack. Professor Black, welcome back to the program.
William Black: Thank you. It's good to be back.
Thom Hartmann: It's been way too long since we have talked. So, I'm curious your thoughts on the Trump administration working with the Wall Street banksters to roll back regulations on Wall Street and how this doesn't seem to be eliciting a peep of resistance from the Republican base.
William Black: Well, you don't expect it necessarily from the Republican base because after all they were supposedly the great haters of regulation, but all those new voters, all those populist types, they were promised that Trump would be taking on the bankers. In the first Republican debate Trump said, 'you don't know bankers like I do - they're killers', right?
Thom Hartmann: That's right.
William Black: And he in one of his late ads in the campaign used the face, the photo of Blankfein, the head of Goldman Sachs, to embody all that was evil and how the Democrats had failed to take on Goldman Sachs, the 'vampire squid' and such.
Thom Hartmann: But Goldman Sachs stock is up a third since the election.
William Black: Well, the stocks in general of course are up enormously because business loves the idea of being able to loot with impunity and, you know, it's not like the Obama administration put any of them in jail, but it did at least have some fines against the corporations. And now that there's a prospect of evisceration of the rules putting Goldman Sachs people all over the top positions of the administration to ensure that whatever rules still exist won't be enforced and putting an anti-prosecutor in again as the Attorney General, they're going to create the most criminogenic environment in the history of the United States both for leak fraud by these corporate types, but also good old-fashioned corruption.
Thom Hartmann: Well, we've seen this happen a couple of times. I mean, Warren Harding in 1920 ran on a campaign platform of less government in business, more business in government. In other words, deregulate and privatize. And he also campaigned on tax cuts. He dropped the 91% tax rate that was in effect in 1920 down to 25% over the course of the first four years, by 1925. Correct me if I'm wrong on any of this. I don't think I am. And that led directly to the Great Crash of 1929.
Ronald Reagan deregulated the S&L's in the early eighties - '82, '83. That led to the crash of the S&L's in '86 which you were involved in unwinding or checking out. Then Republicans along with Bill Clinton - well, I don't know how much he was a cheerleader or if he just signed the legislation not even realizing what was going on. Between the Commodity Futures Modernization Act and the bill that killed Glass-Steagall, deregulated the banks in '99 and 2000, that led right to 2008.
Should we expect that this is going to be a repeat of these cycles?
William Black: Both. Don't forget the Enron fraud.
Thom Hartmann: Oh yes, that was the Commodity Futures Modernization Act actually. Phil Gramm, his wife Wendy was on the board of Enron and that was his baby.
William Black: So, well, actually, the time sequence is slightly different. First they passed the Commodity Futures Modernization Act; that created the general black hole in our ability to regulate financial derivatives. And in answer your question, Bill Clinton was an enthusiastic supporter of this, not a reluctant one, but yes, you're right, it was assuredly bipartisan. This is the 13 bankers that show up in the Treasury secretary's office to demand the scalp of Brooksley Born, the only sort of real regulator in the entire...
Thom Hartmann: I remember that, now, you're right.
William Black: Right, and then, after that, with Brooksley Born out and the Republicans back in charge, they appoint Wendy Gramm to chair the Commodities Future Trading Commission and Wendy then does a special energy derivative carve out of derivatives that weren't covered by the Commodity Futures Modernization Act and using those two carve outs that create this immense regulatory black hole, Enron engineers artificial shortages of electricity that bankrupt California, cause the Democratic governor to be annihilated and make Enron a fortune.
Thom Hartmann: Right, and Ken Lay had a secret meeting with Arnold Schwarzenegger early on in this process and when when Darrell Issa found out about it he broke down in tears because he wanted to be the next governor of California.
William Black: Yeah. It's even worse because on the way to that California meeting Ken Lay met with Dick Cheney and the California senators were begging and pushing the administration to use its authority under the Federal Energy Regulatory Commission to block these immense price rises and Lay, we know subsequently - though that this was all kept secret at the time - gave his wish list to Dick Cheney of the infamous secret Energy Committee in which, much like Tillerson, they brought all the bad guys within the tent and kept it secret how they would carve up American energy and land and things like that.
And the next day Dick Cheney went out and delivered this full-scale right from the script attack and said that there would be no price caps, warning off the Federal Energy Regulatory Commission, and adding gratuitously a blast at California as a bunch of tree-huggers that had caused their own problems because they didn't build more turbines. In fact, demand was unusually low for electricity but what was happening is the energy companies were deliberately taking production offline.
Thom Hartmann: Right, creating artificial scarcities.
William Black: Creating brownouts and blackouts and threatening people's lives.
Thom Hartmann: Right, and wiping out Gray Davis as governor. So, you've been observing this for some time. Where do you think the current deregulatory environment that the Trump administration's promoting is going to take us? What is your prognosis?
William Black: Well, it is so bad that there are parts of the Wall Street Journal that are actually aghast. So there's an article, as we speak, that talks about Trump is going to kick off a renewal of the disastrous race to the bottom and so this is where mostly it's a contest between the US with Wall Street and the United Kingdom with the City of London on who can have the weakest regulation, the weakest supervision and the least danger of anyone being prosecuted.
What we call the 3 Ds: deregulation, desupervision and de facto decriminalization. And this was a race that again, both parties ran, in the United Kingdom Blair deliberately modeled himself after Clinton so he called it New Labour instead of new Democrats. And he excoriated his regulators, financial regulators as supposedly being mean to the bankers. Now, banking supervision had died completely and such.
Now, with Brexit as a threat where the United Kingdom fears losing parts of the City of London finance to Frankfurt and other places - Singapore, Hong Kong and such - the Brits especially under these Brits, the very conservative Prime Minister May will have every incentive to be even more aggressive than the United States in this deregulation, except now it looks also like they're trying to kick off a war - a race to the bottom - on corporate income tax.
And again with Brexit and the loss of the ability to be part of the EU in terms of tariffs, the United Kingdom is also going to have a huge incentive to reduce corporate income taxes to try to out-compete the Irish that are so close to their shores.
Thom Hartmann: So, all this happens and where does it lead us? Is this setup for economic prosperity, which is the sales pitch we're getting from Teresa May and so-called President Donald Trump? Or is this the setup for another crash? Are we looking at repeating the mistakes of Harding and Coolidge?
William Black: The answer, of course, is yes. And that is because the first thing you have to produce to get the really big crisis is the next really big bubble and everything looks good in a bubble as Bill Clinton knows, right? Bill Clinton took credit for all those years his brilliance, his embrace of austerity and it was all wonderful. Well, he was the beneficiary, of course, of the two biggest bubbles in world history: the tech bubble and the housing bubble, which didn't just start under the Bush. It was going big time in the later years of the Clinton administration as well. So we're going to probably have the Trump bubble.
Thom Hartmann: So what's the bubble? I've heard that the banksters are now tranching car loans and student loans - particularly student loans, because they're non-defaultable - and that they're basically doing the same thing they did with mortgages. Are they doing mortgages again? I mean, what bubble do we expect to pop?
William Black: We don't know yet, but it has to be big enough that it actually causes major financial institutions to get into liquidity crises. So you are correct, they are doing exotic derivatives of things like student loans and subprime - in fact they call it subprime - automobile loans. But you also have to remember the crisis that we know best, the one that blew up the world in 2008, that was the third iteration of these kinds of derivatives. These kinds of derivatives which are called CDOs - Collateralized Debt Obligations - they were first done by Michael Milken with junk bonds. Then they were...
Thom Hartmann: That was during the Reagan years wasn't it?
William Black: That was during Reagan and Bush years, that is correct. The first Bush.
Thom Hartmann: Right.
William Black: Then they did it again under the late years of Clinton and right into early Bush when it crashed again. And what they did then was a whole menagerie, but a lot of manufactured housing. So that that's mobile home, trailer type stuff that doesn't have a very good resale value.
So that crashed and then the third one was the new and improved, hey, 'liars loans'. This package a bunch of liar's loans which we know to have a 90% fraud incidence and then we'll pay outrageous fees to the credit rating agencies who will give us a triple-A. And while alchemists could never transmute lead to gold, credit rating agencies, baby, they can take...
Thom Hartmann: Right. And this is what they're doing with sub-prime car loans.
William Black: And this is what they're doing. But they're much smaller in dollar amounts than the crisis. So you need, to get the really big crisis again, you need a much bigger bubble, but we're only in the first month of the term.
Thom Hartmann: Right.
William Black: Give it time, baby.
Thom Hartmann: Right. Fascinating. So you're predicting a bubble coming out of this, and a crash coming out of the bubble, essentially.
William Black: Yeah. But the first thing again is, remember, in a bubble, every stupid decision in the world looks brilliant.
Thom Hartmann: Yeah. There you go. Professor William Black, you're absolutely brilliant, sir. Professor William Black, Professor of Economics and Law at the University of Missouri, Kansas City, the author of the book The Best Way to Rob a Bank is to Own One. Professor Black, thank you so much for being with us.
William Black: Thank you.
Transcribed by Sue Nethercott.