"When People Cheat, You Cannot As A Regulator Continue Business As Usual"You probably know by now that a great deal of Elizabeth Warren's new book, A Fighting Chance, deals with creating the Consumer Financial Protection Bureau. "I had no doubt-- zero-- that the banks should be held accountable for breaking the law," she wrote. "Would the banks ever be held accountable, and would they ever be forced to repair the damage they had done to so many families." At one point she was recounting how, in the process of setting up the bureau, she asked her team to keep in mind who they were there to protect.
I have no doubt that the majority of [people working in regulatory agencies] have the best of intentions, but let's face it; Given the way their jobs are designed, they spend most of their time talking to bankers. "Show me the books," they say. "Explain this practice." "comment of this new mortgage for or proposed regulation." All the while, they are inundated by a constant stream of push-back and pressure from industry people. In the normal course of things, banking regulators simply don't hear from many ordinary citizens. After all, someone who gets ripped off in a $40 credit card scam might call a consumer complaint hotline, but that person doesn't have access to the agency lawyers and investigators who supervise the banks on a day-to-day basis. Nope. Bank regulators spend a lot of time with bankers and and almost no time with bank customers.…How could we ensure that someone working for the CFPB would spend most of her time working on behalf of the consumers who didn't show up at our door-- rather than the representatives of the banks did?One answer was to run straight up the middle and hit the biggest targets, and that's exactly what Rich Cordray did. Rich was fearless, and he led by example. Among other things, he investigated Capital One for misleading customers about the costs of "free" add-ons to their credit cards-- "free" services that actually cost customers a total of $140 million. (He ultimately forced Capital One to send the hidden fees back to every customer-- and not one customer had to file papers or ask for a refund because the checks came automatically in the mail. Rich and his team also hit up the company to pay an additional $25 million fine.)
The keystone of corporate law is that shareholders can't be help criminally liable for the activities of the corporation. But what can't criminal managers? Well, they can… but they almost never are. Wednesday, Robert Reich explained to his readers why that is so so wrong-- and so damaging to America. "Who," he asked, "is legally responsible when a big corporation breaks the law? The government thinks it’s the corporation itself. Wrong… Corporations don’t do things. People do."
For a decade GM had been receiving complaints about the ignition switch but chose to do nothing. Who was at fault? Look toward the top. David Friedman, acting head of the National Highway Traffic Safety Administration, says those aware of the problem had ranged from engineers “all the way up through executives.”Credit Suisse employees followed a carefully-crafted plan, even sending private bankers to visit their American clients on tourist visas to avoid detection. According to the head of New York State’s Department of Financial Services, Credit Suisse’s crime was “decidedly not the result of the conduct of just a few bad apples.”Yet in neither of these cases have any executives been charged with violating the law. No top guns are going to jail. No one is even being fired.Instead, the government is imposing corporate fines. The logic is that since the corporation as whole benefited from these illegal acts, the corporation as a whole should pay.But the logic is flawed. Such fines are often treated by corporations as costs of doing business. GM was fined $35 million. That’s peanuts to a hundred-billion-dollar corporation.Credit Suisse was fined considerably more-- $2.8 billion. But even this amount was shrugged off by financial markets. In fact, the bank’s shares rose the day the plea was announced-- the only big financial institution to show gains that day. Its CEO even sounded upbeat: “Our discussions with clients have been very reassuring and we haven’t seen very many issues at all.” (Credit Suisse wasn’t even required to turn over its list of tax-avoiding clients.)Fines have no deterrent value unless the amount of the penalty multiplied by the risk of being caught is greater than the profits earned by the illegal behavior. In reality, the penalty-risk calculus rarely comes close.Even when it does, the people hurt aren’t the shareholders who profited years before when the crimes were committed. Most current shareholders weren’t even around then.…The truth is, corporations aren’t people-- despite what the Supreme Court says. Corporations don’t break laws; specific people do. In the cases of GM and Credit Suisse, the evidence points to executives at or near the top.Conservatives are fond of talking about personal responsibility. But when it comes to white-collar crime, I haven’t heard them demand that individuals be prosecuted.Yet the only way to deter giant corporations from harming the public is to go after people who cause the harm.
And, funny enough, speaking of Credit Suisse, their newsletter featured an interview with economist Joseph Stigliz yesterday of his book, The Price of Inequality. Editor Cushla Sherlock writes, in way of introduction, that "Inequality presents a major risk to human progress and carries a high economic price tag. A 'fragmented' education system, tax laws and corporate governance are some of the key causes of the problem in the United States-- one of the societies that scores worst on this measure in the developed world-- explains Professor Joseph E. Stiglitz, Nobel Prize Winner for economics and leading economist. Professor Stiglitz discusses the future implications of inequality and explains why Scandinavian countries are some of the best in the world in terms of social mobility and equality of opportunity."Inequality," explains Stiglitz, "is not just a moral issue. High inequality results in a high economic price: our economy doesn't perform as well as it could, it doesn't grow as fast, it is less efficient, and it is more unstable. Inequality also undermines democracy and divides society… The life prospects of a young American are more dependent on the income and education of their parents than in virtually any of the other advanced countries, including old Europe, which we often think of as very rigid and lacking mobility. The US is completely lacking mobility. One of the reasons clearly has to do with our very fragmented education system. Basically, where you live determines the quality of education that you get. If you're poor, and you live in a poor neighborhood, chances are you will never get the kind of education that will allow you to move up the economic ladder." Then Sherlock asks him about what creates differences in levels of inequality around the world.
Inequality has grown enormously in most countries around the world, but not all. The fact that there are such large differences in inequality between the United States and many other countries-- in fact, some countries are actually reducing inequality, or at least preventing it from increasing-- highlights a very important lesson. That is, inequality is not just the consequence of economic forces, because the same economic forces are operating in virtually all countries, especially advanced countries. It's a result of policies and politics: what countries do to promote equality and equality of opportunity. Education is very important. Tax laws are very important: if you allow some of your richest people to pay much lower taxes than people who work for a living, which is what has happened in the United States, then obviously you're providing scope for increasing inequality. If you do not have good unemployment systems, social security systems, systems to help people who are in need, then again you're going to wind up with more inequality. Other factors also play a role. One of the most important sources of high inequality is the increase in what we call ‘rent seeking'. Here, people seek to become wealthy in one of two ways. One way is to increase the size of the national pie, make a contribution, invent a laser, a transistor-- something that really transforms our economy and society. The other way is to try to get a larger share of the national economic pie. Monopolies make their money by shrinking output and driving up price, not by making the economy bigger. Looking across the various sectors of the United States, there are many in which a few firms are dominant.These are just a couple of examples of the ways in which inequality has been growing, with real implications for the future, because it carries momentum. The worry is that this greater inequality of income will lead to inequality of opportunity, and that will eventually feed back to even more inequality of income.
Tuesday, Illinois Senator Dick Durbin, chairing the Constitution Subcommittee looking into how to deal with the Supreme Court's determination to abolish restrictions on the rise of plutocracy, was correct when he said that "It’s increasingly clear that the only way to really reform our system is to pass a constitutional amendment to regulate how we finance our elections." Most regular, normal Americans agree. But the big money behind conservatism does not. In fact, they smell victory in their class war against the American people-- and they're digging in for a long fight. Clearly, even beyond a constitutional amendment, billionaires need to be taxed out of existence. That's what the progressive income tax they have paid politicians to wreck, was intended to ensure.
