Third MMT Conference 2019 Blow the Whistle on What We ‘Can’t Afford’ – Stupid Policies

1. Third MMT Conference 2019Blow the Whistle on What We ‘Can’t Afford’ – Stupid Policies September 28, 2019 SUNY-Stony Brook William K. Black Associate Professor of Economics and Law, UMKC

2. Six ‘Hats’ and Two Schools Primary appointment in Economics (UMKC) Joint appointment in Law (UMKC): White-collar criminologist: elite fraud focus Former financial regulator (S&L debacle) Serial whistleblower. Co-Founder of BWU Former Banker Distinguished scholar in residence for financial regulation: U. Minn. Law

3. U.S. GFC GDP Loss The Saving & Loan Insolvencies and the Costs of Financial Crisis (2017) Alexander J. Field, Santa Clara University Research in Economic History 33:65-113

4. Crisis Prevention & Complacency Field p. 25 n.17: “As Reinhardt and Rogoff concluded in 2013: ‘Lesson 1: On prevention versus crisis management. We have done better at the latter than the former. It is doubtful that this will change as memories of the crisis fade and financial market participants and their regulators become complacent’(2013, p. 5).” WKB: Insane.

5. At Dawn, We Slept (Soundly) “[T]he first line of Richard Sylla’s contribution to Government and the American Economy: ‘Most informed observers today would agree that the United States has just about the best financial system in the world. Its problems are newsworthy because they arise in the context of a well-functioning financial order, not one that is disorderly’ (2007 p. 115).” Field (p. 15)

6. Worst S&L Failures: Fraud “Omnipresent” “If fraud played a small role in bringing the industry to its condition at the start of the 1980s, it, along with political corruption, was omnipresent in the worst failures thereafter” (p. 12).

7. Economists: Nothing to See Here “[E]conomistshave often gone out of their way to downplay the significance of criminal misconduct in contributing to the [S&L] insolvencies.” “Lawrence White, a member of the Federal Home Loan Bank … warned … any treatment that focuses largely…on fraudulent and criminal activities is misguided and misleading” (1991, p. 117).

8. GFC: $41.7 T ($2009) GDP Loss “If we grow potential output at rates forecast or projected in the 2008 [CBO] report (2.7 percent per year for 2008-13, and 2.5 percent per year for 2014-18, then continuing at that rate until the end of the window of the 2016 projection (2026Q4), and compare this trajectory with actual through 2015 and then projections of actual through 2026Q4, the cumulative output loss at that point will be $41.7 trillion in 2009 dollars….” Field, p. 52.

9. S&L Debacle: No Recession “In the shadow of 2008, and with knowledge of the course of the economy in the 1990s, the claim that the S&L insolvencies were macroeconomicallysignificant is problematic, both because at the aggregate level the recession was mild, and because there is little evidence linking it to the S&L travails.” Field, p. 33.

10. The Liar’s Loan Crisis Liar’s Loans, Mortgage Fraud, and the Great Recession. Thomas Herndon (2017) “[T]he most convincing interpretation that is able to explain the pattern of extreme executive compensation, despite the abandonment of underwriting standards resulting in the bankruptcy of their firms, comes from fraud expert Bill Black, who argues that executives looted their companies” (p. 5).

11. 70% of Total Pvt Label MBS Losses “Losses from foreclosure for the entire private label RMBS market totaled $500 billion from 2007-2012. About 70%, or $345 billion, of these losses are accounted for by losses in no/low documentation Liar’s Loans” (p. 22).

12. Also Predation “Median wealth declined by about 72 percent among Hispanic college-grad families versus a decline of only 41 percent among Hispanic families without a college degree. Among blacks, the declines were 60 percent versus 37 percent.” (FRB St. Louis study)

13. Systematic & Underwriting “At originating institutions, there was a systematic abandonment of underwriting standards in order to increase the volume of loans originated, with no regards to quality. Mortgage fraud through the falsification of borrower financial information helped to increase origination volume through allowing institutions to originate larger loans than otherwise possible (Taub, 2014; Black, 2013; FCIC, 2011; Hudson, 2010).”

14. Gresham’s Dynamic v. Irony “[A]llreputable intermediaries involved in the sale of mortgages were engaged in systematic misrepresentation (Griffin and Maturana, 2016b; Piskorski, Seru and Witkin, 2015).”

15. BWU & ‘The Con’ Blowing the whistle on fraud and economic malpractice

16. Whistleblowers Transform Within days of the gist of the whistleblower’s warning becoming public, the impossibility of impeachment under Speaker Pelosi has become a likelihood. The whistleblower transformed the terms of engagement, where no senior leader would or could. MMT economists have an advantage using whistleblower and investigative insights – we get the fact that the world is often non-linear.

17. Transform via Information What whistleblowers and real investigations do that causes non-linear responses is provide vastly superior information that transforms the framing of the issue. Neoclassical scholars’ mono-research methodology ignores and prevents tapping this novel information. Huge advantage for us if we take advantage.

18. Listen to Trump.1 President Trump told staff members [and their children] at the United States Mission to the United Nations on Thursday that he wants to know who provided information to a whistle-blower about his phone call with the president of Ukraine, saying that whoever did so was “close to a spy” and that “in the old days” spies were dealt with differently.

19. Listen to Trump.2 The comment stunned people in the audience…. “I want to know who’s the person who gave the whistle-blower the information because that’s close to a spy,” Mr. Trump said. “You know what we used to do in the old days when we were smart with spies and treason, right? We used to handle it a little differently than we do now.”

20. Listen to Keating “HIGHEST PRIORITY. GET BLACK … KILL HIM DEAD.”

21. They Attack Those They Fear Whistleblowers pose the greatest threat to the world’s most powerful corrupt people – the ones who commit the most harmful crimes and predatory acts with seeming total impunity.

22. Listen to the Silence of Trump Appointees The only ones who blew the whistle on Trump were non-appointees, apparently ‘detailed’ to the NSC from the CIA officers.

23. Listen to AG Barr re Whistleblowers.1 After the Supreme Court unanimously upheld the False Claims Act’s constitutionality, AG Barr (during the Bush administration) denounced it as an “abomination”

24. Listen to AG Barr re Whistleblowers.2 Barr falsely claimed whistleblowers were “inter­ested only in money, not in the faithful execution of the laws.”  He quoted favorably Lord Coke’s description calling informants “viperous vermin” (and suggesting that whistleblowers were informants.

25. Listen to AG Barr re Whistleblowers.3 Barr described whistleblowers as a threat to “the liberties of the American people.”They posed “a devastating threat to the Executive’s constitutional authority” and “grave dangers to the president. He claimed the “Department of Justice has an obligation to the President” to “resist this encroachment on executive power.” 

26. Listen to the Right re Whistleblowers.1 They go berserk because they know whistleblowers pose the gravest threat to their elite patrons who can otherwise cheat with impunity. Ronald H. Filler; Jerry W. Markham, Whistleblowers - A Case Study in the Regulatory Cycle for Financial Services, 12 Brook. J. Corp. Fin. & Com. L. 311, 340 (2018).

27. Listen to the Right re Whistleblowers.2 “Perhaps the most infamous whistleblower was Judas Iscariot, who betrayed Christ for thirty pieces of silver.” “whistleblowers have historically been viewed with much disdain” [then quotes Macey] “traditionally have been considered tattletales and otherwise viewed with suspicion….”

28. Listen to the Right re Whistleblowers.3 "Deep Throat's" role in bringing down the Nixon administration is now legend. See CARL BERNSTEIN & BOB WOODWARD, ALL THE PRESIDENT'S MEN passim (1974) (describing that informant). This form of whistleblowing was most recently demonstrated byleaks from officials in the intelligence community who are seeking to cripple the Trump administration.

29. Listen to the Right re Whistleblowers.4 “In the wake of the Financial Crisis of 2008,public companies, financial services firms in particular, were assaulted byenforcement actions brought by the SEC, CFTC, and a host of other regulators. The costs of settlements imposed by regulators in those actions just for the sixteen largest banks, which are public companies, collectively totaled more than $320 billion by the end of 2016.”

30. ‘Dystopian’ “[M]odern macroeconomics is almost, but not perfectly, dystopian. It remains maximally cynical about the behavior of people and the corporations they run. [Athreya 2013: 357]

31. Do Not ‘Deify Markets’ “A … theme that runs through the whole book is that one should not deify … markets.” Athreya(2013: 5-6)

32. Oops, the Laissez Faire God “A silent assumption of the ADM model” [is that there is an] “ADM God.” [Athreya 2013: 103] [“ADM” refers to the Arrow Debreu McKenzie family of “general equilibrium” models.]

33. The Laissez Faire God “It is implicit in the ADM that … law enforcement [is so perfect and punishment so “vicious” that no one] even thinks about breaking the law. [F]irmsnever find it useful to consider breaking the rules” (italics in original).

34. Kocherlakota’s Sly “Almost” “almost coincidentally—in these models, all government interventions (including all forms of stabilization policy) are undesirable.”

35. Timing: Prescott ‘04 Laureate Thomas Sargent, in his interview by Evans and Honkapohja (2005, pp. 567-568): “Calibration is less optimistic about what your theory can accomplish, because you’d only use it, if you didn’t fully trust your entire model, meaning that you think your model is partly misspecified or incompletely specified, or if you trusted someone else’s model and data set more than your own.”

36. Con Came from the Top “My recollection is that Bob Lucas and Ed Prescott were initially very enthusiastic about rational expectations econometrics. After all, it simply involved imposing on ourselves the same high standards we had criticized the Keynesians for failing to live up to.”

37. DSGE Failures Common “[E]arly empirical applications spawned by this development proved to be disappointing, as rejections of particular parametric implementations of the restrictions were commonplace….” Structural Macroeconometrics (2007) Chapter 6. Calibration David N. DeJong and Chetan Dave.

38. If You Keep Failing the Test…. “But after about five years of doing likelihood ratio tests on rational expectations models, I recall Bob Lucas and Ed Prescott both telling me that those tests were rejecting too many good models.

39. Great Models Always Fail? Prescott (1986: 10): “The models constructed within this theoretical framework are necessarily highly abstract. Consequently, they are necessarily false, and statistical hypothesis testing will reject them.”

40. Macro Needs Criminologists • In his book (2013: 221), Athreya identifies two related problems that he argues “interact” (emphasis in original) to form the twin scourges of real world economies and orthodox macro. • “[A]symmetric information and limited commitment” “are economists two ‘usual suspects’ in creating problems for decentralized trade.”

41. Athreya: Pathologically Complex “[The macroeconomy is] almost pathologically riddled by dynamic considerations and feedback effects….”

42. Listen to Mike Patriarca

43. Listen to Joe Selby

44. Listen to Michael Winston

45. Listen to Richard Bowen

46. Distorting Perception: Romer2 “We find that the average decline in output following a financial crisis is … only moderate in size. [W]e find little evidence of nonlinearities in the relationship between financial distress and the aftermaths of crises.” American Economic Review 2017, 107(10): 3072–3118 New Evidence on the Aftermath of Financial Crises in Advanced Countries By Christina D. Romer and David H. Romer*

47. Romer2 GFC Not ‘Extreme’ Text: GFC was not an ‘extreme’ event for any G6 nation. Only extreme event (1997:2Q) for a G6 nation was Japan long after the collapse of its “twin bubbles” in 1990 (which they describe: “minor crisis”). [Actually, Exhibit 1 labels GFC in the U.S. as “extreme” in 2008:2Q.]

48. Romer2 – GFC Not ‘Terrible’ Consistent with the previous literature, we find that real GDP and industrial production fall rapidly and significantly following a crisis, and that unemployment rises. However, the magnitudes are moderate rather than terrible.

49. Romer2 – Definition = Key The definition of financial distress that underlies our new measure is that suggested by Bernanke (1983): a rise in the cost of credit intermediation. In this way, we focus on disruptions to credit supply, rather than on broader conceptions of financial problems. [WKB: They classify based on OECD narratives’ adjectives!]

50. Romer2 – We’re Pessimists [O]ur estimates of the typical aftermath are almost surely overestimates of any adverse causal impact of crises. Sensible permutations of the econometric specification also suggest that our baseline results are at the upper end of plausible estimates of the average adverse aftermath.