Welcome Raghuram G. Rajan, and Host William Black.

[ As a courtesy to our guests, please keep comments to the book.  Please take other conversations to a previous thread. - bev]

Fault Lines: How Hidden Fractures Still Threaten the World Economy

William Black, Host:

Ignoring the Elephant in the Room: Control Fraud and the Financial Crisis

A review of Fault Lines: How Hidden Fractures Still Threaten the World Economy

Dr. Raghuram G. Rajan, is a distinguished professor at the University of Chicago’s business school and former chief economist of the International Monetary Fund (IMF). Readers familiar with Chicago school economics will see that the crisis has not led to a fundamental reevaluation of that school’s policy recommendations. The title of his book captures his thesis – Fault Lines: How Hidden Fractures still Threaten the World Economy. Rajan writes clearly and his book is intended for the intelligent lay reader. His book contains no charts, graphs, or equations, doubtless at the urgings of the Princeton University Press. It is an ambitious book, for it seeks to explain the global crisis and different trends in the real economy and the financial sector in many nations.

Brief Synopsis and Primary Themes

Rajan argues that the “rational actor” model explains the crisis – and why future crises are likely: “each one of us did what was sensible given the incentives we faced” (p. 4). He argues that the government can cause individually rational, well-motivated actors to produce results which, collectively, are disastrous. Their actions were disastrous because the government interferes with the economy, “derail[ing]” what would otherwise be “finely incentivized” financial markets (p. 126).

U.S. housing policy caused the crisis. Rajan offers an obligatory passing whack to the Community Reinvestment Act, but his real target is the equally obligatory “government sponsored enterprises” (GSEs) – Fannie and Freddie. Fannie and Freddie were the weapons of mass destruction that perverted the “finely incentivized” financial markets. The “government” is culpable for the making Fannie and Freddie the GSEs that perverted the private incentives. The government did so, inevitably because of the most treasured Chicago school meme – “unintended (negative) consequences.” Rajan speculates (he concedes that he has no evidence) that because U.S. income inequality became so extreme and middle class families’ income stalled, the “government” decided to reduce the inequality through subsidies to housing. In Rajan’s account, income inequality’s great danger becomes the risk that the government will interfere with the economy. Fannie and Freddie prevented “private market discipline” from being effective because they were willing to pay top dollar for “liar’s” loans and securities backed by liar’s loans that were certain to suffer catastrophic losses as soon as the housing bubble stalled. If Fannie and Freddie were the “fool” in the market, then everyone else simply, rationally, skinned them alive. Rajan asserts that Fannie and Freddie made these suicidal purchases because the Congress mandated that they do so. Rajan claims that Fannie and Freddie’s creditors and shareholders did not exert effective private market discipline to prevent the suicide because they (erroneously) expected to be bailed out fully by the Treasury and suffer no losses.

The first part of his explanation for the crisis is globalism and macroeconomics. The fastest growing nations in the East continued to save. U.S. businesses grew by borrowing cheap funds from the East. This led to the high tech bubble and a recession. The Federal Reserve responded to the recession by driving interest rates even lower. This led to the housing bubble because, Rajan asserts, government policies directed credit toward housing credit for low-income buyers. The collapse of the housing bubble triggered the Great Recession – a “child of past crises” (p. 5).

Rajan also addresses why we experienced a banking crisis. He provides his key explanation of the banking crisis (pp. 137-39) is response to his own question: “Why Did Bankers Take on Tail Risk? Searching for Alpha.” This passage is probably the most difficult portion of the book for a non-specialist reader because it involves the interaction of more complex finance and statistical theories, so I will address it in greater detail in the next section.

The Author’s Suggested Reforms

Rajan’s policy remedies are the standard Chicago school proposals. They follow logically from his analysis of the causes of the crisis. The government should withdraw from housing. Deposit insurance should be eliminated. The income tax should be eliminated and replaced by a sales tax (a change from his earlier view that it should be replaced by a tax on wealth). Social Security and Medicare benefits should be cut back and Social Security should be privatized. The Fed should raise interest rates and resist the temptation to try to use easy monetary policies to reduce unemployment even in “jobless recoveries” from recession. Those familiar with IMF austerity policies will recognize the monetary and fiscal policies that Rajan proposes.

Rajan proposes the latest variant in the neoclassical quest to create effective, timely private market discipline in the real world. The idea is to convert creditors into equity positions if the borrower gets in financial trouble, which could increase the creditors’ losses in the event of bankruptcy. With more to lose, the hope is that endlessly predicted, but rarely observed, effective, timely private market discipline will (finally!) emerge. Neoclassical theorists make recurrent efforts to try to create effective, timely private market discipline because the stakes are so high. Absent such discipline, the efficient markets and contracts hypotheses that provide the essential foundation for the entire edifice of “modern finance” and critical aspects of microeconomics fail.

A Critique of the Author’s Explanation of Modern Banking Crisis

Rajan’s explanation of banking crises is inherently complex for general readers. I quote, it at some length, so that the reader can get a feel for what I think is his book’s most important claim. “Alpha” is a financial term of art that refers to the premium return created when the banker’s skills increase investment returns in a manner that does not simply reflect taking greater risk. When Rajan refers to “tail risk” he means the very low risk of an extremely bad event occurring in any particular year.

Why should a manager care about generating alpha? If she wants to attract substantial new inflows of money, which is the key to being paid large amounts, she has to give the appearance of superior performance. The most direct way is to fudge returns. In recent times, some fund managers, like Bernard Madoff, simply made up the numbers, while others who held complex, rarely traded securities attributed excessively high prices to them based on models that had only a nodding acquaintance with reality. But it is easy to track and audit the returns most financial managers generate, so fudging is usually not an option, even for those with consciences untroubled by committing fraud. What then is a financial manager to do if she is an ordinary mortal….?

The answer for many is to take on tail risk. Suppose [she] write[s] earthquake insurance policies but does not tell her investors. As she writes policies and collects premiums, she will increase her firm’s earnings. If the manager does not set aside [loss] reserves … she will be feted as the new Warren Buffett…. The money can all be paid out as bonuses or dividends.

Of course, one day the earthquake will occur, and she will have to pay insurance claims. Because she has set aside no reserves, she will likely default on the claims, and her strategy will be revealed for the sham it is. But before that she will have enjoyed the adulation of the investing masses and may have salted away enough in bonuses to retire comfortably to a beach house in the Bahamas. Failing in a herd rarely has adverse consequences.

I quote this extended passage because it reveals so much about the crisis and why the people that caused the crisis and grew wealthy from it have not been dealt with. Rajan should be applauded for demonstrating that the banking crisis was caused by endemic “accounting control fraud.” In a control fraud the CEO that controls a seemingly legitimate firm uses it as a “weapon” to defraud. For financial firms, for some of the reasons Rajan explains, accounting is the “weapon of choice.” Rajan’s earthquake insurance example confirms the findings of white-collar criminologists and the economists George Akerlof and Paul Romer in their classic 1993 article – Looting: the Economic Underworld of Bankruptcy for Profit – accounting fraud is a “sure thing.” They meant that it produced guaranteed, record (albeit fictional) reported accounting income.

The recipe for a lender to maximize reported short-term (fictional) income was perfected by accounting control frauds decades ago and has been known to competent financial regulators since 1984 (when our “autopsies” of S&L failures revealed the consistent pattern).

1. Grow extremely rapidly
2. Lend to borrowers who will agree to pay a premium yield (this typically means borrowers with high default risks but the ideal is predatory lending – charging extreme yield premiums unrelated to risk to financially unsophisticated borrowers)
3. Extreme leverage
4. Provide only trivial loss reserves

The primary constraint on demand for homes is the unavailability of financing to borrowers that pose serious default risk, so the second ingredient to the fraud recipe leads to a dramatic increase in effective demand. This increase in effective demand, as Akerlof and Romer (and we) explained decades ago, can hyper-inflate real estate bubbles. Credit Suisse reported in 2007 that 49% of mortgage loan originations in 2006 were “stated income” (liar’s loans). Liar’s loans, as the name suggests, are endemically fraudulent. That means that the lenders made millions of fraudulent home loans annually. The resultant epidemic of accounting control fraud, once again, caused a financial bubble to hyper-inflate.

Once we apply the recipe, and its implications, to the facts that Rajan reports we can see why those facts demonstrate that accounting control fraud drove this crisis. We can also explain many of the factual patterns that puzzled Rajan (because they are inconsistent with Chicago school neoclassical theory – which assumes away fraud). Rajan cannot understand why many originators or packagers of liar’s loans held such loans or securities backed by liar’s loans in their portfolios instead of selling them. The answer is yield and compensation. The officers controlling the bank can become wealthy. The bank will fail (unless it is bailed out or allowed to cover up its losses), but the officers can walk away wealthy. This is why Akerlof and Romer’s title emphasizes that the looters profit from bankrupting “their” firm.

Rajan believes that the CEOs of the huge nonprime lenders were among the largest victims of the frauds. He bases this claim on the drop in the value of their stock. This is a common error. The relevant comparison is what their financial position would have been without the fraud. The fraud created the fictional income that drove the run up the bank’s stock price. Rajan writes at several places that the control frauds such as New Century were initially profitable, but in reality their lending had a negative expected value. The stock price of “their” bank would have collapsed if markets were efficient. (Note that the ability to sell the bad assets prior to default does not explain this behavior. Nonprime loan sales overwhelmingly took place with substantial recourse. The sellers of fraudulent liar’s loans (due to falsified applications), for example, typically committed a second felony (actually, a fifth fraud if one includes the related appraisal and securities frauds involved in making and accounting for the loan origination and the fraudulent reps and warranties made to the entity “enhancing” the credit of the CDO) when they sold the loan under false reps and warranties. Such loans can be put back to the seller, so an honest lender would not make fraudulent loans not only because that would be oxymoronic but because it wouldn’t protect them from the inevitable losses. Instead, the CEOs falsely reported that they were highly profitable and this typically successfully deceived enough investors to hyper-inflate the stock price. The same four-ingredient recipe simultaneously maximizes fictional reported short-term income and real losses. The senior insiders cannot capture for their personal benefit all of that run up in stock price because if they sell their shares at the same time the stock price will collapse and their behavior will make the fraud obvious.

Rajan shows why accounting control fraud, by contrast, was “easy” and became widespread. First, take his earthquake insurance example. It is, of course, an obvious case of accounting control fraud. Rajan’s example contains two typical acts of deceit. The CEO “does not tell her investors” that she is taking on a massive insurance liability and the CEO does not provide loss reserves to make it possible for the bank to honor its insurance obligations. The CEO Rajan describes is defrauding the bank’s shareholders, creditors, and insurance customers.

Second, Rajan recognizes elsewhere that banking crisis occurred because hundreds of banks successfully – and massively – overstated nonprime mortgage asset values and returns.

Third, Rajan recognizes elsewhere that accounting control frauds could produce guaranteed, record (albeit fictional) returns by making “liar’s” loans that would produce catastrophic losses not in unlikely (“tail”) circumstances, but rather in any normal circumstances.

Fourth, Rajan’s logic demonstrates that there is no given (exogenous) random distribution of financial events – which means that the entire concept of “tail” events is misleading. When we create criminogenic environments through deregulation, desupervision, and perverse executive and professional compensation we can produce such severe, perverse incentives that we produce recurrent, extreme crises. Rajan recognizes this point later in his book.

Fifth, Rajan’s specific scheme is a real world fraud scheme, but not one that played a material role in the actual crisis. Financial control frauds used superior schemes.

The Crisis was not Caused by Tail Risk

Accounting control frauds typically invest in asset portfolios that are certain to suffer catastrophic losses. Indeed, they deliberately construct their loans and investments in a manner that greatly increases the probability of catastrophic defaults. “Liar’s” mortgage loans create severe “adverse” selection, which creates a “negative expected value.” In English, that means that a portfolio of liar’s loans has an extremely high probability of suffering severe losses. Subprime loans have a particularly high expected default rate. Combining liar’s loans to subprime borrowers, which became common, produces catastrophic default frequencies. The do so because lending on those terms maximizes short-term reported accounting income, which maximizes their income.

Assets that have only a tiny tail risk of going bad are less risky and offer a much lower yield. Conventional, fully underwritten prime mortgage loans are the exemplars of “tail” risk. The historic default rate on such loans is around one percent. The accounting control frauds invariably shifted dramatically away from such loans in favor of nonprime loans with exceptional “layered” risk. Indeed, there was no exogenous risk distribution – the control frauds structured loans to fail because doing so maximized their compensation.

Compensation and Fraud Drove the Disasters at Fannie, Freddie, Lehman, New Century, and Ameriquest

Rajan places primary blame on the “government” purportedly forcing Fannie and Freddie to buy bad loans from poor people for causing the crisis. The effort to force the facts to fit the claim leads to sentences like this:

New Century Financial … was founded in 1995, with about $3 million of venture capital, as government support to the subprime market increased (p. 126).

New Century was created to avoid federal regulation. It was not federally insured. It was not subject to the Community Reinvestment Act. It was a venture capital (VC) initiative, not supported by the government. It chose not avoid regulation because the “government” had recently killed the type of liar’s and subprime loans that New Century made. In 1990-91, several West Coast S&Ls began to make material amounts of liar’s loans. The West Region of OTS, realized that such loans were inherently unsafe and unsound because they were an open invitation to fraud so we used our supervisory powers to end them. Some S&Ls reacted by dropping their federal S&L charter (and deposit insurance) so that they could escape federal regulation and supervision. Roland Arnall converted the California S&L he controlled into Ameriquest, an uninsured and unregulated mortgage banker, to escape our regulation.

Rajan premises his argument on a factual premise that I believe is flawed:

The private financial sector did not suddenly take up low-income housing loans in the early 2000s out of the goodness of its heart, or because financial innovation permitted it to do so – after all, securitization has been around for a long time. To ignore the role played by politicians, the government, and the quasi-government agencies is to ignore the elephant in the room (p. 42).

First, the private sector took up low income housing no later than 1991 and they did it to maximize fictional yields and real bonuses. Second, while “securitization” had been around for a long time, securitization of toxic assets had not been. Securitizing prime assets is relatively straight forward. Securitizing toxic assets is inherently dangerous. Securitizing toxic mortgage product was in fact a (terrible) “financial innovation.” The innovation was led by “private label” entities (not Fannie or Freddie). Fannie and Freddie were private entities engaged in accounting control fraud. Financial regulators were chosen on the basis of their ideological opposition to regulating. Desupervision was endemic. The real elephant in the room was theoclassical economic dogma and perverse (not always) unintended consequences of that dogma which optimized a criminogenic environment in the finance industry.

126 Responses to “FDL Book Salon Welcomes Raghuram G. Rajan, Fault Lines: How Hidden Fractures Still Threaten the World Economy”

BevW October 23rd, 2010 at 2:01 pm

Raghu, Welcome to the Lake.

Bill, Thank you for Hosting today’s Book Salon.

dakine01 October 23rd, 2010 at 2:02 pm

Good afternoon Raghuram and Bill and welcome to FDL this afternoon.

Raghuram, I have not had an opportunity to read your book so forgive me if you answer this in it but I do have a basic question.

How can any economic model be called “rational actor” in any way shape or form when at the heart of economics or anything else, are human beings who are almost by definition totally irrational actors?

Jane Hamsher October 23rd, 2010 at 2:02 pm

Thanks so much Bill, and welcome Dr. Rajan. A pleasure to have you both here today.

William Black October 23rd, 2010 at 2:03 pm

Welcome to the Lake Professor Rajan.

Let me kick things off an opening question drawn from today’s news that relates to one of the important themes of your book, the global trade imbalances.

Can you explain the nature and importance of the G-20 pact that Secretary Geithner has just proposed? What is your view of whether his proposal should be adopted. What alternative, if any, would you have proposed to the G- 20?


Raghuram G. Rajan October 23rd, 2010 at 2:05 pm
In response to dakine01 @ 2

If you look at what most people do, it is reasonably rational. We all behave irrationally some of the time, and some do behave irrationally all the time. But to base all policy or prediction on irrationality alone may not be wise. Nor is it wise to ignore it totally. Economics has spent time learning about irrationality and incorporating it in our view of the world.

Raghuram G. Rajan October 23rd, 2010 at 2:05 pm
In response to William Black @ 4

Secy Geithner wants all countries to keep their current account deficits or surpluses below 4% of GDP. This means that no country should either be an extreme saver or an extreme spendthrift. The idea is sensible, but anyone who will be affected by the rules is unhappy – hence China and Germany don’t want anything to do with it.

William Black October 23rd, 2010 at 2:08 pm

In your book, you cite favorably the Prompt Corrective Action (PCA) law that Congress adopted in 1991. Congress, at the behest of the Chamber of Commerce, the banking trade associations, and Chairman Bernanke, extorted FASB and intimidated it into gimmicking the accounting rules on loss recognition. This makes the banks, particularly the systemically dangerous institutions (SDIs), appear to be profitable and have adequate capital, which evades the PCA. It also allows the CEOs to continue to receive large bonuses even if the bank is, under real accounting rules insolvent and unprofitable. Do you support changing the accounting rules to require financial institutions to recognize currently their losses under the pre-extortion accounting rules?


Teddy Partridge October 23rd, 2010 at 2:10 pm

This should be fun.

Thank you, both, gentlemen.

*pops popcorn*

Raghuram G. Rajan October 23rd, 2010 at 2:10 pm

I think presenting a true and fair picture of bank balance sheets is important. So I am certainly against gimmickry. That said, we should not underestimate the difficulty of presenting a true and fair picture when the markets for some instruments are very thin. Because bankers could make up prices, even straightforward accounting opened up room for gimmicks and mis-statement.

Teddy Partridge October 23rd, 2010 at 2:12 pm

My general question for Raghuram G Rajan is this: how far off the rails must the oligarchs’ dream go for the rest of us before anyone in Chicago recognizes that their pet themes aren’t working?

thatvisionthing October 23rd, 2010 at 2:13 pm

Hi, great to have you here to ask questions.

Regarding rational actor — the movie The Corporation did a personality analysis of corporations as person and says they meet the definition of a psychopath — that section of the movie is here, on youtube: http://www.youtube.com/watch?v=7nNvmkFShNI


- Callous unconcern for the feelings of others
- Incapacity to maintain enduring relationships
- Reckless disregard for the safety of others
- Deceitfulness: repeated lying and conning others for profit
- Incapacity to experience guilt
- Failure to conform to social norms with respect to lawful behaviors

Subject: The Corporation
Diagnosis of Personality Disorder: PSYCHOPATH

Does that fit in with your theories?

Jane Hamsher October 23rd, 2010 at 2:13 pm

Dr. Rajan, I would like to know if this is an accurate appraisal of what you believe:

Rajan asserts that Fannie and Freddie made these suicidal purchases because the Congress mandated that they do so.

From my reading on the situation, this is not the case.

William Black October 23rd, 2010 at 2:15 pm

If you go back in time several years and recall what your view was in say 2005, did you think that the “AAA” rated top tranches of CDOs backed primarily by liar’s loans would likely lose value only in what you refer to as a tail event (extremely unlikley)? Did you see that CDO market then as relatively broad and efficient or a disaster certain to happen as soon as housing prices stalled? Was there any consensus view on this issue at the IMF?


Raghuram G. Rajan October 23rd, 2010 at 2:16 pm

So while we are waiting for more comments, may I just say Bill that while I appreciate all the hard work you have done in reading the book, you have fallen into a trap psychologists recognize well — of typifying me as one of those “chicago types” and ascribing to me all the usual attributes of the chicago school, many of which I do not subscribe to (in the book or elsewhere) — for example, I am not for privatizing social security. I think you do me and the book and disservice, not because I think Chicago is wrong, but because what Chicago truly stands for is new ideas. And if anyone reads the book carefully, they will see that I cannot be pigeon-holed into right or left. For example, I do want us to put tremendous effort into expanding quality education and job-training for those left behind. And I do want a safety net without holes.

Raghuram G. Rajan October 23rd, 2010 at 2:18 pm
In response to Jane Hamsher @ 12

Congress mandated higher and higher affordable housing lending mandates for Fannie and Freddie throughout the 1990s and 2000s. The department of Housing and Urban Development had this to say in 2000 when it announced that it was increasing Fannie and Freddie’s affordable housing goals, it concluded

“Lower-income and minority families have made major gains in access to the mortgage market in the 1990s. A variety of reasons have accounted for these gains, including improved housing affordability, enhanced enforcement of the Community Reinvestment Act, more flexible mortgage underwriting, and stepped-up enforcement of the Fair Housing Act. But most industry observers believe that one factor behind these gains has been the improved performance of Fannie Mae and Freddie Mac under HUD’s affordable lending goals. HUD’s recent increases in the goals for 2001-03 will encourage the GSEs to further step up their support for affordable lending.”

And in 2004, when it announced yet higher goals it said
“Over the past ten years, there has been a ‘revolution in affordable lending’ that has extended homeownership opportunities to historically underserved households. Fannie Mae and Freddie Mac have been a substantial part of this ‘revolution in affordable lending’. During the mid-to-late 1990s, they added flexibility to their underwriting guidelines, introduced new low-downpayment products, and worked to expand the use of automated underwriting in evaluating the creditworthiness of loan applicants. HMDA data suggest that the industry and GSE initiatives are increasing the flow of credit to underserved borrowers. Between 1993 and 2003, conventional loans to low income and minority families increased at much faster rates than loans to upper-income and nonminority families.”

October 23rd, 2010 at 2:20 pm

Dr. Rajan – please respond to the fact that CRA loans accounted for less than 3% of the Fannie/Freddie portfolios prior to Graham-Leach-Bliley, and whether or not 3% of such portfolios could drive the economy to the brink prior to Graham-Leach-Bliley.

Was it not in fact, new and perverse incentives with the withdrawal of the banking and securities sides of the financial institutions?

Otherwise, how could you account for the fact there was not a bubble nor deleterious financial consequences to mortgage fraud in the period from the enactment of CRA lending to the Graham-Leach-Bliley legislation?

Jon Walker October 23rd, 2010 at 2:21 pm

It seems the problem has not been isolated to the US. England Spain and other had similar bubbles. How can you chalk this up to US policy involving Freddie and Fannie?

Raghuram G. Rajan October 23rd, 2010 at 2:21 pm

I think you do injustice to the vast majority of corporations. There are rogues in every business, but I think tremendous value is being created every day by people who care about the products they make and want to give good value for money.

June Carbone October 23rd, 2010 at 2:23 pm


When I teach Law and Financial Institutions, I emphasize the New Deal regulations that separated investment banking from commercial banking, and then S&L’s from commercial banks. The system seems to have been extraordinarily stable from the thirties until the S&L crisis of the eighties. When I teach the eighties, I emphasize not only interest rate mismatches, but disintermediation, with deposits moving out of banks and into higher paying non-insured savings. Since then, we have had two major financial crises, each fueled by bubbles and deregulatory efforts that disproportionately benefitted the least responsible actors. Yet, it seems impossible to simply go to back to the tight financial controls of the New Deal. And the current system seems to be treating the big banks — e.g., Citibank or B of A — with kid gloves, while cracking down on the little guys. Any thoughts?

William Black October 23rd, 2010 at 2:24 pm

I anticipated from some aspects of your background, e.g., your taking on Greenspan during his valedictory conference, that your book would make more of a break from what I see as long falsified Chicago views. I was surprised at how little change there was.

It was never my impression that the Chicago school opposed either education or health care. I’ll have to dig out your article I read to prep to host you in which you discussed your position on social security — my memory is that you did come out in favor of private investment accounts. That is commonly referred to as privatizing.

Raghuram G. Rajan October 23rd, 2010 at 2:24 pm
In response to Kelly Canfield @ 16

More than deregulation, it was the attitude amongst regulators that markets do not need to be regulated that played a role in the crisis. This was some parts ideology, some parts genuine belief that market participants were smart and would do the right thing, and some parts the political environment and pressures.

Knut October 23rd, 2010 at 2:25 pm

Ì would like to have your opinion on the possibility that much of the problem was due to deliberate attempts to avoid government regulation. Professor Black notes above that New Century Financial was deliberately set up to avoid regulation. We all know that the term `Credit Default Swaps`was invented to circumvent regulations requiring insurers to maintain reserves against their liabilities. When one examines the history of monetary instruments going back to the nineteenth century, one observes systematic avoidance by bankers of explicit or implicit regulations that restrain their capacity to create means of payment. Counterfeiting is the obvious criminal example, but there are analogies in standard banking practice, like the creation of offshore dollar accounts in the late 60s, which were exempt from reserve requirements, and the development of chequagle brokerage accounts in the 1970s. There is always profit to be made between the demand price and the supply price of means of payment; but that profit does not always signify a net social gain.

The point is that there is no obvious self-correcting mechanism here other than an monetary implosion. It may be individually rational to invent means of circumventing regulations, but is surely not always socfially rational. Otherwise, we would have to argue that the real cause of these problems are the regulations that limit unrestricted creation of means of payment.

thatvisionthing October 23rd, 2010 at 2:25 pm

I was just going to ask a similar question to Jane’s, re this –

Rajan speculates (he concedes that he has no evidence) that because U.S. income inequality became so extreme and middle class families’ income stalled, the “government” decided to reduce the inequality through subsidies to housing.

– because of a quote from Catherine Austin Fitts that I left in a comment yesterday that suggests Clinton era policy changes were made to take advantage of people who were only getting poorer:

The Fed Did Indeed Cause the Housing Bubble

My company served as lead financial advisor to the Federal Housing Administration between 1994 and 1997. I watched both the Administration and the Federal Reserve aggressively implement the policies that engineered the housing bubble. These are described at my website and in my on-line book, Dillon Read & the Aristocracy of Stock Profits (http://www.dunwalke.com).

One story, for example, is the following:
“In 1995, a senior Clinton Administration official shared with me the Administration’s targets for Fannie Mae and Freddie Mac mortgage volumes in low- and moderate-income communities. We had recently reviewed the Administration’s plans to increase government mortgage guarantees — most of these mortgages would also be pooled and sold as securities to investors. Even in 1995, I could see that these plans would create unserviceable debt loads in communities struggling with the falling incomes expected from globalization. Homeowners would default on mortgages while losses on mortgage-backed securities would drain retirement savings from 401(k)s and pension plans. Taxpayers would ultimately be hit with a large bill . . . but insiders would make a bundle. I looked at the official and said that the Administration was planning on issuing more mortgages than there were houses or residents. “Shut up, this is none of your business,” the official snapped back.”

masaccio October 23rd, 2010 at 2:29 pm

You and every other mainstream economist are arguing for reforms that will hurt average Americans, while rich Americans are protected by bailouts, weakening of regulations and the opportunity to dominate political discourse.

Do you think it is reasonable for working and unemployed Americans to feel bitter about that?

Raghuram G. Rajan October 23rd, 2010 at 2:29 pm
In response to Jon Walker @ 17

As the book indicates, a whole set of causes were responsible for the crisis. Common to all these countries was loose monetary policy, driven primarily by loose Fed policy (the ECB has no option but to follow where the FEd goes, else the Euro will appreciate uncontrollably). However, what is special about the US is that the low end of the market went up much more and crashed much more. The same people who lost out in the growth before, and had stagnating incomes in the go-go years, now have lost their jobs and are being foreclosed on. We need to get to the real root of the problem, which is too many Americans cannot earn decent incomes, and not paper over it through loose credit or low rates.

October 23rd, 2010 at 2:30 pm

Well that didn’t happen now, did it?

And isn’t what you just wrote more easily understood as “They didn’t think rules were required to extract the rents they wished to.” ?

thatvisionthing October 23rd, 2010 at 2:30 pm

Question for Bill Black — Elizabeth Warren said at Netroots Nation this summer that the 2005 Bankruptcy Act had a little-known provision via a sponsorless amendment that made Lehman’s failure not a bankruptcy in the traditional sense but a run on the bank by insiders with toxic debts — transcript here — because it took away the automatic stay. What about that? It sounds to me like TARP was a fraud set up in 2005.

[Mod Note: Please stay on Dr Rajan's book which is the actual topic today]

mzchief October 23rd, 2010 at 2:30 pm

{salting the popcorn}

Welcome Mr. Rajan and Mr. Black. Everyone. :)

Jane Hamsher October 23rd, 2010 at 2:31 pm

And this is what Bloomberg had to say:

Shareholder Pressure

At the same time, Fannie and Freddie were under pressure from shareholders to generate profits to bolster their stock price. Fannie dropped 17 percent from 2004 through 2006 and Freddie declined 7.9 percent. The Standard & Poor’s 500 Index, by contrast, gained 7.4 percent.

Fannie and Freddie gravitated to the securities as yields on agency mortgage bonds often fell below the cost of selling their debt. In 2006, AAA rated securities backed by subprime or second mortgages averaged 0.57 percentage points more than U.S. Treasuries, according to Lehman Brothers Holdings Inc. index data. That compares with 0.48 percentage points for fixed-rate agency mortgage securities.

The public and private demands on Fannie and Freddie led to their demise, Paulson said on Sept. 7, when he announced the government was assuming control after their shares plunged more than 90 percent. HUD said the companies shouldn’t blame policy makers for driving up subprime holdings. The companies weren’t required to keep the debt on their books as part of their home- financing goals.

The article does go on to note that “The companies said they were urged to increase purchases of subprime debt by the Bush administration.”

I guess I’d like to know in what fantasy world George Bush gave a hoot about the poor. As always, the poor — who saw very little benefit — were used as the scapegoats for further Wall Street looting.

Jon Walker October 23rd, 2010 at 2:33 pm

would you than advocate for a whole sale adoption of Sweden and Norway’s social/financial policies, which produced some of the lowest level of income inequality and greatest social mobility?

Raghuram G. Rajan October 23rd, 2010 at 2:34 pm
In response to June Carbone @ 19

I think the biggest problem as we come out of this crisis is that we have created entities that are too big to fail — the Citibanks of the world, that have shown a repeated ability to get themselves into trouble. A number of proposals in the book are focused on how to reduce this privilege if not eliminate it. Perhaps I can correct one more error in the opening post — I do not ask to get rid of deposit insurance. Instead I advocate reducing deposit insurance for large banks, while preserving it for small community banks. That way, large banks do not get government insurance over and above their too-big-to fail provilege. Banks that have been mismanaged should not be allowed to grow big by being privileged.

Raghuram G. Rajan October 23rd, 2010 at 2:36 pm
In response to masaccio @ 24

More education, better training, stronger safety net hurts average Americans? Which book are you talking about?

William Black October 23rd, 2010 at 2:36 pm

The question of why Fannie and Freddie invested so heavily in nonprime is important. Having been an expert witness for OFHEO in their enforcement action against Fannie Mae’s former senior managers, I met all of the senior staff of the entity that were supposed to regulate Fannie and Freddie and studied what was driving Fannie and Freddie’s senior managers.

The straight forward reason I found was that Fannie and Freddie did it for the same reason Lehman, Bear, and Merrill did it. They did it for the fictional accounting yield. I say fictional because these nonprime assets would have shown massive losses had the holders placed appropriate loss reserves. If you book extreme yield and don’t reserve for the losses you create a “sure thing” and you max out your bonuses. Note the key fact — Fannie and Freddie did not have to purchase liar’s loans. They did so after even the mortgage industry’s experts warned that they were endemically fraudulent. Instead of ballyhooing their purchases of liar’s loans (and CDOs backed by liar’s loans) — which they should have done if their purpose was to please Congress — they lied about their liar’s loans and called them prime. They bought subprime for the same reason that they bought liar’s loans — to max out their bonuses. That’s why Lehman and Merrill did the same strategy even though they weren’t subject to any laws such as the CRA and had no quotas.


June Carbone October 23rd, 2010 at 2:38 pm

I found your comments on human capital really intriguing. Naomi Cahn and I wrote a book, Red Families v. Blue Families, and found that in the “blue areas” of the country, fertility, teen births, and divorce are down. From the mid-nineties to 2004, college grads saw a 20% decrease in unintended pregnancies, while they increased by 29% for the least educated women. We argue that this increases the likelihood that poor children will be born younger mothers, who are more likely to divorce (if they marry at all) than older women, and are less prepared to invest in their children.

We point out that while the one-child policy in China has its problems, it produced a dramatic increase in human capital in one generation. We seem to be following policies — abstinence education, obstacles to the availability contraception and abortion, cutbacks in assistance to poor women and their children, less money for higher education — guaranteed to lower the human capital of the next generation.

Raghuram G. Rajan October 23rd, 2010 at 2:39 pm
In response to Jon Walker @ 30

I don’t think you want to imitate any system blindly. The Swedes are worried aout the very high levels of people in their system opting for disability insurance at an early age, and thus becoming a charge on the system. We have to design a system that gives everyone a chance, and enough incentive to work hard, while creating enough of a safety net to help those who do not succeed or are plain unlucky. The key is to give everyone access to opportunity — which means they should have the means to get the skills, the health, and the finances to be able to succeed.

William Black October 23rd, 2010 at 2:41 pm

Lehman died because it was an accounting control fraud. It made massive amounts of liar’s loans and subprime loans and loans that had both characteristics. When the secondary market tanked they were stuck with the toxic mortgages in their pipeline. Lehman also died because of similarly awful origination of commercial real estate — with grossly inadequate loss reserves. All of this did eventually cause a liquidity crisis.


geoshmoe October 23rd, 2010 at 2:41 pm

Dr. Rajan, I too, would like to know if this is an accurate appraisal of what you believe:
Rajan asserts that

Fannie and Freddie made these suicidal purchases because the Congress mandated that they do

Yes or No please sir. quicker, less Bernanke, or Geitner,

Just the facts simple so lay folks can get it.

I think I get: that you are posturing to replace: Bernanke or Geitner… Yes?no?

Prof. Black is ahead at the moment.

William Black October 23rd, 2010 at 2:42 pm

Dr. Rajan,

The Federal Reserve Bank of New York, Pimco, Fannie, Freddie (with the approval of the FHFA), and Ambac have all conducted internal investigations that have led them to demand that Bank of America repurchase billions of dollars in loans sold to them under false “reps and warranties.” The SEC has charged that Countrwide’s senior managers engaged in fraud. Ambac states that its investigation found that 97% of the Countrywide loans it insured were presented under false reps and warranties. Citi’s senior mortgage credit officer testified that 80% of the mortgage loans it sold to Fannie and Freddie were sold under false reps and warranties. We now know that major servicers’ employees knowingly filed false affidavits (a felony) in tens of thousands of foreclosures. How should we respond to these fraud epidemics?



Raghuram G. Rajan October 23rd, 2010 at 2:45 pm
In response to William Black @ 33

I think this debate will go on for a long time. I have no quarrel with the argument that Fannie and Freddie eventually saw some profit in this market. I also think they did shout from the roof-tops that they were obeying, and indeed exceeding, their affordable housing mandate (see below).

For instance, consider this press release from 1992 :
Countrywide Funding Corporation and the Federal National Mortgage Association (Fannie Mae) announced today that they have signed a record commitment to finance $8 billion in home mortgages. Fannie Mae said the agreement is the single largest commitment in its history…The $8 billion agreement includes a previously announced $1.25 billion of a variety of Fannie Mae’s affordable home mortgages, including reduced down payment loans…

“We are delighted to participate in this historic event, and we are particularly proud that a substantial portion of the $8 billion commitment will directly benefit lower income Americans,” said Countrywide President Angelo Mozilo…”We look forward to the rapid fulfillment of this commitment so that Countrywide can sign another record-breaking agreement with Fannie Mae,” Mozilo said.

“Countrywide’s commitment will provide home financing for tens of thousands of home buyers, ranging from lower income Americans buying their first home to middle-income homeowners refinancing their mortgage at today’s lower rates,” said John H. Fulford, senior vice president in charge of Fannie Mae’s Western Regional Office located here.

And I think politicians were very happy with all this, as evidenced by scores of newspaper reports where politicians inaugurate new developements, made possible with government aided finance. I really don’t understand why you have such a strong aversion to accepting that the politicians were hand in glove in this process with fannie and Freddie, which saw a golden chance to preserve their prime franchise by doing what the politicians wanted.

Jane Hamsher October 23rd, 2010 at 2:45 pm
In response to William Black @ 33

Thanks, Bill. Didn’t know you testified for OFHEO, should have known.

I was just going through Armando Falcon’s 2003 OFHEO report to Congress on Freddie Mac. This is what it said about perverse earnings incentives for management:


The term “earnings management” came into widespread use among accountants, lawyers, and others following a now famous September 1998 speech by the then Securities and Exchange Commission Chairman, Arthur Levitt. The term is perhaps unfortunate, in that almost all business activity is designed to enhance earnings, and the essence of good corporate management is maximizing profit (earnings) for shareholders. As used in this report, it means inappropriate manipulation of reported accounting results through various devices.

This chapter reviews how Freddie Mac manipulated its reported earnings and disclosed other financial information in a misleading way in 1999 through 2002. The chapter provides a chronology of relevant events, reviews the strategies that the Enterprise employed to manipulate earnings, and indicates that the Board was made aware of transactions whose sole purpose was to shift income. The chapter also examines how the executive compensation program of Freddie Mac, particularly compensation tied to earnings per share, influenced accounting and management practices at the Enterprise during the period.

The special examination concludes that excessive attention and dedication of corporate resources of a government-sponsored enterprise to management of earnings for the purpose of meeting securities market expectations, without an additional, overriding business purpose, is an unsafe and unsound practice.

The words “HUD” and “Housing and Urban Development” appear nowhere in the 172 page document.

fuckno October 23rd, 2010 at 2:46 pm

“The key is to give everyone access to opportunity — which means they should have the means to get the skills, the health, and the finances to be able to succeed.”

And that will be accomplished by the World decoupling from the Washington Consensus, and the Dollar, – leaving the American middle class to scrape the bottom of the barrel with no ” means to get the skills, the health, and the finances to be able to succeed.”

mzchief October 23rd, 2010 at 2:47 pm

Tangential– From William Black @ 33:

I met all of the senior staff of the entity that were supposed to regulate Fannie and Freddie and studied what was driving Fannie and Freddie’s senior managers.

When you have a chance, Bill, do you mind reminding us what year and month that was and when you made your determination if those are separate events/dates?

October 23rd, 2010 at 2:48 pm

One more thing.

Prior to Graham-Leach-Bliley, Fannie and Freddie both had policies with loans underwritten with their then automated underwriting software packages, “Desktop Gold” and “Desktop Underwriter.”

One of the policies was specific to Hawaii property values, due to the Japanese economic malaise. At that time, neither would purchase loans from originators without a negative time value adjustment on the property value. These were quite strict conditions, but reflected actual reality of HI property values at that time.

Such respect to property values, much less the rest of underwriting criteria were undoubtedly dealt a blow respective to Graham; none of these were created by property owners or mortgage applicants.

Twonine October 23rd, 2010 at 2:49 pm

You state that G-20 4% of GDP is sensible and that you’re all for a safety net without holes. How do you have it both ways?

Raghuram G. Rajan October 23rd, 2010 at 2:49 pm
In response to Jane Hamsher @ 29

President Bush touted the “Ownership Society” and pushed on Fannie and Freddie. My sense is that both Clinton and Bush felt that putting more people into homes was a good thing, and they were probably right — if people could afford it.

From the democratic side of the aisle, it was more money to traditional constituents. From the republican side, it was more property owners, who eventually vote republican. I do not think it totally crazy — but it did not work.

Jane Hamsher October 23rd, 2010 at 2:50 pm

I think politicians were very happy with all this, as evidenced by scores of newspaper reports where politicians inaugurate new developements, made possible with government aided finance. I really don’t understand why you have such a strong aversion to accepting that the politicians were hand in glove in this process with fannie and Freddie, which saw a golden chance to preserve their prime franchise by doing what the politicians wanted.

Before I say anything about this, I just want to be clear: you’re saying that the politicians were driving this process, and their goal was to help the poor get homes? And that Wall Street “went along” with it so they could..”preserve their prime franchise by doing what the politicians wanted?”

I appreciate your honesty here, I’m just trying to make sure I understand what it is you’re saying.

Raghuram G. Rajan October 23rd, 2010 at 2:52 pm
In response to June Carbone @ 34

I agree. I do not think that China’s policy is at all sensible (they have the fear that they will grow old before they grow rich). But we have to invest more in human capital on a war footing. I think the focus on education in this administration is one of the things it has right, but i wish that it was a more central part of the agenda. In addition, I would think about sensible programs to retrain those how have lost jobs in dying industries.

Knox October 23rd, 2010 at 2:53 pm

It didn’t work because servicers saw the potential to abuse financially illiterate people by the millions, and they did so in spades.

Raghuram G. Rajan October 23rd, 2010 at 2:55 pm
In response to Jane Hamsher @ 46

You should read the book. Fannie and Freddie contributed to the housing crisis (which is partly why they are sitting on 393 bln of losses and counting). Wall Street was chasing after profits (of course), and created the appearance of profits by taking on tremendous amount of tail risk. The bankers were certainly not blameless.

William Black October 23rd, 2010 at 2:56 pm

Revealed preferences! Of course they shouted about the quotas (and elsewhere praised them to try to make themselves popular with progressives). But we know that what they say isn’t what matters (unless it’s contrary to interest — and there are great admissions contrary to interest.

What matters is that we can test the proposition — did they buy the toxic mortgages only when they were compelled? That is the key analytical question and we can test it accurately (with the facts in your book). No, Fannie and Freddie bought yield (not “profit” — all these pools created losses, and Fannie and Freddie’s managers knew what purchasing endemically fraudulent loans invariably does as soon as the bubble stalls (catastrophic losses). We know they bought yield (and engaged in further accounting and securities fraud) because they bought hundreds of billions of liar’s loans they were not compelled to buy and they lied about those purchases in order to deceive their investors, creditors, and regulators). Here are some key admissions that show you why they bought yield:

Modern executive compensation systems suborn internal controls. (Control frauds do not “defeat” controls — they turn them into oxymoronic allies.) The Business Roundtable is made up of the nation’s 100 largest firms. In response to the series of accounting control fraud failures (e.g., Enron and WorldCom) in 2001 and 2002, the Roundtable chose Franklin Raines, then Fannie Mae’s CEO, as its spokesman to explain why that epidemic of fraud had occurred. In a Business Week interview he was asked:
[Businessweek:] We’ve had a terrible scandal on Wall Street. What is your view?
[Raines:] Investment banking is a business that’s so denominated in dollars that the temptations are great, so you have to have very strong rules. My experience is where there is a one-to-one relation between if I do X, money will hit my pocket, you tend to see people doing X a lot. You’ve got to be very careful about that. Don’t just say: “If you hit this revenue number, your bonus is going to be this.” It sets up an incentive that’s overwhelming. You wave enough money in front of people, and good people will do bad things.
Unfortunately, Raines’ insights stemmed from his implementation of just such a system. Raines knew that the unit that should have been most resistant to this “overwhelming” financial incentive, Fannie Mae’s Internal Audit department, had succumbed to it. Mr. Rajappa, its head, instructed his internal auditors in a formal address in 2000 (and provided the text to Raines, who praised it):
By now every one of you must have 6.46 [the earnings per share bonus target] branded in your brains. You must be able to say it in your sleep, you must be able to recite it forwards and backwards, you must have a raging fire in your belly that burns away all doubts, you must live, breath and dream 6.46, you must be obsessed on 6.46…. After all, thanks to Frank [Raines], we all have a lot of money riding on it…. We must do this with a fiery determination, not on some days, not on most days but day in and day out, give it your best, not 50%, not 75%, not 100%, but 150%. Remember, Frank has given us an opportunity to earn not just our salaries, benefits, raises, ESPP, but substantially over and above if we make 6.46. So it is our moral obligation to give well above our 100% and if we do this, we would have made tangible contributions to Frank’s goals [emphasis in original].
Internal audit is the “anti-canary” in the corporate “mines”; by the time it is suborned every other unit is corrupted.


masaccio October 23rd, 2010 at 2:57 pm

From your introduction, page 19, talking about your reforms:

Such reforms will require societies to change the way they live, the way they grow, and the way they make choices. They will involve significant short-term pain in return for more diffuse but enormous long-term gain.

The pain will be borne by workers and the unemployed, and most certainly not the people who caused the crash. Again, do you see why people aren’t interested in those solutions, and might prefer solutions involving jail time for the people responsible for the economic conditions that produced their misery?

juliania October 23rd, 2010 at 2:57 pm

Welcome Mr. Black, and thank you Mr. Rajan for participating in this forum. Not having read your book, and not at all being an economist, I can only address the subject in very general terms. You have just said the following:

“We need to get to the real root of the problem, which is too many Americans cannot earn decent incomes, and not paper over it through loose credit or low rates.”

Certainly that is a problem here, but as we have been learning in the last few weeks thanks to the excellent coverage at firedoglake, the [b]root[/b] of the problem, exposed when the TARP bailout took place, has gone on to produce what might kindly be called a sucker on the original graft (pursuing the gardening motif of course) – that being large mortgage managing entities creating new instruments to sell, which, as has been pointed out, changed the profitmaking (fruitbearing) segment of these enterprises to involve not only the selling of said instruments, but a new role with regard to mortgages – that of servicer and fee charger. This change, it seems to me, can have nothing to do with whether or not the homeowners have or do not have a job. The incentive, a natural one perhaps, will be, surely, to have the homeowner fall into arrears in some manner or default – otherwise how does the middleman profit?

Now, certainly the middleman will profit if the homeowner can pay the fees, so then jobs would be first on the agenda, and certainly we do need jobs in a big way. But the homeowner with a job isn’t going to be very well served if the endemic problem remains, is nurtured, and prospers. Eventually, that sucker will take over. And you won’t be getting any apples if that happens, not a one. A lot of us are very afraid that has happened already.

fuckno October 23rd, 2010 at 2:57 pm

China’s policies may not be sensible to the US central planners, but it’s eminently sensible to the Chinese who do have a huge population to take care of, while the US is merely concerned about the profits of their puppet masters on Wall Street, – the US population be damned.

masaccio October 23rd, 2010 at 3:00 pm

You argue that markets can discipline the risk-taking of large entities. For example, you say large depositors at banks should be aware of the financial position and riskiness of the bank and demand higher interest rates as risk-taking increases (p.167). How much time do you think depositors should devote to learning about the loan portfolio of banks where they keep their money?

You think market discipline can come from bank debt holders. Can you explain how the average investor can figure out the risk level of JPMorgan Chase, with, among other things, its $78 trillion nominal exposure in credit default swaps?

In any case, do you think that the accounting profession does an adequate job of evaluating the financial statements of these huge businesses, so that it is reasonable to rely on them? If so, who is it that disciplines the accountants?

William Black October 23rd, 2010 at 3:00 pm
In response to Jane Hamsher @ 40

I know that the SEC complaint against Freddie explicitly alleged that the reason they engaged in accouting fraud was to max their bonuses. The first wave of Fannie and Freddie frauds involved hedge accounting — a notorious area of accounting abuse.

These earlier frauds helped trigger the nonprime accounting frauds at Fannie and Freddie. The earlier frauds required Fannie and Freddie to grow the assets they held in portfolio rapidly. OFHEO responded to the frauds by clamping down on that growth. Fannie and Freddie responded by maxing out on yield (hence the massive purchases of liar’s loans and CDOs backed by liar’s loans).



Jon Walker October 23rd, 2010 at 3:01 pm

Having studied American politics I rarely seems even Democrats and especially not Republicans in mass motivated to pass laws giving stuff to poor people. Notice we have one of the worst social safety nets and rarely give poor people anything even when they are clearly in need.

If you think the prime driver of Congress was to help poor people instead of help the big banks donating millions to their campaigns and provide them with extremely lucrative jobs after retirement, I would say you need to pay better attention to the actual political and law writing process in America

Raghuram G. Rajan October 23rd, 2010 at 3:03 pm
In response to William Black @ 38

I make the point that lending decisions were terrible, sometimes fraudulent. But you have to ask why did this all happen now — and why did the bankers decide to take advantage of the poor at this point. Did these guys suddenly become evil? Did regulators suddenly become laissez faire? Why did all these factors come together at this time. If you think there is something broken in the financial system, why did it all not come to a boil before? For those who think it was deregulation alone, you have to point to the specific deregulation that led to sub-prime mortgage backed securities and CDOs. Vague appeals to Graham Leach Blyly are not enough.

October 23rd, 2010 at 3:05 pm
In response to masaccio @ 51

As well to this point about reforms, isn’t it logical that rational actors would return to rules that prevented the current outcomes, i.e. returning to Glass-Steagall?

Raghuram G. Rajan October 23rd, 2010 at 3:05 pm
In response to masaccio @ 51

By all means punish the guilty. But that will not bring back the jobs and the incomes of the past. Brazil and China are working very hard to improve their competitiveness, and the quality of their workforce. We have to also focus on the future, because the rising inequality in the United States reflects a workforce that is not as competitive as it could be.

knowbuddhau October 23rd, 2010 at 3:05 pm

(Slipping quietly to a back row seat)

Thanks for the engrossing debate. Sorry to say, haven’t read the book. Deeply obliged, Prof. Black, for your Campbellian heroism (not just going to hell on orders, but out of compassion, and coming back with a boon for the whole community).

Much obliged to you, too, Dr. Rajan, for braving a skeptical audience. Looking forward to learning a lot.

I’m an economics know-nothing. So my concern is, with all this narrow focus and competition between vested interests, will we lose sight of forming a more perfect union? Is there really an ultimate boon for the people, or is it all about faking us into debt peonage in the name of “efficiency”?

William Black October 23rd, 2010 at 3:06 pm
In response to William Black @ 50

Oh, and the internal auditor spoke from a written speech so this wasn’t some improv mistake and he sent Raines a copy of the speech. Raines, rather than going: “My God, my internal audit staff has been ruined” , made suggestions as to the chief internal auditor could strengthen the message to his troops.

Modern executive and professional compensation is severely criminogenic — not simply unfair or unequal. By the way, Michael Jensen, the very conservative father of modern executive compensation, now gives talks about the terrible unintended consequences of those changes. He emphasizes that they have eroded integrity and presents statistics demonstrating this loss of integrity by CFOs at most large corporations. I repeat — most.


Jon Walker October 23rd, 2010 at 3:06 pm

regulators did not “suddenly become laissez faire,” over 8 years George Bush systematically appointed regulators who made it clear their goal was to undermine the job they were appointed to.

October 23rd, 2010 at 3:09 pm

Did these guys suddenly become evil? Did regulators suddenly become laissez faire?

Well yes and yes. Citi and Travelers started down the marriage aisle when it was still illegal for them to do so. That merger was indeed illegal but given forebearance.

mzchief October 23rd, 2010 at 3:12 pm
In response to William Black @ 61

I don’t have a reason not to disagree. The folks on the inside at Freddie at the time I was interviewing there were totally juiced to be there as their compensations were geared off the “24% profit margin Freddie always had” except for the scheduled lesser profit margin for the year the Y2k IT system fixes were to be rolled through. That threw a flag for me right here. I was refused the Y2K consulting position at Freddie to work between Legal and the computer folk as one VP was clearly afraid I would not shut up about any discrepancies I might find in the IT systems and business procedures. Upon realizing that, I was happy to not be the dog that caught that car.

Knox October 23rd, 2010 at 3:13 pm

The identical abusiveness is evident also with credit cards. I did not get my first credit card until I was in my mid-twenties in 1995. At the time, it was not as easy as picking up the phone to get a line of credit, and fees and aprs did not seem overly excessive.

Within the last decade, Americans – especailly young Americans – have been bombarded with loan offers at teaser rates, fees went up and lenders took any excuse to to raise aprs as high as almost 30%.

The abuses can be detailed further. We were charged hidden fees (illegally) when using a credit card overseas,for another example.

You tell me what changed.

Raghuram G. Rajan October 23rd, 2010 at 3:14 pm
In response to Jon Walker @ 62

Most bank supervisors are civil servants, whose jobs are not affected by changes in administration. I agree that there was a push coming from on top for them to exercise forebearance. And I agree it was political. But I think it was more that no one on top wanted the lending boom and the associated economic boom to end. Greenspan failed to go further after his 1996 speech complaining about irrational exuberance in the stock market — and that was a Democratic administration.

Raghuram G. Rajan October 23rd, 2010 at 3:19 pm
In response to William Black @ 7

I think presenting a true and fair picture of bank balance sheets is important. So I am for no gimmickry. That said, we should not underestimate the difficulty of presenting a true and fair picture when the markets for some instruments are very thin. Because bankers could make up prices, even straightforward accounting opened up room for gimmicks and mis-statement. Strong accounting standards will help in many ways, but will not fix the problem of banks taking on hidden risk.

Knox October 23rd, 2010 at 3:21 pm

Irrational Exuberance =

Glee at the prospect of rolling in ever greater amounts of profit, leading to some of the stupidest decisions by supposed geniuses and some of the greatest efforts to abuse an economic system that the world had ever seen.

So it was Greenspan’s fault? Clinton’s fault?

Jane Hamsher October 23rd, 2010 at 3:22 pm

With all due respect, I think you’ve seriously misjudged what tail was wagging what dog. This analysis does not seem to reflect an understanding of how money cycles through Washington DC.

I recommend the famous Washingtonian article on Fannie and Freddie by Ross Guberman from 2002:

Congressman Christopher Shays was lying in bed one night last March and told his wife he was about to take on a new battle. He said the Enron scandal had gotten him thinking about Fannie Mae and Freddie Mac, the two government-chartered housing-finance corporations. They were the only Fortune 500 companies that didn’t have to tell the public about their financial condition. He had mentioned the problem to a couple of staffers and allies on the House Committee on Financial Services.

The next morning, before he talked to anyone else, his office got a call from Duane Duncan, Fannie Mae’s chief lobbyist. Duncan said he’d heard about Shays’s comments and wanted to set up a meeting with Frank Raines, the head of Fannie Mae. He wondered if Shays “liked” Raines enough for such a meeting to be fruitful.

Another lobbyist approached Shays and said, “You’re making a lot of people unhappy with this.”

Shays, a Republican from Connecticut, knew Fannie’s antennae stretched all over town, but he never expected that a few stray remarks would trigger such a reaction. Figuring he was on to something, Shays teamed up with Edward Markey, a Massachusetts Democrat, on a bill to apply the government’s disclosure rules to Fannie Mae and Freddie Mac.

“The more I look,” Shays says, “the more convinced I am that they’re not eager to disclose what they do. They’re wonderful organizations, but they’re trying to protect a privilege that could ultimately be destructive to them.”

Shays broke a political rule in Washington: Don’t mess with Fannie Mae. Wealthier than most nations, Fannie Mae is known to try to devour anyone who crosses it. That’s fine with Fannie Mae’s supporters, who say it has helped millions fulfill the dream of homeownership by combining public spirit and private innovation. Critics contend that Fannie Mae’s public face of heartwarming largess masks plenty of private greed. Fannie, they claim, is a company with the lowliest of missions: to juggle politicking and public relations so that its blend of subsidies and privileges remains intact.

Jobs at Fannie and Freddie were doled out as political payoffs, as were positions on the board. Their vast coffers were used to keep money flowing through the system:

Controversy surrounds the Fannie Mae Foundation as well. It gives out more affordable-housing grants than anyone else in the country, provides millions to DC advocacy groups and cultural institutions like the Kennedy Center and Arena Stage, and sponsors the Help the Homeless walkathon and other charitable ventures.

The foundation also helps Fannie Mae fight its adversaries. Although foundation CEO Stacey Davis claims that a “Chinese wall” separates the foundation from Fannie’s corporate interests, housing advocates and other critics accuse Fannie Mae of using the foundation’s grant money as a weapon.

“It’s grant payola,” says Nader. “Fannie sprinkles millions around the District and then calls on those groups when the company needs to neutralize dissent.”

Franklin Raines and Jim Johnson were fond of making big speeches about how much they wanted to make the dream of home ownership come true for low income communities, but Johnson made $21 million in 1998 alone and Raines took home $90 million from 1998 to 2003. It doesn’t take a rocket scientist to figure out what their true love was. I really do not understand how anyone could look at the history of Fannie and Freddie and come away with the notion that anybody involved was ideologically driven. Rarely has there been a more extravagant exercise in concocting ideological excuses on both sides of the aisle for making a dishonest buck.

thatvisionthing October 23rd, 2010 at 3:23 pm
In response to William Black @ 36

Right, Lehman died for predictable reasons, but Warren’s statement suggests Congress set up a run on the bank, and disabled an orderly bankruptcy, well beforehand, as a way for fantasy money debts to get actualized at the expense of honest players. Kind of money laundering courtesy of Congress and whoever can slip in sponsorless amendments, bad money for good, it sounds like to me. Congress is part of the fraud.

to mod: If that’s off topic, I don’t know how to reply to Mr. Black offscreen.

Raghuram G. Rajan October 23rd, 2010 at 3:25 pm
In response to Jon Walker @ 56

Congress was not helping people at the bottom of the ladder, who unfortunately are ignored. It was trying to help people at or near the middle (remember, only 65% of households own a house). The intent was good (coupled with the fact that more credit usually brings votes), the consequences probably unintended.

Raghuram G. Rajan October 23rd, 2010 at 3:26 pm
In response to Knoxville @ 68

Greenspan, plus the many on the hill and on Wall Street who called him to tell him he had no business arresting the rise of the market.

Knox October 23rd, 2010 at 3:28 pm

Finally, the heart of the matter. You say that government policy has an undue influence over corporate interests and their constant reaching for profits beyong the dreams of avarice, but now you finally admit that the opposite is true. Thank you.

Raghuram G. Rajan October 23rd, 2010 at 3:31 pm
In response to Jane Hamsher @ 69

I agree that Fannie and Freddie were very well connected. There is a narrative that has them telling HUD to expand their affordable housing mandate (why would they do this, they were free to lend if they wanted). It just seems a more circuitous explanation — simpler is to say the politicians desired it and leaned on the regulators. If you want to add that Fannie and Freddie said amen!, I have no problem.

Raghuram G. Rajan October 23rd, 2010 at 3:35 pm
In response to Knoxville @ 73

The book comes down equally on corporate and government interests. The real problem is when they come together, and the dangers all arise at the interface between the private sector and the government. We managed this interface very poorly before the crisis.

Jane Hamsher October 23rd, 2010 at 3:37 pm

The “intent” was to enable banks to engage in predatory lending practices. Ney-Kanjorski, for example, was a bipartisan effort to enable banks to get around predatory lending laws and make more bad loans. The outfit behind it was The Coalition for Fair & Affordable Lending, an astroturf group financed by the banking industry, that lobbied on behalf of. . . you guessed it. . . sub-prime lenders.

Once again, they justified the bill based on the oh-so-high-minded need to provide loans to low income and minority borrowers. It was true scumbaggery.

It was actually national civil rights leaders who joined together to fight the Coalition and defeat the measure.

June Carbone October 23rd, 2010 at 3:37 pm

In an era of growing inequality, don’t we have two problems: the rich are massively richer, with the result that a few politically active types like Kock Industries and Rupert Murdock (owner of Fox News) permanently change the political landscape, and the group in the middle (which used to be called the white working class) is so eager to hang on to what they are in danger of losing that they attack any efforts to help the poor. Together, it makes for a pretty powerful political coalition.

thatvisionthing October 23rd, 2010 at 3:37 pm

When you talk about affordable houses, maybe this will help you to visualize one:

Affordable program house on flickr

It’s in California, supported by county and state programs I believe (traceable to federal?). KB Home, Countrywide, MERS, San Diego County DPLU, CalHFA. The environmental impact report, major use permit, and seller’s disclosures all specify a 25-foot protective buffer for the oak trees, but this was permitted. How would you explain it? Here (youtube) is the homeowner trying to get the county supervisors to take notice. Fat chance. Now the HOA fines the homeowner $100 a month for not maintaining a lawn that could kill the tree that could fall on the house that was illegally built on top of the tree and legally requires an illegal lawn (the MUP also specified drought-tolerant landscaping). And of course, being an affordable program house, any buyer would have limited income, no chance of being able to afford a lawyer. I don’t know if that fits in with the proper definition of “control fraud” — but I think it’s fair to raise the question about the relationship between governmental affordable house programs and HOAs. In this case the county will not cross the HOA line. Maybe it’s in all cases, maybe that’s a feature not a bug.

The world is babbled to pieces after
the divorce of things from their names.
– Wendell Berry

Edit: I started replying to @18 but then got carried away by other comments, sorry.

October 23rd, 2010 at 3:38 pm

You’re kidding, right? As soon as the walls were down from Glass-Steagall, Fannie/Freddie expanded their “Delegated Endorsement” authority like gangbusters, and tons of new loan originators popped up.

And because of rules, to keep your DE status, you had to do a minimum amount of CRA lending.

Hence the rise of liars loans, which by the way expanded beyond sub-prime loans. That pesky 1008 is long and hard to fill out, right?

Finance and comp drove these decisions, not any sense of “politicians desired it.”

William Black October 23rd, 2010 at 3:39 pm

Excellent, now we are getting to the some of the right questions. Here are the answers: (1) they didn’t begin liar’s loans in 2000. Liar’s loans became common in California S&Ls in 1990 and we killed them by supervision around 1991. Effective regulators would never allow liar’s loans to be used for mortgages because they inherently create intense adverse selection and a negative expected value (the lender will lose money). They are also great devices for accounting fraud for the reasons I’ve explained. (2) they didn’t make liar’s loans in 1990-91 because of pro-housing governmental policies or the CRA. The lenders that made these loans were not under CRA pressure. (2) there was no private label secondary market in that era for mortgages and Fannie and Freddie would only buy prime (indeed, Fannie created the concept of prime). Firms that wanted to make liar’s loans and subprime loans reacted to our crackdown by opening unregulated, uninsured mortgage banking firms. You discuss New Century in your book. Ameriquest gave up its S&L charter (it was then Long Beach S&L) to escape our regulation and, like New Century, became infamous for its predatory loans and frauds. These firms were not subject to the CRA or any pressure from regulators to make loans to poor people. This was a matter of exploiting a regulatory black hole. These uninsured firms, however, still could not sell to private label securitizers in any great volume until somewhere shortly before 2000 (and Fannie and Freddie still wouldn’t buy any large amounts of their nonprime mortgages.

3. Enforcement of the CRA became progressively weaker during the first decade of this century, so if someone is claiming that the CRA drove the crisis the vector arrow is refutes the thesis.

4. The rise of private label securitizers that would buy nonprime roughly coincided with the arrival of the Bush administration, which appointed anti-regulators to every financial regulatory agencies — because they opposed regulation. Executive compensation also exploded in this era. The combination was a deadly witches’ brew that caused the housing bubble to begin to hyper-inflate and to persist for many years.

Yes, there is self-selection (the ethical tend to leave the frauds in disgust) and there is an important Gresham’s dynamic that causes bad ethics to drive good ethics out of the marketplace (think of appraisals and rating agencies), but the fundamental issue is not “evil” but perverse incentive structures that create intensely criminogenic environments. Combining desupervision, perverse executive and professional compensation, and a secondary market run on the financial version of “don’t ask; don’t tell” created the criminogenic environment that continued to hyper-inflate the bubble.

I fear that you are the one relying on “vague appeals” — you keep asserting that places like Lehman created a massive,fraudulent, and suicidal liar’s loan operation not because it was in the interests of the unfaithful agents to do so (Akerlof & Romer’s title says it all: “Looting: the Economic Underworld of Bankruptcy for Profit.”) The firm fails but the agents walk away rich. These accounting control frauds have been documented repeatedly in the S&L debacle and the Enron era frauds (and in many other nations) by the top economists in the world, the top white-collar criminologists in this field, and effective regulators (when once we had them). You suggest that if the President and Congress like poorer people to get housing Lehman’s CEO goes: “damn, this will destroy the company but I guess I better go make fraudulent liar’s loans because I’d hate to disappoint a politician.”


Knox October 23rd, 2010 at 3:39 pm

Fine. But the root of the problem isn’t politicians/the government per se. It’s the fact that politicians are increasing in the pockets of the private sector and work on behalf of a narrow set of interests.

In the game of Big Government/Big Business collusion, money from the private sector talks.

Coming down equally on corporate and government interests is nothing more than an attempt to confuse the problem while appearing reasonable.

I’ll just reproduce my first comment @ 47, which was a response to your comment @ 44 (the one where you tried to deflect the sleaziness of lenders by talking about the political goals of Democrats and Republicans):

It didn’t work because servicers saw the potential to abuse financially illiterate people by the millions, and they did so in spades.

knowbuddhau October 23rd, 2010 at 3:42 pm

Here’s the rub of it for me: what interface? I thought we had installed perpetual-motion revolving doors? Looks to me like we’re talking about a small cohort that wears many costumes.

Can someone please finger for me the precise boundaries between the players? (he asked rhetorically) Where does one group end and the next begin?

So many masks on so few faces. And a spurious debate rages between fans of the various teams, never mind that the owners are looking down on us all from the same luxury box.

geoshmoe October 23rd, 2010 at 3:43 pm

I agree that Fannie and Freddie were very well connected


That’s pretty close to a “yes” on #38 or #12. Connected will have to suffice for mandated. just a matter the “cart in getting in front of the horse:” on that cycle.

All they do is play revolving doors and musical chairs anyways.

William Black October 23rd, 2010 at 3:44 pm

A rule of law and holding fraudulent and corrupt elites accountable is essential to achieving a better tomorrow. Indeed, I would be willing to wager that you stress that point in other contexts such as when you serve as an advisor in India.


knowbuddhau October 23rd, 2010 at 3:45 pm
In response to Knoxville @ 81


Raghuram G. Rajan October 23rd, 2010 at 3:46 pm
In response to June Carbone @ 77

It is worrisome. But i think the U.S. has been through periods of high inequality before, and managed to come out. But it will take resolve.

Raghuram G. Rajan October 23rd, 2010 at 3:48 pm
In response to William Black @ 84

Why do you assume that I am not against holding the corrupt accountable here? This reflects your biases, rather than anything I have said.

William Black October 23rd, 2010 at 3:50 pm

I would urge you to reexamine your book. I was struck in reading it by the the manner in which your language choices invariably make the government the primary villain and suggest that anyone that disagrees with that view is willfully blind due to ideology (e.g., your reference to the elephant in the room). You typically employ euphemisms (“fudging”) for private sector crimes and use what criminologists refer to as “neutralization” techniques minimizing the culpability of the private sector criminals.


eCAHNomics October 23rd, 2010 at 3:50 pm

To hold the corrupt accountable, you need a functioning govt. I would think you would be against public courts, as you are against many other public functions.

Knox October 23rd, 2010 at 3:51 pm

Your arguments can appear valid and/or reasonable only to those who’ve already made their fortunes in an abusive system and/or who still have hope that some day they will make their fortunes in an abusive system, too. That’s why.

Teddy Partridge October 23rd, 2010 at 3:51 pm
In response to knowbuddhau @ 82

Most excellent metaphor.

Knox October 23rd, 2010 at 3:52 pm

The rising inequality in the United States reflects a workforce that is not as competitive as it could be.

Do corporate executives and shareholders care about the US workforce being competitive? They all seem to be racing to build factories in China in the last couple of decades and rewarding those who increase profits by doing it. That’s not happening in a vacuum.

BevW October 23rd, 2010 at 3:53 pm

As we come to the end of this Book Salon,

Dr. Rajan, Thank you very much for stopping by the Lake and spending the afternoon discussing your new book and economics.

Bill, Thank you for returning and Hosting this great Book Salon.

Everyone, if you would like more information:
Dr. Rajan’s website, book
Bill’s website, blog

Thanks all,
Have a great evening.

Teddy Partridge October 23rd, 2010 at 3:53 pm

America didn’t “come out” of high inequality before; progressive solutions to restrain oligarchs were put in place. It wasn’t evolutionary; it was practically revolutionary.

And the oligarchs — and their media and academic handmaidens — squealed at every turn.

Raghuram G. Rajan October 23rd, 2010 at 3:53 pm
In response to eCAHNomics @ 89

No, I am not against public functions or courts. You may want to read what I say before jumping to assumptions. I think regulations are necessary to keep a market honest, and the worst mistake we can make is to assume it will function on its own. However, let us not also assume that we will find superhuman regulators who will always enforce regulations wisely. We need to be equally skeptical of too much faith in private interests or in public action.

chipsm116 October 23rd, 2010 at 3:54 pm

What’s your opinion on the gold standard or any other commodity-backed currency? You mention that loose monetary policy contributed to the crisis. Wouldn’t a tighter policy have just held back growth? It seems to me that the Fed always has to get the interest rate just right or else there are negative consequences. This isn’t going to be possible 100% of the time, even for our best economists. Wouldn’t a commodity-backed standard eliminate this problem?

October 23rd, 2010 at 3:55 pm

But what has happened in the last 10 years has led to the worst inequality since the late 1920′s in the US.

Whose resolve are you talking about?

I would maintain it would be us plebeian non-millionaires to enforce some rigors on those who have extracted such rents from us, and further, I would say the rent extractors which you defend are the irrational actors, not us normal citizens who labor and labor and labor.

Teddy Partridge October 23rd, 2010 at 3:55 pm
In response to BevW @ 93

Yes, thanks to all.

eCAHNomics October 23rd, 2010 at 3:56 pm

That’s interesting. I didn’t know we lucked out with superhuman regulators before it became the policy of the USG to deregulate fin mkts, which is when the big problems began. Quite a coincidence, that.

Raghuram G. Rajan October 23rd, 2010 at 3:57 pm
In response to William Black @ 88

I pointed to the terrible things that were going on in the financial sector long before most did. And I do believe that a lot of it was driven by poor incentives rather than criminal behavior. There were a few criminals, and they need to be rooted out. But if you think that the majority of those who worked in the financial sector were criminal, you are pandering to prejudice.

Knox October 23rd, 2010 at 3:57 pm

Dr. Rajan, Thank you for discussing your ideas with us.

William Black October 23rd, 2010 at 3:59 pm

No, it was a direct comment on your answer which said that it was fine to jail the crooks but doing so did nothing to improve the future. My point, which as I said I’m certain you actually agree with, is that holding criminals, particularly elite ones, accountable is a vital, positive step in creating a better future. It helps the economy, social cohesion, and democracy. What “bias” — I said that my guess was that our actual beliefs on this subject were likely the same (agreeing with what I, apparently correctly, guessed was your real view is the opposite of being biased against your views).


geoshmoe October 23rd, 2010 at 3:59 pm
In response to Knoxville @ 90

Your arguments can appear valid and/or reasonable only to those who’ve already made their fortunes in an abusive system and/or who still have hope that some day they will make their fortunes in an abusive system, too. That’s why.

or who still have hope that some day they will make their fortunes

What’s that as a (%) of Americans? who probably never turn off talk radio ?

Raghuram G. Rajan October 23rd, 2010 at 4:00 pm
In response to chipsm116 @ 96

The problem with a commodity standard is that it is extremely restrictive. Why should the quantity of gold constrain output growth? I think we have made an advance with fiat money, but I would like to see less aggressive monetary policy. We should accept the fact that there is only so much monetary policy can do without precipitating bubbles or credit booms.

fuckno October 23rd, 2010 at 4:00 pm

co-conspirators, then, as nary of them raised objections.

seaglass October 23rd, 2010 at 4:00 pm

I agree, but the bad apples are spoiling the barrel Professor.

TheLurkingMod October 23rd, 2010 at 4:01 pm

David Dayen is upstairs!
Obama Rallies 37,500 at USC

Jane Hamsher October 23rd, 2010 at 4:02 pm
In response to William Black @ 80

I was under the impression that HUD restricted Fannie & Freddie’s ability to repurchase liar’s loans in 2000:

In 2000, as HUD revisited its affordable-housing goals, the housing market had shifted. With escalating home prices, subprime loans were more popular. Consumer advocates warned that lenders were trapping borrowers with low “teaser” interest rates and ignoring borrowers’ qualifications.

HUD restricted Freddie and Fannie, saying it would not credit them for loans they purchased that had abusively high costs or that were granted without regard to the borrower’s ability to repay. Freddie and Fannie adopted policies not to buy some high-cost loans.

That year, Freddie bought $18.6 billion in subprime loans; Fannie did not disclose its number.

In 2001, HUD researchers warned of high foreclosure rates among subprime loans.

“Given the very high concentration of these loans in low-income and African American neighborhoods, the growth in subprime lending and resulting very high levels of foreclosure is a real cause for concern,” an agency report said.

But by 2004, when HUD next revised the goals, Freddie and Fannie’s purchases of subprime-backed securities had risen tenfold. Foreclosure rates also were rising.

That year, President Bush’s HUD ratcheted up the main affordable-housing goal over the next four years, from 50 percent to 56 percent. John C. Weicher, then an assistant HUD secretary, said the institutions lagged behind even the private market and “must do more.”

Weicher wasn’t some lifelong bureaucrat, he was a Bush appointee. And when Kit Bond wanted to stab Falcon and OFHEO for investigating Fannie and Freddie, I believe it was Bush appointed HUD IG Ken Donohue who did the honors.

William Black October 23rd, 2010 at 4:02 pm

Ah, but you still have the standard neo-classical reflex — you create a false dichotomy between incentives and criminality. As I’ve said repeatedly here, it is perverse incentives that leads to fraud epidemics. That is what criminogenic environment means — an environment with incentives so perverse that they produce widespread crime.


Raghuram G. Rajan October 23rd, 2010 at 4:03 pm
In response to William Black @ 102

I think you are reading too much into every sentence. The point was not that it was unimportant, but that there were other things we also need to do. If we think that the crisis only reflects the criminal behavior of the financial sector, and not a larger set of problems, then we miss the message that crises typically should send. There are problems in the United States, and these will not be solved by sending more people to overcrowded jails (that is not to say again, in case you jump at this, that the criminal should not be punished).

Knox October 23rd, 2010 at 4:04 pm
In response to geoshmoe @ 103

I’m sure there is a high percentage of Americans who have bought into the idea that making large amounts of money means success, if that’s what you’re getting at.

But I wonder what the percentage of those who eagerly want to make their fortunes in a system that’s been as abusive as this economic system has been during the last decade or so is.

How much money does one need before being satisfied?

I think the percentage of those who think it’s a good idea to make ridiculous amounts of money as they watch the entire economic system of a great country collapse is about 2%.

William Black October 23rd, 2010 at 4:05 pm

Thank you all, particularly Dr. Rajan for stirring this excellent discussion that (overwhelmingly) remained a productive, vigorous discussion of the merits.


Knox October 23rd, 2010 at 4:06 pm
In response to William Black @ 112

On that we can all agree. Thank you.

mzchief October 23rd, 2010 at 4:07 pm

To thatvisionthing @ 78: I found out that HOAs are a creature of land developers and their inner circle. Full of self-dealing and fraud. I won’t touch them with a 25 meter pole. I prefer to deal with a city or county government.

To Kelly Canfield @ 97: Hence the recent NY gubernatorial candidate’s comment “The rent is too damn high!”

Teddy Partridge October 23rd, 2010 at 4:08 pm

White collar Club Feds are insufficiently populated.

William Black October 23rd, 2010 at 4:09 pm

But it was precisely because I thought that you probably hadn’t phrased your response (which is inherently limited and hurried in this setting), that I emphasized that I did not think what you wrote captured your more nuanced views.

Yes, no one thinks that when we discuss how to make this and other nations’ citizens better off the only issue is criminality. I never suggested that. I simply make the point that classical economists emphasized — a rule of law is essential to economic progress and fairness. It is necessary, but it is never sufficient.


Jane Hamsher October 23rd, 2010 at 4:09 pm
In response to William Black @ 112

Thank you both, and ditto that — many thanks to Dr. Rajan for being here today and engaging in a lively discussion. We really appreciate it.

knowbuddhau October 23rd, 2010 at 4:10 pm

Glad you liked it TP. Would t’were we Americans took to our politics like the rest of the world takes to soccer.

Much obliged, bowing in all y’all’s virtual directions.

fuckno October 23rd, 2010 at 4:11 pm

Hardly overcrowded with white collar criminals, no?

geoshmoe October 23rd, 2010 at 4:11 pm
In response to Knoxville @ 111

Of the “true believers” maybe 5% those who drink the Koolaid another… 5% others who don’t much care, get on the bandwagon. The horatio Algers myth/dream http://en.wikipedia.org/wiki/Horatio_Alger,_Jr.
another big no.

I thought you would stand by your comment better than that, but thanks. over and out.

thatvisionthing October 23rd, 2010 at 4:12 pm

To Bill Black and Raghuram Rajan: I can’t tell you how much I wish you were discussing this on Bill Moyers Journal! I could understand! So, I miss Bill Moyers (make him come back!), and I thank you for coming here today to take our questions.

thatvisionthing October 23rd, 2010 at 4:13 pm

How would you explain MERS?

mzchief October 23rd, 2010 at 4:13 pm

Thanks everyone for a great thread. :)

thatvisionthing October 23rd, 2010 at 4:22 pm
In response to mzchief @ 114

Right, but the point is you can’t deal with the county, go to youtube @78. Affordable program houses were HOA houses, and the county won’t/can’t cross that line, feature not bug. They permit illegal crap and then wash their hands and walk away, feature not bug. Affordable program house = HOA. Goodbye democracy, hello private government. I would really like to know the statistic, how many affordable program houses were HOA houses? I think it’s possible that it’s 100%. Does anyone know how to find out?

knowbuddhau October 23rd, 2010 at 4:28 pm

I’d be all for making room for them by releasing the millions unconscionably held as POWs in our war on pot.

Here in the Evergreen (bud) State of Washington alone, we could produce enough high-grade product to put the Mexican cartels out of the business for good. Unless coke heads pick up the slack, of course. Effing coke heads.

Why is the market the panacea for everything under the sun (and earth, and sea), but it’s not good enough for markets created by our effed up laws?

Why? It’s the mythology!

The cosmos itself is imagined to be the construction, and thus, private property of the Biggest Man Up the Highest Stairs. The Big Man brings markets into being, he can certainly take them out, too (just ask ultimate economic hit man for the Big Man, Lord Lloyd of Goldman Sachs). The only way to get to Heaven On Earth is by standing in the proper relation to the proper dogma as preached by the proper priests of the proper church.

IOW, our credit scores have become more important than being a decent human being.

And as we all know, the Big Man doesn’t have to make sense, he isn’t bound by human ethics and mores, he just has to make sufficient ROI.

captjjyossarian October 23rd, 2010 at 5:47 pm

I’m glad that to see that Bill Black harped on the topics on perverse incentives and enforcement.

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