Monday, June 4, 2012

Career Limiting Gestures, And God Save The Queens

[Pound notes, plus a few dollars, at the donations box of the British Museum. Image credit: Lawrence OP.]

For some reason, I just don't seem to get around to discussing these articles, even though I have them bookmarked. I'll just say they're worth reading if you want some idea of why economics policy goes the way it's been going in America recently.

The first is from Bill Black, a former Federal Savings and Loan Insurance Company (FSLIC) executive during the George H.W. Bush (A.K.A. "Big Bush") Administration. He discusses why, despite his being one of the few people in America who have successfully investigated the sort of financial fraud that brought about the Crash of 2008, he was not invited to a bipartisan congressional committee hearing on the subject:

At the large law firm where I began my professional career we were warned about making “career limiting gestures” (CLGs). I confess to being an expert in committing CLGs, such that I am unemployable in the federal government. I’m a serial whistle blower who blew the whistle too often and too effectively on too many prominent politicians and bosses running my agency. One of the proofs of what a great nation America is capable of being is that I survived and the prominent politicians and agency heads who tried so hard to destroy my career and reputation failed. Indeed, in the process they helped to make me an exemplar that public administration scholars use to illustrate how regulators should function. The latest act of Congress disinviting me from speaking truth to power has caused me to ruminate on CLGs. I have concluded that they are essential to effective regulation.

Bill Black: Career Limiting Gestures (CLG): Trying to Speak Truth to Congress

I think most large organizations and professions have some phrase to describe CLG's. I'm certainly familiar with the idea from my own time working in the defense industry. Speaking your mind, even when you're right, is potentially hazardous, as there seems to be no lack of people in authority who would rather ignore expensive or embarrassing problems than deal with them.

Near the end of the article, Black discusses the experiences of Black's own boss at the FSLIC, board chairman Edwin J. Gray, and Brooksley Born, Commodity Futures Trading Commission (CFTC) chairwoman in the Clinton Administration

Here's the introduction to an interview of Ed Gray following his stint at FSLIC:

The following spring Gray was appointed the chairman of a sleepy little government agency: the Federal Home Loan Bank Board. Gray promised his homesick wife that he'd serve for two years and then return to San Diego with her.

But something happened on the way home. Deregulation, a cornerstone of Reagan's policy agenda, plunged the bank board into chaos. The Federal Savings and Loan Insurance Corporation, which insures deposits in the nation's savings and loans, went bankrupt. The U.S. financial system went into the darkest period it had seen since the 1930s.

Former Federal Home Loan Bank Board chairman Edwin J. Gray (interview)

Despite his desire to leave government service, at least in the DC area, he realized his country needed him. He stayed on long enough to clean up one of the biggest messes in the country's financial history. Instead of whining about how hard it all was, he, Black, and a few others bucked the establishment at that time, which included then-Speaker of The House Jim Wright, a Democrat from Texas, and made sure that the people who committed the fraud were punished.

Wikipedia provides a summary of Brooksley Born's time at CFTC:

Born was appointed to the CFTC on April 15, 1994 by President Bill Clinton. Due to litigation against Bankers Trust Company by Procter and Gamble and other corporate clients, Born and her team at the CFTC sought comments on the regulation of over-the-counter derivatives,[4] a first step in the process of writing CFTC regulations to supplement the existing regulations of the Federal Reserve System, the OCC, and the National Association of Insurance Commissioners. Born was particularly concerned about swaps, financial instruments that are traded over the counter between banks, insurance companies or other funds or companies, and thus have no transparency except to the two counterparties and the counterparties' regulators, if any. CFTC regulation was strenuously opposed by Federal Reserve chairman Alan Greenspan, and by Treasury Secretaries Robert Rubin and Lawrence Summers.[5] On May 7, 1998, former SEC Chairman Arthur Levitt joined Rubin and Greenspan in objecting to the issuance of the CFTC’s concept release. Their response dismissed Born's analysis and focused on the hypothetical possibility that CFTC regulation of swaps and other OTC derivative instruments could create a "legal uncertainty" regarding such financial instruments, hypothetically reducing the value of the instruments. They argued that the imposition of regulatory costs would "stifle financial innovation" and encourage financial capital to transfer its transactions offshore.

Wikipedia: Brooksley Born

The last few years have been a grand example of how all that "innovation" was likely to work out. Still, Born paid a heavy price for not going along with Clinton's hand-picked economic team. Born lost the turf war with Wall Street pirates Rubin and Summers, but was proved right in the end.

After discussing this history, Black concludes:

If someone has the money and the academic forum, I urge them to hold a conference now to honor Mr. Gray and Ms. Born for their service to the nation and the costs they bore for us by making their CLGs. I urge a conference that takes seriously and investigates the questions of what works in regulation and how we can select regulatory leaders with the integrity to take vigorous actions to prevent or limit crises. I would add praise for the efforts of the late Federal Reserve Board Member Gramlich who tried to convince Alan Greenspan to act against the “green slime” (endemically fraudulent “liar’s” loans and collateralized debt obligations (CDOs) (not) “backed” largely by the liar’s loans). Gramlich did not push the point to CLG levels. If Greenspan had acted on Gramlich’s advice, however, we could have avoided the financial crisis. The Federal Reserve – and only the Fed – had the statutory authority under the Home Ownership and Equity Protection Act of 1994 (HOEPA) to ban all lenders (even those who were not federally insured) from making liar’s loans. Bernanke also refused to use the HOEPA authority to bar what he knew to be endemically fraudulent liar’s loans until he finally succumbed to Congressional pressure on July 14, 2008 – and even then he substantially delayed the effective date of the prohibition on liar’s loans. We wouldn’t want to inconvenience endemically fraudulent lenders – even after they were leading drivers of the Great Recession.

...

So here is the test for President Obama in his second term or President Romney should he win: check whether they will make the most effective financial regulator in America the head of the Office of the Comptroller of the Currency. His name is Michael Patriarca. Give him the mandate to shrink the SDIs and supervise them ultra-intensively until they have shrunk to the size that they no longer pose a systemic risk. I guarantee that he will commit a host of CLGs by speaking truth to power and saying “no” to the SDIs. It is a national scandal that neither President Bush nor President Obama called on Patriarca. We need regulatory professionals with track records of success, of integrity, of fearlessness, of CLGs, and of speaking truth to power. The right and left seem to agree that regulation is impossible. They have not seen a regulatory head, with the exception of Brooksley Born, since Ed Gray willing to commit a CLG that will destroy her career in order to fulfill her oath of office. Gray did so a quarter-century ago. Born did so nearly 15 years ago. If you want successful regulators, search for those with a track record of making repeated CLGs whenever it is necessary to fulfill their duty to the nation.

Bill Black: Career Limiting Gestures (CLG): Trying to Speak Truth to Congress

I'm pretty sure that either future President will fail that test.

Meanwhile, in a much different place, a Salon article on Paul Krugman's recent trip to Europe sheds some light on the differences in how people view economics on each side of the Atlantic:

Like Americans, Europeans either love or hate our rock-star economist, but his reception on their side of the Atlantic drives home a hard truth that few aside from Krugman have bothered to tell. Eurod√§mmerung, as he calls it, came to Spain and Ireland neither from public extravagance nor from Goldman Sachs fiddling the accounts with credit default swaps, but from genuine efforts to bail out over-indebted private banks sucked in by low-interest loans from German and American lenders. Easy money and European Union grants to build motorways were the euro’s early blessings. The curse came only after Wall Street wrecked the world’s financial system by selling derivatives based on shaky subprime mortgages.

Paul Krugman, European celebrity

What strikes me as fascinating is that there seem to be so many Europeans who are interested in reading about what an American economist thinks about their situation. He's studied it pretty well, and I suspect he has as good a handle on it as most economists, but it's hard to believe that a Spanish economist would be taken seriously here.

There are a lot of lessons we could learn from Europe's recent history, particularly the effect on an economy of increasing or cutting back on government spending during a depression. The verdict is a pretty obvious one, but few on this side of the pond want to learn the real lesson. Instead, they seem to prefer inventing their own versions of both their economies and ours, and learning exactly the lessons they're motivated to learn.

Of course, Krugman understands the reasons for this interest in economic fantasy. As he wrote about the conversations he had in his European trip:

So why is Britain doing exactly what it shouldn’t? Unlike the governments of, say, Spain or California, the British government can borrow freely, at historically low interest rates. So why is that government sharply reducing investment and eliminating hundreds of thousands of public-sector jobs, rather than waiting until the economy is stronger?

Over the past few days, I’ve posed that question to a number of supporters of the government of Prime Minister David Cameron, sometimes in private, sometimes on TV. And all these conversations followed the same arc: They began with a bad metaphor and ended with the revelation of ulterior motives.

The bad metaphor — which you’ve surely heard many times — equates the debt problems of a national economy with the debt problems of an individual family. A family that has run up too much debt, the story goes, must tighten its belt. So if Britain, as a whole, has run up too much debt — which it has, although it’s mostly private rather than public debt — shouldn’t it do the same? What’s wrong with this comparison?

The Austerity Agenda

As he goes on to write, these discussions usually end with these people admitting that their real priority is to either curtail or eliminate social programs. While they aren't as transparent as their American counterparts, he goes on to say, they get there in the end. It's all about the Benjamins. Or, I suppose given the circumstances, the Queens.

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