The Situationist

Archive for April 7th, 2009

Is The Fear of Being Afraid Leading to Violation of Federal Banking Law?

Posted by The Situationist Staff on April 7, 2009

obama-bush1In his first inaugural address, President Franklin Delano Roosevelt said “the only thing we have to fear is fear itself.”  The comment was made in the context of the worst economic crisis of the 20th Century, and perhaps of all time in the United States: the Great Depression, where unemployment rose to 25% and where, until the New Deal, there were minimal safety nets for those impacted by the crisis.

According to William Black, a law professor at the University of Missouri Kansas City, a former bank regulator, and author of The Best Way to Rob a Bank is to Own One, President Bush and now President Obama, along with their respective Treasury secretaries, Henry Paulson and Tim Geithner, have embraced that sentiment to justify the lending of tax dollars to distressed banks.  The gist of their concern, according to Black, is that persons with bank deposits will remove their money from banks if they fear the banks no longer have their deposits — a phenomenon that led to the Panic of 1907 and that FDIC insurance (which guarantees bank accounts up to $100,000) is supposed to prevent.

In an interview with PBS’ Charlie Rose, Black contends that the Bush/Obama lending violates federal banking law, specifically the Prompt Corrective Action Law, and that the federal government has worked with banks on trying to prevent the public from realizing that.  Here is a transcript of the interview, as excerpted on Daily Kos:

* * *

WILLIAM K. BLACK: Well, certainly in the financial sphere, I am. I think, first, the policies are substantively bad. Second, I think they completely lack integrity. Third, they violate the rule of law. This is being done just like Secretary Paulson did it. In violation of the law. We adopted a law after the Savings and Loan crisis, called the Prompt Corrective Action Law. And it requires them to close these institutions. And they’re refusing to obey the law.

BILL MOYERS: In other words, they could have closed these banks without nationalizing them?

WILLIAM K. BLACK: Well, you do a receivership. No one — Ronald Reagan did receiverships. Nobody called it nationalization.

BILL MOYERS: And that’s a law?

WILLIAM K. BLACK: That’s the law.

BILL MOYERS: So, Paulson could have done this? Geithner could do this?

WILLIAM K. BLACK: Not could. Was mandated—

BILL MOYERS: By the law.

WILLIAM K. BLACK: By the law.


WILLIAM K. BLACK: In the Savings and Loan debacle, we developed excellent ways for dealing with the frauds, and for dealing with the failed institutions. And for 15 years after the Savings and Loan crisis, didn’t matter which party was in power, the U.S. Treasury Secretary would fly over to Tokyo and tell the Japanese, “You ought to do things the way we did in the Savings and Loan crisis, because it worked really well. Instead you’re covering up the bank losses, because you know, you say you need confidence. And so, we have to lie to the people to create confidence. And it doesn’t work. You will cause your recession to continue and continue.” And the Japanese call it the lost decade. That was the result. So, now we get in trouble, and what do we do? We adopt the Japanese approach of lying about the assets. And you know what? It’s working just as well as it did in Japan.

BILL MOYERS: Yeah. Are you saying that Timothy Geithner, the Secretary of the Treasury, and others in the administration, with the banks, are engaged in a cover up to keep us from knowing what went wrong?

WILLIAM K. BLACK: Absolutely.


WILLIAM K. BLACK: Absolutely, because they are scared to death. All right? They’re scared to death of a collapse. They’re afraid that if they admit the truth, that many of the large banks are insolvent. They think Americans are a bunch of cowards, and that we’ll run screaming to the exits. And we won’t rely on deposit insurance. And, by the way, you can rely on deposit insurance. And it’s foolishness. All right? Now, it may be worse than that. You can impute more cynical motives. But I think they are sincerely just panicked about, “We just can’t let the big banks fail.” That’s wrong.


For additional analysis, click here.  For critical analysis of Black’s arguments, click here.  See also The 2009 PLMS Conference: The Free Market Mindset.

Posted in Law, Politics, Public Policy, Social Psychology | Tagged: , | 1 Comment »

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