Talking Economic Accountability with Economist James Galbraith
Remember: Tell members of Congress that you want them to take action here. We will be delivering your comments to Congress in the coming week.
One of the constants in this economic meltdown has been the attempts at projecting an aura of calm certainty by various public officials and rabidly rose-colored financial reporters whose fondest wish was to not spook investors, whether or not conditions ought to have made them more wary.
The few economic analysts who have been direct about potential pitfalls along with upsides? In the single digits, by my count.
One of those economic observers is with us this afternoon. Economist James Galbraith has been calling this financial mess like he sees it for quite a while. From September, 2008:
Further, anti-fraud provisions requiring that firms investigate fraud and make criminal referrals (or SARS) as appropriate, and agree to assist DOJ in the investigation and prosecution of frauds, could be implemented by regulation — as is already required of insured institutions.
The question now is could the purposes of this bill be met with a smaller appropriation. In my view, the best way to answer that question is to ask: What problem does $700 billion solve? The answer to that is, we do not really know.
It is that refreshing honesty that has made Galbraith’s analysis a favorite read, because it is up front about the downsides rather than cloaking it in PR terminology. That we still don’t know the answers on this is a testament to how much further we have yet to go.
When Prof. Galbraith was asked to come and chat with us, Jane asked his opinion on what the next step ought to be from here — especially with so many unknowns about where TARP money has gone and so little accountability. The answer James gave was blunt and spot-on:
I have a very simple demand.
Not one goddam cent until the Treasury has done proper due diligence on the assets that it proposes to purchase or guarantee. Specifically, Treasury should be prohibited to buy, guarantee or otherwise support mortgage-backed securities without first examining a reasonable sample of the underlying loan tapes in each asset class for prima facie evidence of misrepresentation, fraud and missing documentation, and reporting in public on what it finds.
This is important because if misrepresentation or fraud are prevalent, then there will never again be a liquid private market for those securities. Without a liquid private market, the assets cannot later be resold at a price significantly above zero. The case for providing guarantees depends on the idea that the assets may recover value in a general economic recovery; but if fraud, misrepresentation and missing documentation are prevalent, that case will properly collapse. At that point, Treasury will have to face reality: the toxic assets are trash.
Our evidence on this issue so far comes from a small-sample study in 2007 by Fitch Ratings of well-rated sub-prime RMBS securities, which found evidence of fraud and misrepresentation in practically every file….
Rep. Lloyd Doggett raised this issue with Geithner at the Budget Committee hearings and Geithner promised an answer for the record. The video is here: www.house.gov/doggett/Hearings/2009-03-05_Budget_Geithner.wmv
[We've turned this Doggett-Geithner exchange into a convenient YouTube. --Ed.]
Put the pressure on to make the Treasury do this.
As I said earlier, having oversight on public money expenditures is a good start. But we must all ask detailed questions, including members of Congress, and demand answers to them. And also demand that public officials come up with solid answers where they seemingly have none.
At a time when AIG alone has swallowed $173 billion dollars with no real accounting for where a lot of them have gone, and the Fed has no compunction whatsoever to account for their spending of public monies, shouldn’t we all be asking a lot more accountability questions?
I’m so please to welcome economist James Galbraith to FDL, and look forward to a lively discussion about how we got into this economic mess, what we can do now to help keep it from getting worse. And what we ought to do in the future — including implementing more sound and substantive regulations and reforms — to prevent these problems from recurring.
As with all guests, please stay on topic and be polite — take all off-topic discussions to the prior thread. Please help me welcome James Galbraith to FDL. With that, I open the floor for your questions and comments.
(YouTube — Interview with James Galbraith on Democracy Now regarding the need for a better regulatory structure.)
And please don’t forget to join us later today (7:30pm EDT, 4:30pm PDT) for a live chat with Rep. Alan Grayson.