Slides from Bill Black's presentation at FLACSO (Latin American Social Science Institute) in Quito, March 17, 2014.

1. El Milagro Ecuatoriano
Latin American Social Science Institute
(FLACSO), Quito: marzo 17, 2014
William K. Black
Associate Professor of Economics & Law
University of Missouri-Kansas City

2. Ecuador was in terrible shape
What were the experts saying in 2006?
―Ecuador: The Continuing Challenge of
Democratic Consolidation and Civil-
Military Relations‖ US Naval Postgrad.
1. Long-term ―political paralysis‖
2. Gov‘ts ―do not function effectively‖
3. Oil revenues ―weakened‖ Ecuador
4. ―Extremely serious economic
‗meltdown‘ in 1999‖ ―econ. disaster‖

3. More dismal facts
5. ―500,000 had already left five years ago,
mainly to Spain and the United States, with
the pace increasing since then‖
6. Author recounts all the heads of state
forced out of office since 1997.
7. ―By observing the behavior of the elite and
talking with them, it is clear to me that they
have not embraced democracy, and vast
majority of the population are apathetic‖
A conservative US author

4. More facts, all grim
8. Government is in ―serious debt‖
9. The people of Quito show ―total
disgust‖ with the government in 2005
10. Which prompted ―serious discussion
within the military to create a civil-military
group, or junta, to rule‖
11. ―The Continuing Vicious Circle of
Illegitimacy and Political Paralysis‖

5. ―el dueno del pais‖
12. ―In this situation of institutional
disintegration, the personal power of Leon
Febres Cordero, historic leader of the Social
Christian Party and President from 1984 to
1988, looms large. He wields tremendous
power in the judicial system and to a great
extent in the legislature. He is frequently
referred to, even in public, as ‗el dueno del
pais‘—or owner of the country.‖

6. Author‘s ―Conclusion‖
―Ecuador is a challenged … democracy…
[T]he political institutions of a civilian-led
democracy are extremely weak and highly
personalized. [D]emocratically elected
presidents are periodically forced from
office, and the military is pulled in to play a
passive or complicit role in what are clearly
unconstitutional changes of power.‖ ―Many
of the legal control mechanisms of a
democracy are … still not in place.‖

7. By 2008, Challenges Grew
The Great Recession: Ecuador‘s leading
trading partner
Price of oil rises, then collapses
Doha Round of WTO fails – supposed to
bring justice to developing nations
Ecuador lacks a sovereign currency
Left fractures

8. Economic Treason
Price for oil sales designed to benefit oil
companies at Ecuador‘s expense
Odious debt/corruption
Contract clause with Texaco excusing it
from liability to Nation of Ecuador
The looting of the banks and their
collapse in 1999: the banks go bankrupt
and the bankers get wealthy [My book]
―Free trade‖ deals expose Ecuador to
massive damage awards

9. Virulent Opponents
The oligarchs that the author warned had no
attachment to democracy
The United States: the National Endowment
for Democracy – a cynical title
The IMF: Washington‘s ―hammer‖ that
forced Ecuador to conduct the privatization
and the three ―de‘s‖ that create criminogenic
environment. Result was ‗99 bank crisis.

10. Hard Work Makes Miracles
President Correa‘s policies came from a
sophisticated understanding of economics
and politics. The policies work together,
but for clarity I first treat them in isolation.
One of the most important steps he took
seemed small to many but it was critical
because the IMF‘s policy demands would
have prevented the miracle & produced
disaster.

11. Step 1: Repay the IMF
IMF debt is conditional – extorts policy
IMF demands Washington Consensus
Austerity trumps other factors and would
block Correa‘s social/budget changes
Fierce supporters of the three de‘s –
particularly in finance. Poses grave risk.
Repaying the IMF removed its leverage and
most U.S. leverage over Ecuador
Privatization: monopoly & crony capitalism

12. Correa wrote the ―book‖ on this
Warned of dangers of the ―Washington
consensus‖ in his dissertation
Privatization and lack of anti-trust agencies
lead to monopolies & cartels that harm
economy & create corrupt crony capitalism
―Accounting control fraud‖ explains paradox
of bankrupt banks & billionaire bankers
Race to the bottom & ideology maximize
the ―three de‘s‖

13. The three ―de‘s‖
Deregulation, desupervision & de facto
decriminalization
The regulators have to serve as the ―cops on
the beat‖ to prevent a ―Gresham‘s‖ dynamic
in which bad ethics drive good ethics out of
the markets & professions: Cheaters prosper
That dynamic creates fraud epidemics/crises
Good regulators help honest banks

14. ―Now we know better‖?
―Neither the public nor economists foresaw that
[S&L deregulation was] bound to produce
looting. Nor, unaware of the concept, could
they have known how serious it would be.
Thus the regulators in the field who understood
what was happening from the beginning found
lukewarm support, at best, for their cause. Now
we know better. If we learn from experience,
history need not repeat itself‖ (George Akerlof
& Paul Romer.1993: 60). Before ‗99 Crisis

15. Gresham‘s dynamic: Akerlof
―[D]ishonest dealings tend to drive honest
dealings out of the market. The cost of
dishonesty, therefore, lies not only in the
amount by which the purchaser is
cheated; the cost also must include the
loss incurred from driving legitimate
business out of existence.‖ George
Akerlof (1970).

16. The Irish beat the Economists
―The Lilliputians look upon fraud as a
greater crime than theft. For, they allege,
care and vigilance, with a very common
understanding, can protect a man‘s goods
from thieves, but honesty hath no fence
against superior cunning. . . where fraud
is permitted or connived at, or hath no law
to punish it, the honest dealer is always
undone, and the knave gets the
advantage‖ (Swift, J. Gulliver’s Travels).

17. Accounting: The CEO‘s ―weapon‖
Accounting: finance‘s ―weapon of choice‖
Fraud ―recipe‖ for optimizing (fake) income
1. Grow extremely quickly, by
2. Make (buy) bad loans at premium yield
3. While employing extreme leverage, and
4. Grossly inadequate allowances for loan
and lease losses (ALLL)

18. The Recipe‘s Three Sure Things
1. The lender (buyer) will report record
income in the near term
2. Modern executive compensation will
promptly make the CEO wealthy
3. The lender (buyer) will suffer very large
losses because the loans have a
―negative expected value‖

19. Recipe Solves the Paradox
Correa asks why the banks go bankrupt
while the bankers become wealthy.
Akerlof & Romer‘s title solves the paradox.
―Looting: The Economic Underworld of
Bankruptcy for Profit.‖
By repaying the IMF Correa freed up his
ability to use revenues wisely and prevented
a renewed banking crisis in Ecuador.

20. Washington Consensus Games
As the Washington consensus sparked
massive fraud epidemics the economist
who authored it tried to airbrush history.
His original document shows that he was
familiar with the U.S. savings and loan
debacle.
That crisis proved that his plan was deeply
criminogenic.

21. Fraud in the S&L Debacle
―The typical large failure [grew] at an
extremely rapid rate, achieving
high concentrations of assets in
risky ventures…. [E]very
accounting trick available was
used…. Evidence of fraud was
invariably present as was the
ability of the operators to ―milk‖ the
organization‖ (NCFIRRE 1993)

22. Original re Deregulation
―Another way of promoting competition is by
deregulation. [It was] carried forward by the
Reagan administration. It is generally
judged to have been successful within the
US, and it is generally assumed that it could
bring similar benefits to other countries.
The potential payoff from deregulation
would seem to be much greater in Latin
America….‖

23. Revisionism re Regulation
Williamson now admits that bad financial
regulation causes crises. He claims ―Skeptics
may … point to the recommendation to
deregulate. [T]his was intended to endorse
freeing entry and exit, rather than to advocate
an absence of regulations intended to protect
the consumer, or the environment, or to
supervise the banking system. With that
interpretation there is no contradiction.‖

24. Correa avoided this trap
Williamson, stung by criticism from scholars
such as Correa declared his ideas perfect:
―I submit that it is high time to end this
debate about the Washington Consensus. If
you mean by this term what I intended it to
mean, then it is motherhood and apple pie
and not worth debating.‖ Correa understood
the parts that were good v. rotten apples.

25. What Williamson got wrong
He admits that privatization often went
wrong. He favors disastrous austerity. He
claims that Reagan‘s disastrous
deregulation – which was S&Ls – was
―generally judged … successful‖ by
economists. Williamson doesn‘t realize
what a devastating admission he has
made about the dishonesty and
incompetence of those economists.
Correa got it right; both the good & bad.

26. Step 2: Getting the Revenue
Ecuador was faced with a revenue disaster.
Net revenue is the key so one must manage
revenues and debt.
I will begin the discussion with Ecuador‘s
debt. Ecuador lacks a sovereign currency so
it could not borrow in its own currency. This
puts it at the mercy of the ―bond vigilantes.‖
The eurozone crisis shows how dangerous
they are to a nation.

27. The Debt Doomed Ecuador
If Correa had attempted to pay Ecuador‘s
debt he would have killed any chance to
achieve the miracle.
―In 2007 the Ecuadorian government paid
$1.75 billion in debt service alone, more
than it spent on health care, social
services, the environment, and housing
and urban development combined.‖ It was
essential to reduce the debt service.

28. Correa pares down the debt
Correa broke sharply with prior debt
policies. He took four vital actions. He
paid off the small debt to the IMF because
it would have blocked the next two
actions. He used the audit of odious debt
to reduce the debts (e.g., Norway
renounced Ecuador‘s debt to it).

29. Negotiating the debt
Correa used the debt audit strategically to
provide a basis for a legitimate default
and to put the bondholders on notice that
they could be wiped out. He then used an
auction system to buy back 91% of the
debt at issue at a 65% discount. He then
negotiated an alternative line of credit
from China. Correa knew it was politically
impossible to drop dollarization so he
wasted no time trying.

30. The Right Man at the Right Time
Just as his expertise with the Washington
Consensus‘ weaknesses and strengths
and his rejection of failed economic
dogma made Correa the right man at the
right place and time to make possible the
miracle, an economist and former finance
minister was the ideal person to handle
the debt renegotiations.

31. Two Proofs of the Point
First, the financiers went berserk in
denouncing Correa, which proves they
lost enormous profits on the odious debt.
―Ecuador had ‗lived up to its reputation as
a banana republic‘ (Investor‘s Business
Daily). Ecuador was ‗one of the axis of
evil in Latin America‘ (Financial Times).
There is no sincerer compliment!

32. The 2d Compliment
―Hans Humes, chief executive of Greylock
Capital, said.
―Ecuador‘s move was a ‗brilliantly run and
managed process. They nailed the
timing‘‖.

33. Increasing Revenue
Reducing bond interest expenses was
essential, but not sufficient to produce the
dramatic change in public spending
required for the miracle. Correa worked at
the same time to greatly increase revenue
and integrity. He renegotiated the
percentage of oil revenues that went to
Ecuador. Many oil companies left, but
enough remained to prove Correa‘s point
that the prior share was absurdly low.

34. Tax Compliance
Correa made a major, also successful,
effort to transform the rate of compliance
on corporate and other taxes both to
increase revenue and integrity. He also
instituted an excess profits tax on banks.

35. Step 3: Spend Wisely
Even ideas promoted by Washington are
not always bad. Correa proved to be very
well suited to the task of spending wisely
because he had the skills and the
temperament to be pragmatic and wise in
choosing the priorities and energetic in
implementing those policies. He spent on
the development trinity: education, health
& infrastructure.

36. Washington Agrees!
Williamson: ―there are three major
expenditure categories on which views are
strongly held: subsidies, education and
health, and public investment.‖
―Education and health are regarded as
quintessentially proper objects of
government expenditure. They have the
character of investment (in human capital)
as well as consumption. Moreover, they
tend to help the disadvantaged.

37. Step 4: Aid Entrepreneurs
A conservative Peruvian economist,
Hernando de Soto, is best known for
emphasizing the need to speed the ability
to start an honest business.
Correa agrees – Ecuador has just adopted
a law (and technology) to revolutionize the
process. It is inescapable that Correa‘s
default position is to be friendly towards
honest businesses.

38. Step 5: Competitive Markets
Correa warned of the market power
abuses that could result from privatization
under the Washington Consensus. (This
is another area in which Williamson has
reinvented history.) Even Williamson now
agrees that Correa was correct. Correa
has appointed a vigorous, skilled
economist, Pedro Paez to create and run
the competition agency.

39. Step 6: Creating a Team
Ecuador was wise to choose a leader who
had the best skill set to bring about the
miracle, but the work that created the
miracle was done by millions of citizens. I
have met a number of the officials who
are helping to make and implement the
policies and their general level of care
and skill is very high.

40. Head, Spine, Heart & Fire in
the Belly
The miracle took four key traits that we
often use our bodies to exemplify. The
miracle took top analytical abilities (head),
the courage (spine) to face down even
armed police officers and powerful special
interests, the heart to keep the poor as
the lodestar, and the fire in the belly to
stay committed to sometimes boring
details required to make good ideas real.

41. The Miraculous Results
Unemployment has fallen sharply
Poverty has fallen sharply
Inequality has fallen sharply
The Nation is at peace
There has been political stability
There‘s a well functioning democracy with
peaceful transitions of power after elections

42. And you, and trucks can drive
Much more safely and quickly
Critical to critical care and health
Living the good life, not simply a longer
life in great pain and disability

43. People Vote with their Feet
In economics we stress ―revealed
preferences‖ – what do people actually do
as opposed to what they say they‘ll do.
Ecuador, as a percentage of its
population, was the leading exporter of
citizens in Latin America.
Today, the citizens of Ecuador are often
choosing to live here.

44. Correa is Right about Finance
The central problem is the agents – bank
CEOs too often run a bank for their benefit
at the expense of the bank & people
In the U.S., finance takes 40% of total
corporate profits. Wall Street harms Main
Street. This leads to massive inequality and
crony capitalism.
Need to create a race to the top of integrity.

45. Stop Pandering to Power
Ethics: ―Speaking truth to power‖
―When plunder becomes a way of life for
a group of men living together in
society, they create for themselves in
the course of time a legal system that
authorizes it and a moral code that
glorifies it.‖ (Frederic Bastiat)

46. Citicorp‘s Ode to Plutonomy
Citicorp (2005): ―In early September we
… introduced the idea that the U.S.is a
Plutonomy - a concept that generated
great interest from our clients.‖
Citigroup‘s wealthy clients were thrilled to
hear that the U.S. was ascending to the
exalted state of ―plutonomies, where
economic growth is powered by and
largely consumed by the wealthy few.‖

47. Glorifying Inequality
―[T]he top 1% of households in the U.S.,
(about 1 million households) accounted
for about 20% of overall U.S. income in
2000, slightly smaller than the share of
income of the bottom 60% of households
put together. That‘s about 1 million
households compared with 60 million
households, both with similar slices of the
income pie! Clearly, the analysis of the
top 1% of U.S. households is paramount.‖

48. Obscene Wealth Inequality
―[T]he top 1% of households also account
for 33% of net worth, greater than the
bottom 90% of households put together. It
gets better (or worse, depending on your
political stripe) - the top 1% of households
account for 40% of financial net worth,
more than the bottom 95% of households
put together.‖

49. The Top 1/10 of One%
Citi then warns that focusing on the top
1% masks the fact that their share of the
pie is ―almost entirely driven by the
fortunes of the top 0.1% (roughly 100,000
households).‖ Citi praises the lower taxes
and changes in senior executive
compensation that have driven the
tremendous increase in the share of the
pie taken by these 100,000 households.

50. Managerial Aristocracy
―[W]hile in the early 20th century capital
income was the big chunk for the top
0.1% of households, the resurgence in
their fortunes since the mid-eighties was
mainly from oversized salaries. The rich
in the U.S. went from coupon-clipping,
dividend-receiving rentiers to a
Managerial Aristocracy indulged by their
shareholders.‖

51. Correa & Bastiat‘s Warnings
―Society and governments need to be
amenable to disproportionately
allow/encourage the few to retain that
fatter profit share. The Managerial
Aristocracy, like in the Gilded Age, the
Roaring Twenties, and the thriving
nineties, needs to commandeer a vast
chunk of that rising profit share, either
through capital income, or simply paying
itself a lot.‖

52. Greed is Insatiable
―We project that the plutonomies … will
likely see even more income inequality,
disproportionately feeding off a further
rise in the profit share in their economies,
capitalist-friendly governments, more
technology-driven productivity, and
globalization.‖

53. You Can‘t Make This Stuff Up
―The earth is being held up by the
muscular arms of its entrepreneur-
plutocrats, like it, or not.‖

54. The Multitudinous Many
―In a plutonomy there … are rich
consumers, few in number, but
disproportionate in the gigantic slice of
income and consumption they take.
There are the rest, the ―non-rich‖, the
multitudinous many, but only accounting
for surprisingly small bites of the national
pie.‖

55. Bonfire of the Inanities
―Since we think the plutonomy is here, is
going to get stronger, its membership
swelling from globalized enclaves in the
emerging world, we think a ―plutonomy
basket‖ of stocks should continue do well.
These toys for the wealthy have pricing
power, and staying power. They are
Giffen goods, more desirable and
demanded the more expensive they are.‖

56. Bastiat was an Optimist
―At the heart of plutonomy, is income
inequality. Societies that are willing to
tolerate/endorse income inequality, are
willing to tolerate/endorse plutonomy.
[A]n examination of what might disrupt
Plutonomy - or worse, reverse it - falls
to societal analysis: will electorates
continue to endorse it, or will they end it,
and why.‖

57. Simetría

58. Simetría

59. Asimetría
Detroit: Bankrupt Romney: 1 of 6 Houses

60. Romney‘s Six Homes
He forgot how many homes he owned!
Family received government aid for the
poor when it moved to U.S. from Mexico
Became wealthy in Detroit: auto industry
Picture: his $12 MM La Jolla beach home
―Romney filed…to bulldoze the single-
story beachfront home and replace it with
a larger, two-story home.‖ (After election.)
http://realestate.aol.com/blog/2012/01/24/slideshow-see-mitt-romneys-6-homes/#!slide=4773192

61. Detroit: Largest Bankruptcy
$16-20 billion in net liabilities
Unemployment 3X 2000; 2X national rate
78,000 city structures: abandoned
Picture of ―Zombieland‖
―[Population] exodus left behind …nearly
83% African-American‖ ―Detroit the
nation's largest black-majority city.‖
Detroit citizens lost all political power
http://www.usatoday.com/story/news/nation/2013/07/18/detroit-files-for-bankruptcy/2567159/

62. Asymmetrical Coverage: Correa
1. Technocrat v. Leftist
2. Mediocre v. superb growth
3. The smear that wasn‘t
4. The great compliment – ignoring
Ecuador
5. The thing they will never forgive
Ecuador for is its miracle