“The only thing we really learned from the S&L scandal was how CEO’s should lawyer up”
It’s almost 15 minutes long, and the first couple of minutes are concerned with the housing market, which he has strong opinions on and I don’t, but then he moves on to financial regulation, the question of accountability, municipal bankruptcies, and whether economists suck at their jobs, subjects I care about a lot.
It’s a super interesting interview, and I’m planning to mail Thornberg a copy of Occupy Finance soon. Even though he serves on the advisory board of hedge fund Paulson & Co, he agrees with lots of people who come to Alternative Banking on many issues.
A few examples of what he’s talking about for those of you without 15 minutes to spend on him.
He talks about how Dodd-Frank is collapsing in on itself through extensive watering-down and lobbying, and how negotiations over how much “skin in the game” is required around securitization is the death knell of that process.
He talks about how the overall system is under-regulated and not being made accountable. He claims that, instead of trying to draw lines in the sand, we should try to attack the skewed incentives. A lot of people got very rich doing very bad things, he says, and the continued existence of those messed-up incentives will encourage a whole new generation to do the same.
For example, bonuses shouldn’t be given on how many loans you push out into the market but how they perform. We should be able to clawback money, which is to say pull back money from someone who’s done something bad. After all, he points out, Dick Fuld and Angelo Mozilo as men who became filthy rich from doing bad things and are now “untouchable”.
He also points out that D.C. never went through a recession because of money coming in through lobbying. His top two priorities to improve our system would be:
- To simplify the tax code, both corporate and personal. There too many special interests. Get rid of complexity and make it more progressive.
- Political reform. We like to say the Chinese are “one-party state”. But are we really two-party? We have very little “choice” especially if you take into account the gerrymandering. California is doing a good job reforming here.
Next, he moves onto municipal emergencies in Detroit, Stockton, and San Bernadino. All three city bankruptcies pose the fundamental decisions: what is the sanctity of public pensions? State laws generally insist that pensions be paid.
The issue here is, says Thornberg, that federal bankruptcy laws trump, not state law. So the relevant federal judge can say “too bad” to the contract, and the pensioners will be forced to take a cut like all the other debtholders.
Lawyers in the know think pensions are gonna go, and that precedent for this kind of thing is being established in these three cities in the very near future.
The Reuters interviewer addressed the issue that, generally speaking, economists missed the oncoming crisis. Does that mean there’s something wrong with economics?
Thornberg: “Professors don’t get published writing papers about the current economy – nobody cares about that.”
He claims that, yes, economists should be more on top of day-to-day stuff, but he claims that the critique misses the broader point, which is that everyone needs to be a better economist. He claims it is a social science which tries to address why people do what they do. And although economists would like to think of it as a mathematical science, they’re wrong to do so.
His advice: don’t listen to economists on TV. Educate yourself and know your source. It’s amazing how much stock we put into economists working for, say, the National Association of Realtors who get paid to say good things like, “it’s a good time to buy and sell a house!”