by Kara Petrovic // Spring 2010

William K. Black

William K. Black, UMKC’s associate professor of economics and law, is a leading economic crisis expert. Best known as the senior regulator during the heart of the savings and loan crisis, he’s appeared on several political news stations and in Michael Moore’s documentary Capitalism: A Love Story. Perspectives sat down with Black to talk about the financial crisis and his view of bailouts and the stimulus efforts.

Who’s/what’s to blame for the housing/financial crisis? Former President George W. Bush; the Democratic-controlled Congress, which had oversight for two years; consumers; the financial industry; Wall Street; or a combination of everything?

This is primarily crisis brought on by “accounting control fraud,” which is where seemingly legitimate organizations are used as a weapon to defraud. The FBI began warning in September 2004 that there was an “epidemic” of mortgage fraud by lenders, and said that if was not perfected that it would lead to an economic crisis. So, it’s this epidemic of mortgage fraud by lenders that hyperinflated the bubble and led to the worst of the crisis.

Do you have budgeting tips for consumers?

Consumers are generally doing the appropriate thing and that creates what’s known as the “paradox of thrift.” From the standpoint of any individual consumer, on average, they have been badly over expended – too much credit card debt and too expensive of a house – and what consumers are now doing overwhelmingly is consuming less and trying to pay down their debt. This is a perfectly rational thing for any consumer, especially when scores of millions of them do it at the same time. However, it accelerates the economic decline and unemployment. But to fix the economy, you can’t simply go around saying, “Hey consumer, for the good of the country you should start spending and go back into debt.” That doesn’t make any sense, and that’s why fiscal stimulus at the federal level makes an enormous amount of sense. It can defeat that “paradox of thrift,” which would otherwise turn the “Great Recession” into the second Great Depression.

Which of the bailouts (if any/all) were absolutely necessary?

Very little of the bailouts were necessary. Conservatives, progressives and people in the middle seem to find that the bailouts were handled very poorly. The things that made sense to do were increasing the insurance limit and deposits, and at least temporarily spending insurance limits to money market mutual funds. Those actions will probably involve minimal cost to the tax payers and were probably essential in preventing runs that would have been extremely destructive. But most of the infamous bailouts, like AIG, were economically insane.

How would you explain budgets/deficits/spending/etc. to non-academics and what’s an easy way to illustrate $1 trillion?

$1 trillion is bigger than the entire annual economic production of the great bulk of nations. The estimates are that this crisis caused more than $4 trillion in losses. That’s bigger than the entire economy of all but about five nations. It’s pretty amazing to have that happen. If you don’t want deficits, deal with unemployment because unemployment is pure waste of human beings and all of their productive potential. Unemployment produces enormous budget deficits. People will tend to cut back on their spending for obvious reasons. But if a lot of people do this at the same time, it makes the recession even worse and then you absolutely need government deficit spending to replace that lost demand or you’ll spiral downward into a really severe recession and maybe into a depression.

Where should people go to better understand economics? Monetary policy?

The UMKC economics department has a superb blog, Economic Perspectives from Kansas City, that people should look at. The department at UMKC has one of the top programs in the entire nation if you judge programs by people who get it right rather than by people who get it wrong. Our chair, Jim Sturgeon, has a wonderful slogan, “UMKC economics: the people who got it right probably will get it right again.”

If undeterred spending by government and consumers was a significant culprit, why was the solution to spend even more?

When you have what people are calling the “Great Recession,” you lost probably $4 trillion ($1 trillion is $1,000 billion), an immensely large number in private demand. And if you don’t fill that private demand, then you have a Great Depression. To recover, you absolutely need to get the economy moving again. But it won’t start moving again through private sector initiatives when you’re in that kind of a hole. The government’s $780 billion stimulus was far too small when you’ve got a $4 trillion shortfall in private sector demand.

What’s the biggest misconception you’ve seen about the crisis? Unemployment? The economy? Bailouts?

The single misconception might be that we should praise Federal Reserve Chairman Ben S. Bernake and Treasury Secretary Timothy Geithner for getting us out of the crisis, when they are two of the people most responsible for getting us into it. These two are both carryovers from the Bush administration, who helped to destroy the economy in a way that hasn’t occurred for 75 years. It’s insane to not only keep them on, but to promote Geithner from president of the New York Federal Reserve to treasury secretary and to reappointment Bernake as chairman of the Federal Reserve. It’s a bizarre world in which you get promoted for screwing up badly.

Describe some of the media coverage you’ve received. What is accurate? Fair?

It’s been favorable from both conservative and progressive sources. It’s been quite interesting. On a lot of these issues the divide is not really as much along ideological lines. The issue is more, “We can take the country back from Wall Street.”

In the U.S. economy, is it most often best to let the markets correct themselves or do you favor intervention?

The markets were not correcting themselves. They were making things continuously worse. Markets were not clearing. They were collapsing. We could not rely on markets. The great irony is that it was an intensely conservative president, our first M.B.A. president, who junked the markets and realized that to save the markets, he’d have to intervene in unprecedented ways. This is very much the irony that basically Wall Street got everything it wanted in terms of deregulation and supervision, and the results were a disaster thanks to Wall Street, which had to be saved by the government.

Do kids learn enough about finance and budgets in school?

No. Students need some basis level preparation course that teach them how to avoid getting hustled and avoid getting in big, big trouble with credit cards. A class on basic financial literacy should also be taught in high school.

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