William K. Black: It’s time for real economic reform

We are a nation in severe crisis. According to William K. Black, a white-collar criminologist, President Obama doesn't deserve any more of our patience:

The Obama administration promoted Bush's architects of the financial disaster and demands that we hail them as heroes. President Bush was ridiculed for saying: "Brownie, you're doing a heck of a job." FEMA administrator Michael Brown stood by while Hurricane Katrina reduced a single large city to ruin. Geithner and Bernanke stood by while scores of large cities were devastated.
Black offer much more than criticism. He offers ten opportunities for digging us out of this mess. It will be difficult to attain any of these while the banks own Congress, but we need to dig deeply an somehow find the political will. Here are two of Black's points that stand out to me:
Can the Wrecking Crew. Fire the senior leaders of Bush's and Clinton's financial Wrecking Crews and stopping treating them as financial experts. President Obama should not reappoint Bernanke as Fed Chairman. He should dismiss Geithner and Summers and cease to take any advise from Rubin. Replace them with the Reconstruction Crew -- people with a track record of getting things right and being effective economists, regulators, and prosecutors . . . End "too big to fail." These banks are "systemically dangerous institutions" (SDIs). They should not be allowed to grow. They should be shrunk to the point that they no longer pose systemic risk, and they should be subject to vigorous regulation while shrinking. They are too big to manage and too big to regulate. They are ticking time bombs that will cause recurrent global crises as long as they are SDIs.
Here are some of Black's other suggestions. I agree with all of them whole-heartedly: - We need to provide the FBI with 1,000 more specialized white-collar crime investigators. - No more executive compensation looting. - Kill TARP and PPIP. ("Use the funds to help honest homeowners that would otherwise lose their homes because of predatory loan terms.") - Make the Federal Reserve System public. - Defeat any proposal to make the Fed the "Uberregulator." - Create a robust "Consumer Financial Product Agency. - End the waste of long-term unemployment (Instead, of paying them to do nothing, pay them to do public works) Consider, also, Black's Five Fatal Flaws of Finance.

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Down with the GDP

In the November, 2009 edition of The Atlantic, Megan McArdle reminds us why we need to wean ourselves of using the GDP as an indicator of economic health. Here's a sample:

GDP does not, and cannot, reflect the waste of enormous effort, and precious natural resources, that went into building something that suddenly no one wants. Moreover, it misses many other aspects of our existence. Strip-mining a picturesque mountaintop, or clear-cutting a primeval forest, shows up in GDP only as a boost to output. Meanwhile, in India’s national accounts, all of Mother Teresa’slabors among the poor would have had only the most minimal possible impact. GDP can record how much money we spend on health care or education; it cannot tell us whether the services we are buying are any good.

So how do you accurately measure a nation's health? One alternative is the HDI.

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We’re another step closer to auditing the Federal Reserve

This has been a long time coming. The Federal Reserve has never been audited. Ever. The House has now moved us a step closer to shedding real light on all of the secret deals:

The measure, cosponsored by Reps. Ron Paul (R-Texas) and Alan Grayson (D-Fla.), authorizes the Government Accountability Office to conduct a wide-ranging audit of the Fed's opaque deals with foreign central banks and major U.S. financial institutions. The Fed has never had a real audit in its history and little is known of what it does with the trillions of dollars at its disposal.

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When do the prosecutions begin?

In the St. Louis alternative newspaper, The Riverfront Times, James Lieber sizes up the prosecutions now underway for the economic collapse. Oh, wait. There aren't any prosecutions:

As it stands now, there is only one federal prosecution related to the credit crash and bailout cycle, and it was begun by the Bush administration's Justice Department in June 2008. Not that there aren't culprits. Bernie Madoff and other accused Ponzi schemers like Allen Stanford are mere pickpockets compared with Wall Street's institutional buccaneers, who so far have carted off up to $12.7 trillion — that's nearly equal to the entire gross domestic product. They've multiplied their booty with billions in subsidies and a flood of derivatives — some of them merely old soured wine in new bottles. Today's pirates are sailing away from the light regulatory scrutiny that apparently will continue in our benighted, weakened, financially top-heavy and bubble-addicted economy. [Former regulator William] Black says Obama's current efforts are doomed to fail — and, in a twist, it's for lack of trying. "There is not a single successful regulator giving him advice," Black notes.
I've posted about William Black previously. Lieber describes him as follows: "a Ph.D. criminologist and lead lawyer at the Office of Thrift Supervision, who helped steer the brilliant federal effort that cleaned up the S&L industry and won more than 1,000 felony convictions of senior insiders while recovering millions of their ill-gotten dollars." Black is someone to whom Obama should be listening. He states that there are two reasons why there aren't vigorous ongoing prosecutions resulting from this collapse 1) "It's difficult to prosecute others for securities fraud if you condoned the deals to begin with," and
2) Obama administration lacks the will. Obama was the candidate most preferred by Wall Street and he has surrounded himself with lackeys for big finance, including not only Lawrence Summers and Tim Geithner, but also Attorney General Eric Holder, who has made it clear that white collar crime is something which he'd rather not prosecute. Keep in mind that "Wall Street's institutional buccaneers [have] so far have carted off up to $12.7 trillion, and that in 2008, In 2008 American households lost 18 percent of their wealth. Why aren't there more prosecutions? There's no good reason. This is an excellent in-depth article. The title: "No Justice: We've bailed out the banks. When do we go after the crooks behind our financial collapse?"

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Buffett’s bet on peak oil

Warren Buffett is lauded as one of the greatest investors of all time, if not the greatest. He's the second-richest person in the world, and known as the "Oracle of Omaha" for his seemingly prescient investments. For example, in the wake of the collapse of Bear Stearns and during the height of the market panic that followed it, Buffett stepped in and negotiated a deal with Goldman Sachs. He acquired $5 billion worth of preferred shares, which would pay him a 10% dividend, as well as warrants with the rights to sell those shares at any time within 5 years from the time of the transaction. As of September this year, those warrants were "in the money" to the tune of $3.1 billion, and that doesn't include the $500 million in premium payments that Goldman pays every year. Those lucrative terms (punitive for Goldman Sachs) left others wondering why the Treasury Department could only negotiate a 5% dividend, but that only added to the mystique and legend of Warren Buffett. At the time, Buffett was quoted as saying "If I didn't think the government was going to act, I would not be doing anything this week," referring to the massive bailout bill which was indeed enacted by the government. It's deals like that that enable one to become one of the richest people in the world. But it's also that background that has some on Wall Street scratching their heads at the news that he was purchasing Burlington Northern railroad. The Wall Street Journal discussed how the acquisition seemingly broke two of Buffett's cardinal rules on investments: 1) buy undervalued stocks or companies, for obvious reasons and 2) don't split your own stocks, as it dilutes the equity of the existing shareholders. Bloomberg quoted a hedge fund principal as saying, "It could be five years before the logic of [Buffett's purchase of] Burlington Northern becomes clear." Even Buffett admits that the purchase was "not cheap" and that it represents an "all-in wager"on the future of the American economy. And there can be no doubt that it is a significant investment-- he's liquidating other rail investments totaling $691.3 million while the Burlington Northern purchase will cost some $26 billion-- an increase in his railroad holdings of some 3,600%. And this bears repeating, he's splitting stock to get it done. This is the first time ever that Berkshire Hathaway (Buffett's investment company) has split shares. He's so reluctant to split shares, the class A shares regularly trade over $100,000 per share, an unheard-of valuation.

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