Financial crisis: What we’ve learned and how far we’ve come

Marketplace Staff Apr 14, 2011

Financial crisis: What we’ve learned and how far we’ve come

Marketplace Staff Apr 14, 2011

Kai Ryssdal: Perusing the news today, there was a vague feeling of deja vu all over again out there. A Senate committee released a report trashing Wall Street for its conduct during the financial crisis. The story in the New York Times wondered why nobody’s gone to jail over it yet. And the new agency set up to monitor financial stability — that is, systemic risk — has been less than completely forthcoming with what it knows.

William Black teaches law and economics at the University of MissouriMore to the point for our discussion, though, he was a key financial regulator back in the last financial crisis we had — that of the savings and loans. Welcome to the program.

William Black: Thank you.

Ryssdal: So there is this trifecta of things happening today, as I mentioned, that has brought 2008 back to us. And I wonder if we could start with this deceptively simple, but maybe complicated question: Why has it been so difficult to prosecute and to regulate and then to move on from the events of two-and-a-half to three years ago?

Black: Well, in part because we think of it as if it were two to three years ago. In fact, the FBI publicly warned in Congressional testimony in September 2004 that there was an epidemic of mortgage fraud and predicted that it would cause a financial crisis. And people have also forgotten about 1990, 1991 — which is when liar’s loans started and California savings and loans, and we knew it was insane as the regional regulators and we stopped it by normal supervisory means.

Ryssdal: Well then to the question I think a lot of people have, and especially after reading the piece in The Times today: Why hasn’t anybody gone to jail?

Black: Well little people have gone to jail. And of course the answer is they haven’t looked.

Ryssdal: They, regulators?

Black: Well, good point. They, the regulators and they, the FBI, have not investigated, which is why this trifecta was necessary. If you go back to the savings and loan crisis, when we had the inevitable national commission to look at the causes, they had available to them in the public records, a thousand successful felony prosecutions, several thousand successful enforcement actions, and about 800 successful civil suits. And that provided all kinds of facts. Nothing like that exists

Ryssdal: What about the argument, though, that the financial system is so fragile still, and these cases so complicated, that we can’t really tear things apart with substantive investigations and prosecutions because it will all fall apart again?

Black: Yeah, that’s an excellent point. We should leave felons in charge of our largest financial institutions as a means of achieving financial stability.

Ryssdal: See, that’s funny because I was expecting you to come back with — I don’t know, JPMorgan earned $5 billion last quarter. How shaky can they be?

Black: Well, they didn’t earn $5 billion. What we did was change the accounting rules to hide the losses and then we did an amazing amount of off-budget sheet stuff through the Fed. But if you note, you’ll see that most of the recent earnings were because they reduced their loss reserves, which is exactly how they created fictional income during the run up to the crisis.

Ryssdal: What do you think, though, of the Dodd-Frank financial reform regulations out there?

Black: Well it wasn’t designed to deal with the causes of the crisis. It doesn’t deal with causes of the crisis. It won’t prevent future crises.

Ryssdal: So have we wasted this crisis?

Black: Yes, in the sense that you’re supposed to learn from them. We’re not learning the right lessons. In fact, we’re learning the wrong lessons. And that kind of failure to learn is almost always due to ideology getting in the way of facts. We’ve got to get back to American pragmatism, use what works. And boy, this current system does not work.

Ryssdal: William Black teaches law and economics at the University of Missouri, Kansas City. Thanks a lot.

Black: Thank you. Take care.

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