Monday, December 22, 2014

The Fed Lets Banks Continue Risky Trades: Too Big To Fail Ensconced

In December 2014, the U.S. Federal Reserve Bank granted banks an extra year past the July 2015 deadline to comply with a major provision of the Volcker Rule requiring the banks to unwind investments in private equity firms, hedge funds, and specialty securities projects.[1] The Fed also announced that it would give the banks yet another year to hold onto their positions. The Fed’s rationale points to an underlying conflict of interest facing the Fed, a banking regulator arguably  too vulnerable to the banks’ lobbying muscle.

Banks pled that dumping holdings quickly would mean having to accept discount prices. “There’s considerable pressure the Fed is feeling in that they don’t want institutions to have a bloodbath trying to divest funds,” Kevin Petrasic, a partner in a global banking practice, said.[2] At the time, Goldman Sachs had $7 billion invested in private equity that the bank might have had to sell for a loss had the extension not been granted.[3] For Morgan Stanley, $2.5 billion is said to have been vulnerable to being sold at a loss. These figures presumably come from the banks themselves, and reliance on the regulated for information is part of what goes into regulatory capture of an agency by the firms being regulated.

Dennis Kelleher, of Better Markets, claimed the “Street has had years of notice to unwind these investments, and it appears that their self-serving complaints have been accepted fairly uncritically without a real analysis for the basis of the claim.”[4] That is to say, relying on both the information provided by the regulated and their interpretation puts the Fed’s regulatory function at risk—and hence the financial system itself at risk. Interestingly, Kelleher sounds more like a regulator than the Fed in observing, “If you can’t get out of a trade in seven years, it’s probably not the kind of trade you should be doing.”[5] The “regulators” at the Fed seem to have rolled over, taking the “self-serving complaints” at face value—ignoring the obvious problem in doing so. At the very least, regulators at the Fed should have assumed that the information would naturally be skewed; from such a perspective, a critical examination would have been an obvious necessary step prior to any decision to give the banks another year.

In short, the Fed comes off looking rather naïve, though underneath the reality could actually involve the banks having too much control over top Fed officials—the banks having a significant role in the appointing process. As a result, eight years after the financial crisis of 2008, risky proprietary trading was alive and well on a street populated by banks even more so too big to fail. Beyond the question of cozy relationships between the Fed and the banks that it regulates, the lack of any public outcry points to a problematic learning-curve societally in the U.S., with disturbing implications on the ability of a people to self-govern. Yet the alternative would seem to be more cronyism divested of any risk of being made transparent.

1. Zach Carter, “Fed Delays Volcker Rule, Giving Wall Street Another Holiday Gift,” The Huffington PostDecember 18, 2014.
2. Jesse Hamilton, Ian Katz, and Cheyenne Hopkins, “Goldman Needs Volcker Delay to Avoid Private-Equity Losses,” Bloomberg, December 5, 2014.
3. Ibid.
4. Carter, “Fed Delays Volcker Rule.”
5. Ibid.

Monday, December 15, 2014

Police Power Exceeding the Capacity of the Human Brain: Some Countervailing Measures

“Power tends to corrupt and absolute power corrupts absolutely.” Lord Acton’s timeless statement is applicable to legal and illegal power alike, for each is subject to abuse. The victims are those whose wills are bent through either harm or the threat of injury. Put another way, the human brain may lack sufficient cognitive, emotional, and perceptual machinery to check the instinctual plus socialized power-aggrandizing urge. This vulnerability is particularly apparent in viewing video showing a police employee violently over-react in a situation that quite obviously should not have involved violence. Although anger doubtlessly plays a crucial role in the trigger that unleashes the police violence, the more subtle suspension of cognition and warping of perception is also in the mix.

In December 2014, a 23 year-old policeman in Victoria, Texas, pulled over Pete Vasquez, aged 76, because Vasquez’s car did not show an inspection sticker. As Vasquez was trying to explain that his car was exempt—a point that the police chief later confirmed—the policeman grabbed the old man, pushed him to the ground, and used a tazer gun twice. “What the hell are you doing? This gentleman is 76 years old,” a sales manager watching the incident cried.[1] Clearly very angry at Vasquez, the policeman yelled at the onlooker, who seems to have suddenly feared for his own safety.

That the reasonable reaction from a third-party triggered more anger instead of any second-guessing, at least visibly, suggests that the policeman was not in control of his faculties. Crucially, he was not in sufficient control of himself to handle the power that he had been given by law. Psychologically, he evinced a weakness in handling the power in the context of not understanding why the car was exempt from having to show an inspection sticker. An arrogance in not wanting to admit even to himself that he did not understand what he himself had flagged, and a cognitive lapse in assuming that he could not be wrong likely contributed to his need to be in charge and thus his anger at Valsquez for trying to correct him. The anger itself was too much for the policeman, for it eclipsed reason and even perception whose impairment rendered any internal mechanism of self-regulation insufficiently operative.  In short, he used power beyond the capacity of his brain, emotionally, cognitively, and perceptually.

It may be that the authority given to police employees generally is not in keeping with the capacity of the human brain to process and handle power exercisable over other people. Compounding the problem, the police chief talked only about taking “a real hard look at some of the actions that occur within the department,” rather than arresting the aggressor even though the latter action would befit a person who had lost control of his faculties and acted out violently without reason. That the policeman was shifted to an administrative duty is itself an indication that official accountability would come up short within the police department. The implication is that the general public (and city officials) should not rely on departments’ internal-affairs departments to impartially investigate such cases and render sufficient punishment to “their own.” Put another way, the conflict of interest in the very nature of an internal-affairs department is inherently unethical because it can be expected to result in compromised investigations and decisions. To hold a police employee accountable, we must look beyond police departments.   

Although the district attorney said the policeman could face charges including official oppression, injury to elderly, aggravated assault and assault, the grand jury stage may be rigged to favor police employees. That is to say, the system itself may enable the propensity of the human brain to over-react with violence when in a position of power over another person without a sufficient internal check. Given the risk of aggrandized uses of power by police employees, candidates for local offices not only in Texas, but in each of the forty-nine other member-states in the U.S., might consider proposing institutionally and personally independent agencies to hold lapsing police employees accountable. Additionally, legislation changing the instructions to grand juries making it less difficult to indict an employee of a police department could be pursued. Especially if scientists find that the human brain is in fact ill-equipped to handle the power typically given to police employees, then either some of that power should be taken away, which may not be practical, or countervailing changes to grand-jury instructions enacted.

[1] Ed Mazza, “Texas Cop Nathanial Robinson Uses Stun Gun on Elderly Man Over Inspection Sticker,” The Huffington Post, December 15, 2014.

Saturday, December 13, 2014

Advise and Consent: Does Politics Have a Limit?

A film that centers on the U.S. Senate’s role in confirming executive nominations made by the president, Advise and Consent (1962) is arguably about whether moral limits pertain to power.  Put another way, should we expect no-hold barred efforts to manipulate others in the political arena? Personal lives and personal pasts being fair game?  Moreover, is the aim power for its own sake, or the manipulation of others for the sake of a public policy and ultimately the good of the country? 

The full essay is at “Advise and Consent” 

Friday, December 12, 2014

Wall Street Writing Its Own Laws on Risky Derivative Trading

In just four years, Wall Street got away with weakening a part of the Dodd-Frank financial reform law, which became law in 2010 to protect the financial system from the excesses that led to the financial crisis in 2008. Wall Street bankers and their lobbyists accomplished their feat by luring members of Congress into a formidable conflict of interest, which I submit could have been obviated.

Just after a provision that lets banks trade in financial derivatives using deposits in FDIC-insured subsidiaries passed in the U.S. House of Representatives on December 11, 2014, Rep. Peter Welch of Vermont remarked, “This is exquisitely reckless—a special provision for Wall Street in exchange for money from Wall Street.”[1] Essentially, the big banks paid for the legislation. When the same language passed the U.S. House the year before, the New York Times reported that just weeks before, “Wall Street groups . . . [had] held fund-raisers for lawmakers who co-sponsored the bills. At one dinner . . . , corporate executives and lobbyists paid up to $2,500 to dine in a private room of a Greek restaurant just blocks from the Capitol with Representative Sean Patrick Maloney, Democrat of New York, a co-sponsor of the bill championed by Citigroup.”[2] Given the appearance of the conflict of interest facing lawmakers such as Maloney, it is telling that Citibank’s lawyers wrote 70 lines of the 85 line section of the bills that passed the House in 2013 and again in 2014. Such blatancy alone suggests that the practice of vested industry interests writing their own regulations is widespread in Congress.

The relevant section in the 2014 legislation. Relying on the bank's language involves a conflict of interest. (Image Source: Mother Jones)

As sordid as the practice must surely look to a public desiring to be protected from the risky derivative and swap trading that triggered the financial crisis in September 2008, Wall Street bankers and their paid lobbyists had no trouble looking past the ethical problem. “We will provide input if we see a bill and it is something we have interest in,” said Kenneth E. Bentsen Jr., a former lawmaker turned Wall Street lobbyist, who now serves as president of the Securities Industry and Financial Markets Association, or Sifma.[3] Bentsen was not about to hold back just because his involvement would create a conflict of interest for legislators. I suspect that he believed that his input would result in a stronger financial system, which is in the public interest; this belief could easily blind him to the problematic nature of his contribution to the conflict of interest facing members of Congress.

In 2013, Citigroup executives said the change they advocated was good for the financial system, not just the bank. Industry executives said that the changes, which were drafted in consultation with other major industry banks, would make the financial system more secure, as the derivatives trading that takes place inside the bank is subject to much greater scrutiny. That the closer examination is due to the heightened importance of banks in an economy—and thus risky trades are especially risky to the public good as well as the banks themselves—seems to have eluded the bankers. In fact, they were strangely comfortable with going back to the risky behavior leading up to the financial crisis in 2008. Marcus Stanley, a director at the nonprofit group, Americans for Financial Reform, said, “The bill restores the public subsidy to exotic Wall Street activities.”[4] That the view from Wall Street is partial, given the natural effect that self-interest has on perception, suggests that the rationale of being in the public interest justifies contributing to a conflict of interest facing lawmakers is flawed. I suspect that a poll on Wall Street would find little concern for putting lawmakers in such a bind, especially if the general public tends to accept institutional conflicts of interest as only mildly harmful.

On the Congressional side of the equation, we find lawmakers who recognize the conflict and accept it as a given rather than as something to be obviated. “I won’t dispute for one second the problems of a system that demands immense amount of fund-raisers by its legislators,” said Representative Jim Himes, who supported the 2013 industry-backed bill and lead the party’s fund-raising effort in the House at the time. A member of the Financial Services Committee and a former banker at Goldman Sachs, he was one of the top recipients of Wall Street donations. “It’s appalling, it’s disgusting, it’s wasteful and it opens the possibility of conflicts of interest and corruption. It’s unfortunately the world we live in.”[5] This rationalization is very common among people who allow themselves to exploit conflicts of interest. So it is worthwhile to unpack the excuse.

If Himes meant that everybody in Congress takes money from particular vested interests and allows them to essentially write their own laws, then the old adage applies—just because everyone is jumping off a bridge doesn’t mean you should do it. Alternatively, if Himes meant that the lawmakers must agree to take the money in exchange for allowing the regulated to write their own laws, then the question is whether such suspect funds are really necessary for an incumbent to be reelected. If so, public policy aimed at reducing political advertising costs may be the way to unwind the conflict of interest. Television stations could be required to allot substantial time for free political ads, for example, as part of the obligations that go with being licensed to use the public airwaves. Public financing of such ads could also be used. In short, institutional or structural conflicts of interest can be taken apart. The issue may come down to why we tend to overlook or accept them as only mildly harmful rather than inherently unethical and ruinous to the public good.

[1] Sabrina Siddiqui, Elise Foley, and Michael McAuliff, “Government Stays Open as Congress Advances Poison-Pill Spending Bill,” The Huffington Post, December 11, 2014.
[2] Eric Lipton and Ben Protess, “Banks’ Lobbyists Help in Drafting Financial Bills,” The New York Times, May 23, 2014.
[3] Ibid.
[4] Ibid.
[5] Ibid.

Monday, December 8, 2014

Private Interests Over the Public Good: Energy Companies Capture an Attorney General

In Wealth of Nations, Adam Smith argues that the aggregation of the preferences of consumers and producers for a given good is in the public interest for the product or service. Often overlooked is Smith’s Theory of Moral Sentiments, in which the famous economist wraps a moral sentiment around the individual preferences, hence hopefully constraining them, albeit voluntarily. Herein lies the rub, for it is shaky to assume that a preference that seeks to maximize itself will voluntarily restrain itself when it rubs up against an ethical limit that is felt. Such a moral constraint is like a semi-permeable membrane in that the sentiment naturally triggered when a person comes on an unethical situation or person can be ignored or acted on.

To be sure, a sentiment, such as that which a person naturally feels when he or she learns of an innocent person being killed, can be written into law and applied as a new regulation; the individual preferences otherwise triggering the sentiment of disapprobation would thus be constrained involuntarily from doing so. It follows that if a private actor, such as a company’s management, with a preference (which is inherently self-maximizing) can emasculate a restraining regulation without any concern for people’s moral sentiments, then we are back to trusting in voluntary restraint—only now that actor has political power rather than merely being one of many participants in a competitive market. I contend that trusting in the regulated to regulate its regulator is unethical not least because of the underlying conflict of interest.

To illustrate the problem, I discuss the influence of certain energy companies on certain attorneys general in some of the American States. In late 2014, The New York Times reported that Oklahoma Attorney General Scott Pruitt wrote a critical letter to the U.S. Environmental Protection Agency. In particular, he claims that the regulators were grossly overestimating the amount of air pollution caused by companies drilling new natural gas wells in Oklahoma.[1] The public good is salient here because methane, a gas having ten-times the greenhouse effect of carbon, had been shown by independent tests to be leaking from natural gas wells and urban pipe systems.[2]

So the public interest in keeping global warming to within limits palatable to human survival may have been put at risk were Pruitt wrong in his charge. That the letter had actually been written by lawyers for Devon Energy, one of Oklahoma’s biggest oil and gas companies—the attorney general’s staff copied it onto government stationery with only a few word changes and Pruitt signed it as if it was his own—raises serious doubts as to Pruitt’s claim of overstatement.  That is to say, a government  may have been colluding with a private vested interest in a regulation at the expense of the public interest.

An email exchange from October 2011 between attorneys general and large energy producers “offers a hint of the unprecedented, secretive alliance . . . to push back against the Obama regulatory agenda,” according to The New York Times.[3] The newspaper had “reported previously how individual attorneys general have shut down investigations, changed policies or agreed to more corporate-friendly settlement terms after intervention by lobbyists and lawyers, many of whom are also campaign benefactors.”[4] Shutting down investigations is particularly suspect, as it cannot be said that concluding them would run counter to the public good. Moreover, for the regulated to also be campaign benefactors places both the regulated and the regulators and attorneys general in conflicts of interest.

For the energy companies, their roles as the regulated and benefactors conflict because the temptation to obligate regulators and attorneys general to remove a certain regulation goes against being regulated, which implies that government regulation is a viable rather than voluntary constraint. I submit that it is unethical for a society (via its government) merely to allow the regulated to have the other role because of the latent lure of the temptation to obligate government officials to remove unpleasant regulations that are nonetheless in the public interest.

For government officials, taking the campaign contributions from companies whose regulations the officials can relax or expunge creates a conflict of interest between acting on a private interest’s behalf at the expense of the public interest and protecting the public good through non-voluntary constraints on private interests. According to The New York Times, attorney generals “in at least a dozen are working with energy companies and other corporate interests, which in turn are providing them with record amounts of money for their political campaigns, including at least $16 million” in 2014.[5] Also in that year, the U.S. president, Barak Obama, admitted publicly that the federal elected-representatives must take the huge contributions in order to compete in elections “and that obligates us.”[6] We can fill out the president’s point by adding that the large contributions, such as the $1 million from Goldman Sachs to Obama ’08, obligates elected representatives to put particular private interests over the public interest even though being a law-maker or enforcer-of-law carries with it the duty to protect the public interest from otherwise maximizing private interests.

If enough parts of a ship are allowed to go their own way at the expense of the ship itself, steering a steady course and maintaining speed are impeded. Similarly, if powerful private interests in a republic are allowed to obviate measures that restrict them so the republic may remain viable over the long term, then the whole will weaken as if leaking energy. Put another way, prick enough tiny holes in a flat balloon and inflating it will not last very long. Even though a particular pin-prick does not deflate the whole over time, a system enabling such hole-making enables enough tiny holes that a slow deflation becomes a mathematical certainty.

[1] Eric Lipton, “Energy and Regulators on One Team,” The New York Times, December 7, 2014.
[2] The E.P.A. had taken the industry’s own “estimate” of 1 percent as the leakage rate, whereas independent tests showed leak rates up to 18 percent. Cities tested include Washington, D.C., Denver, and Los Angeles.
[3] Lipton, “Energy and Regulators.”
[4] Ibid.
[5] Ibid.
[6] Barak Obama at a news conference in late 2014.

Friday, November 28, 2014

Wales Compromising Scotland: Should Britain Keep Its Promise?

A few months after residents in the Scottish region of the E.U. state of Britain voted not to secede from the state by a margin of 55 to 45 percent, a state commission announced proposals for the regional assembly to have more authority. David Cameron had promised on behalf of the state government that the Scottish region would be given more power provided the residents reject secession. To be sure, replying on such a promise in political matters is hazardous at best, as changing political winds can easily erode such sand castles. At the very least, political players with their own agendas can succeed in obfuscating the understood validity of such a promise.

Under the proposal, the Scottish region would have the power to set income tax rates, control some of the money raised by the state’s sales tax and the duties imposed on passengers in airports in the region, and have more say in the amount of spending on social welfare in the region.[1] The political ideology in the region had tended to run more in the social-welfare direction than in the state as a whole. Accordingly, the proposal would more closely fit the public policy to the preference of the residents.

Seeing an opening for such a benefit for residents in the Welsh region, Carwyn Jones, the first-minister there, claimed that her region should receive similar powers from the state. Ignoring the pre-referendum promise pertaining to the Scottish region, she told the BBC that giving only that region additional powers would be to discriminate against the other regions.[2] Because the Welsh region did not have a referendum on whether to secede from the state, however, neither the government’s promise nor its subsequent proposal are discriminatory. In fact, viewing either one as unfair is itself unfair because it is unfair to treat unlike things as like.

Additionally, to the extent that Carwyn’s claim puts the fulfilment of the promise at risk, the claim is unfair to the residents in the Scottish region. As Kant argues in his text on practical reason, breaking a promise is unethical. Accordingly, manipulating government officials so they will break their promise is unethical, for, Kant argues, were government leaders to regularly go back on their word, no one would take them at their word and promise-making would collapse on itself in utter self-contradiction.

So it can be reasonably concluded that the state government should fulfil its promise made to the residents in the Scottish region. Whether the state goes further, say in borrowing from the states of Germany and Belgium in adopting a federal system for itself, should be handled as a separate matter, after the promise has been fulfilled so as not to compromise it.

[1] Stephen Castle, “Panel Details Plan to Give Scotland More Powers,” The New York Times, November 28, 2014.
[2] Ibid.

Tuesday, November 25, 2014

Political Theater Undermining American Democracy

To be viable, a representative democracy needs a virtuous and educated citizenry. Thomas Jefferson and John Adams agreed on this point in their exchange of letters in retirement. Their assumption was that an electorate would be able to apply judgment informed by virtue and a broad knowledge to not only matters of public policy, but also the candidates and incumbent office-holders themselves. To the extent that the people in power use it to present a false image, the judgment by the popular sovereign is unavoidably marred. The democratic system itself falters even if it is being portrayed as strong by those at its helm. I contend that the extent of political theater being orchestrated by U.S. office-holders compromises the democratic legitimacy of public power at the federal level.

In 2010, U.S. Sen. Carl Levin’s Investigations subcommittee questioned Goldman Sachs managers on the mortgage-based securities sold the even the bank’s best clients without mentioning that the subprime-mortgage-based bonds were “crap.” Lloyd Blankfein, Goldman’s CEO at the time, calmly told Levin that the bankers were under no obligation to share their view of their product on account of the risk-return tradeoff. In other words, a client might want a lot of risk, and such bonds may be of value in that case. However, it could also be argued that crap is crap, regardless of risk. Furthermore, simply in putting their derivative securities up for sale, Goldman Sachs was saying, implicitly, that they have value. In short, it is reasonable to have expected the U.S. Justice Department to make use of the evidence that Levin’s subcommittee amassed to charge Goldman Sachs with fraud. Yet no such action emerged after the dramatic hearing; it was sheer political theater. After all, the bank had contributed $1 million to Barak Obama’s 2008 presidential campaign—its largest single contribution. No wonder Blankfein was so calm; he undoubtedly knew that in spite of the political theater, he had nothing to fear from the feds.

In 2014, Chuck Hegel resigned as U.S. Defense Secretary. In announcing Hegel’s departure, Barak Obama said he was sorry to see the man go. Throughout the prepared remarks of both men, nothing suggested that the secretary had been shown the door. Meanwhile, the media was claiming that sources in the administration had disclosed that Hegel had been pushed out. In an article the next day, The New York Times refers to Hegel’s ouster, quoting David Rothkopf, an expert on the National Security Council, as referring to “the Hegel ouster.”[1] Tension between Hegel and the White House had begun with differences on the administration’s policy on Syria, according to the Times. If the president even just gave Hegel a hint that the secretary should resign, then the scripted announcement was sheer political theater—that is to say, a lie.

If it is so easy for government officials to lie on such a scale, then how can an electorate possibly make informed judgments when voting on candidates? Put another way, if politicians’ respective brands are marketed for effect rather than being based on facts on the ground, then voters actually vote for or against something that does not exist. Were the elaborately orchestrated lies exposed as such beyond a shadow of a doubt, perhaps voters would vote against the offenders simply for having lied so egregiously. Such lying befits a squalid character—certainly not one that can be trusted in positions of power.

Moreover, the basis of representative democracy in the popular sovereign—the People—is severely compromised if much of what is presented through the media is an act designed to manipulate rather than inform the general public. In The Federalist Papers, the idea emerges that the larger the electoral district—meaning more constituents per representative and more distance involved—the less familiar the voters tend to be with candidates and office-holders. This argument bolstered the point that most of the domestic power should remain with the States rather than be transferred to the proposed General (i.e., Federal) Government. Back in 1787, the entire U.S. population was about 7 million. By 2014, that population had grown to over 310 million, with twelve States having more than 7 million. Logic alone would seem to dictate that each of those States should be federal systems. California, for example, could devolve some of its sovereignty to States covering the central valley, the north, the Bay area, and southern California. The particular preferences in these regions would be better reflected in public policy—instead of a one-size-fits-all approach that tends to go to the lowest common denominator.

The U.S. itself is essentially an empire made up of fifty republics (i.e., representative democracies) and one federal republic. Regarding the latter, regulating interstate commerce and providing a common defense have traditionally been imperial-level governmental functions. With the political consolidation at the imperial level has come greater distance, both interpersonal and geographical, between the power and the people. A person in Kentucky, for instance, is more likely to know his or her representatives in Kentucky’s legislature than in Congress. What percentage of Americans have spoken with Barak Obama? The vast majority ely on the managed image through the media, and it is natural to assume veracity without evidence to the contrary. In short, the imbalance in the federal system, along with the growth in population, creates a climate in which egregious lies can thrive at the expense of representative democracy in America.

1. Mark Landler “White House Shake-Up That May Have Stopped at Just One Departure,” The New York Times, November 25, 2014.

Monday, November 24, 2014

Banks Too Big To Jail: A Systemic Conflict of Interest

When a blatant conflict of interest is ensconced in a regulatory system, the public can expect to be insufficiently protected from being harmed. Such a people is probably too tolerant of such conflicts, or else too weak to effectively counter the concentrated power of the vested interests benefitting from the sordid design. I submit that the relationship between U.S. banks and the Federal Reserve is plagued by a clear conflict of interest, and furthermore that the refusal of the Fed and the U.S. Justice Department to go after fraud committed at the big banks is a direct result.

In mid-November 2014, an official at the U.S. Federal Reserve Bank acknowledged that federal prosecutors had not pursued criminal charges against banks—in spite of evidence of laundering money for suspected criminals, manipulating interest-rate benchmarks, rigging commodity markets, misleading investors purchasing mortgage-based securities and homeowners taking out large mortgages, manipulating municipal debt markets, and breaking state and federal laws in attempting to seize houses (i.e., “robosigning”).[1] At a U.S. Senate Banking Committee hearing, William Dudley, president of the Federal Reserve Bank of New York, admitted, “We were not willing to find those firms guilty before, because we were worried that if we found them guilty, that could somehow potentially destabilize the financial system.”[2] He went on to say that he and his colleagues had “gotten past” that way of thinking.

I contend that relying on Dudley and his colleagues to recognize for themselves that enabling criminal conduct orchestrated in large U.S. banks is not a good thing is problematic. Doing so is tantamount to relying on the wolves guarding the hen house to come to the opinion that eating all the hens is not such a good thing for the wolves (or society) after all. That is to say, the sordid mentality at the New York Fed and the U.S. Department of Justice stems at least in part from a structural, or institutional conflict of interest.

At the congressional hearing, Senator Jack Reed (D-R.I.) too issue with the amount of influence that the big banks have over who oversees them.  According to The Huffington Post, “Each regional fed board has three classes of directors -- one selected by banks, another headed by corporate leaders selected by banks, and a third that is supposed to represent other public interests. The corporate and public interest directors choose the Fed president. Since big banks like Goldman Sachs and JPMorgan Chase select the corporate directors in the New York region, they exercise a great deal of influence over the process. Dudley himself is a former Goldman Sachs banker.”[3] Although Dudley insisted that he had changed the culture at the New York Fed, the fact that he has been socialized in a banker’s perspective points to an underlying problem—one admittedly subtle but too large to be swayed by a leader’s attempts to change organizational culture from enabling to regulating.

A glaring structural conflict-of-interest exists in the bankers having a say in who regulates them and their respective institutions. The banks essentially control two of the three classes of directors, and through their corporate picks, the banks can stop any nominee for NY Fed president put forward by the public interest directors. Hence, the system is rigged, in its very design, against a president inclined to hold the banks and their employees accountable to the law. The only way out of this mire is for the system to be redesigned, and such a feat presumably requires visionary and ethical leadership rather than incremental and political leadership.

As one instance of how the system as it stands works, Tim Geithner was supported by Citigroup (and in particular its largest individual stockholder) to be president of the New York Fed. In his tenure there, he went along with U.S. Treasury Secretary Henry Paulson, a former CEO of Goldman Sachs, in not stipulating that banks being bailed out use the funds to increase lending and limit bonuses. The stated reason given was that the bankers might not go along with the bailout—as if they would have preferred facing the short-sellers on their own. A few years later as the Secretary of the U.S. Treasury himself, Geithner went along with the Dodd-Frank financial reform law not including a clause giving the U.S. Government the authority to break up banks that have such systemic risk that a collapse could cause the financial system to “freeze up,” creditwise (e.g., commercial paper). Given the role of the banks at the Federal Reserve, it is truly remarkable that Paul Volker, who was Reagan’s first Chairman of the Federal Reserve, advocated for such authority. From his advice, we can measure the fallout from the systemic conflict-of-interest.

In general terms, for the regulated to have any say in who regulates them, and for the top regulators to come from the ranks of the regulated are such glaring “red flags” that it is astounding to come across a people who tolerate them in how their banking regulators are selected. Perhaps the gap between the political and business classes on the one hand and the popular sovereign (i.e., the People) on the other is so wide that the wolves guarding the chickens can afford to be blatant as to their system. Moreover, the tolerance in a societal culture for institutional conflicts of interest must be huge to allow such a conflict-of-interest not only to exist, but to sustained such that it has become well-ensconced in the existing system of public governance. It is in precisely such an atmosphere that a plutocracy—the rule of private wealth—can flourish openly on the subterfuge of democracy.

[1] Zack Carter and Shahien Nasiripour, “The Fed Just Acknowledged Its Too Big to Jail Policy,” The Huffington Post, November 21, 2014.
[2] Ibid.
[3] Ibid.

Friday, November 21, 2014

Wall Street Banks in Commodities Businesses: An Inherently Unethical Conflict of Interest

Writing to the bank’s board of directors, an executive at Goldman Sachs wrote that the bank’s commodities division would achieve higher value “if the business was able to grow physical activities, unconstrained by regulation and integrated with the financial activities.”[1] According to Sen. Carl Levin, Goldman’s goal here is “to profit in its financial activities using the information it gains in the physical commodities business.”[2] The integration could be achieved in part by using the bank’s access to nonpublic information from the banking or trading operations to manipulate the price of a commodity by artificially restricting or adding to supplies through ownership at the production or storage stages. This structure contains a conflict of interest. Because resisting the temptation to exploit the conflict would put the Goldman bankers at odds with the bank’s financial interest, I contend that reliance by the public on intra-bank firewalls (i.e., policies) separating the commodity businesses from the bank’s trading operations is too weak to protect the public, including buyers of the commodity.

The full essay is at "Wall Street Banks in Commodities"

1. Sen. Carl Levin, “Opening Statement,” Wall Street Bank Involvement in Physical Commodities Hearing, Permanent Subcommittee on Investigations, U.S. Senate, November 20, 2014 (accessed November 21, 2014)
2. Ibid.
3. Ibid.

Wednesday, November 19, 2014

Missing Out in Reducing the Carbon Footprint: Human Reason Lapsing on Opportunities

Wind farms and solar panels—these alternatives to coal and natural gas could play a larger role in reducing the human impact on climate change were it not for missed opportunities. That any would be passed by when the species itself may hang in the balance points to a certain recklessness in the reasoning process akin to ill-afforded complacency.

In 2012, 13 gigawatts worth of wind-powered electricity generation capacity was installed in the United States, enough to meet the needs of roughly three million homes. This represents 40 percent of all the capacity added to the nation's power grid that year. Seven gigawatts had been added in 2011, and a bit more than five in 2010. In 2013, with Congress allowing the federal tax credit to lapse, only one gigawatt of wind power capacity was installed. Bioenergy, geothermal, and offshore wind were lagging too. Worldwide, investment in renewable energy sources was slowing as well, down to $211 billion in 2013, 22 percent less than the amount in 2011.[1]  Meanwhile, carbon emissions were at a record level globally in 2013 and the world’s oceans were already easing back in the additional amount of carbon that they could absorb. It would seem that the homo sapiens species has a self-destructive bent hard-wired in the brain.

At the very least, we are walking past opportunities as we head toward a global climate possibly outside of the realm of human habitation. According to the U.S. Energy Information Administration in 2014, the levelized cost of onshore wind energy for plants going into operation in 2019 could be as little as $71 per megawatt-hour (in 2012 dollars) without subsidies. Similarly, projections for the levelized cost of photovoltaic solar-cell energy were down 40 percent.[2]  Adding solar and wind plants to gas-powered generators and utilizing advanced load-management technologies could leverage the cost-savings, as the cost projections of energy from coal and natural gas were not showing similar drops.

Looking further out on the horizon, technology could perhaps be developed that would extract carbon from the oceans and the atmosphere. This unknown could end up making much of the difference in whether humanity keeps the global temperature increase within the 2C degree limit for sustainability.

In conclusion, the test may be whether we as a species use reason to resist the ever-present urge of instant-gratification. We know that a tax credit can be efficacious, and we see the cost projections coming down, yet on the other hand we find it hard to resist the convenience of driving more as gas prices drop, and we drive right by opportunities to reduce our collective imprint on the climate while we still can. It is as if we were a very overweight person at an unlimited buffet. In spite of having a goal of losing weight, we just can’t help ourselves while we are at the buffet because the food is there and we figure we can always eat less tomorrow. At the buffet, we figure in a warped sort of way that as long as we are there, it won’t be all that much worse if we go back for another dessert. It is just this sort of flawed reasoning that I suspect lies behind the arrows going in the wrong way in our handling of the climate crisis.

[1] Eduardo Porter, “A Carbon Tax Could Bolster Green Energy,” The New York Times, November 19, 2014.
[2] Ibid.

Monday, November 17, 2014

Homelessness in the U.S.: A Reflection of American Values

According to a report by the National Center on Family Homelessness in 2014, nearly 2.5 million American children were homeless at some point in 2013.[1] The U.S. Department of Education had reported that 1.3 million homeless children were going to school. California, which accounted for one-eighth of the U.S. population at the time, had one-fifth of the 2.5 million, which comes out to nearly 527,000. The relatively high cost of living and shortage of low-income housing, along with a largely stagnant minimum wage, are the more visible factors behind the gap.

The full essay is at "Homelessness in the U.S."

1. David Crary and Lisa Leff, “Number of Homeless Children in America Surges to All-Time High: Report,” The Associated Press, November 17, 2014.

Tuesday, November 11, 2014

Adieu to Florida’s Gold Coast: Beyond Money and Politics

In October 2014, the City of South Florida passed a resolution in favor of South Florida seceding from Florida and becoming the 51st State of the United States. Vice Mayor Walter Harris, the resolution’s sponsor, told the city’s commission that the government of Florida had not been addressing adequately the issue of the sea-level rising. Already, Miami was subject to regular flooding at high tide. This reason for secession has a serious downside, however; a better rationale may ironically come from the perspective of Floridians in North Florida.

The proposed State of South Florida would include the counties in orange. (Orlando Sentinel)

Harris was obviously frustrated. “We have to be able to deal directly with this environmental concern and we can’t really get it done in Tallahassee.”[1] However, even though a government of South Florida might indeed be more willing to legislate to save much of South Florida from the inevitable, that State would be more vulnerable to sea-water disasters. A hurricane could cut out a good part of tourism dollars along the “Gold Coast” (i.e., West Palm Beach to Miami), and still Tallahassee could count of unhampered tax revenue from the northern regions of Florida to fund clean-up and restoration projects. A government of South Florida would not have this spread-out diversity, so a major storm could effectively cripple that government’s wherewithal to respond.
So Harris’s rationale is a double-edged sword, meaning it cuts both ways. More pliability but more risk. Mayor Philip Stoddard’s rationale is more solid, and yet more effusive and thus easy to overlook or dismiss. “It’s very apparent that the attitude of the northern part of the state is that they would just love to saw the state in half and just let us float off into the Caribbean. They’ve made that abundantly clear every possible opportunity and I would love to give them the opportunity to do that.”[2] I submit that Northern motive here does not stem from fiscal or even political self-interest; rather, people living in South Florida have a bit of a bad reputation, attitudewise.

After four months living in Miami, I came away wishing that the U.S.  might someday kick South Florida out of the Union for not being civil enough to warrant inclusion in American society. On a daily basis, I found not only irate, impatient drivers honking incessantly, but also extremely rude retail employees dominating the service industry—such rudeness easily passing as passive and even active aggression toward customers. More generally, I found a mix of self-absorption and fastidiousness to be so common that it characterizes the dominant culture.  Obviously, not everyone living in the stretch of urbanization from West Palm Beach to South Miami had this mentality; in fact, I ran into some nice people who admitted to me that the real problem with South Florida is the people. How damning an assessment this is!

In short, enough residents of South Florida do not play well with others that the sordid attitude and its ensuing behaviors can enjoy the validity that comes with being the established norm. Transferring to a local bus at a light-rail station in Dade County (i.e., Miami), for example, I was literally thrown out of kilter mentally when a black 25 year-old fat guy body-slammed me into the side of the opened front-door because he thought I should have let all the Blacks on first rather than wait in line as I did. Adding insult to injury, the black bus driver refused to call the police when I asked him while I was still body-pressed by Fat Albert. “You shouldn’t have gotten on then,” the middle-aged driver said.  I submitted a complaint to the transit company, but never received a reply. At the very least, I concluded, a corrupt institutional culture enables the interpersonal aggression there.

While in Miami Beach on a bus, I was perplexed to find a driver ignoring two local black men shouting at each other in the bus. At the very least, the black woman driving the bus was not concerned about what impression the tourists standing in the aisle would have of the vacation spot. The situation quickly turned surreal when one of the black men lurched down the steps from the back third of the bus to hit the other man standing in the aisle near the back door. From my seat, I caught a glimpse of tourists falling over like dominos in the aisle toward the front of the bus. As they stood up, several of them demanded that the driver stop and call the police. Incredibly, she just kept driving. Eventually, when we stopped to let off some passengers, the driver did call the police, but only to ask if the man who was hit wanted to press charges. He did not, so the driver told the police they did not have to come. Eventually, the troubled man got off the bus of his own accord.

On nearly a daily basis, I encountered aggressively rude people in Fort Lauderdale and Miami of every race. At a Starbucks in a nice suburb of Miami, I was stunned when a woman of about 60 decided even before I had put away my things that I was leaving; she sat down at my small table while I was still drinking coffee.  “You’re leaving,” she said as if she could not be wrong. “No, I’m still here,” I replied, but this made no difference to her sense of entitlement. The employees I encountered at more than one Starbucks store were—how shall I put it—a piece of work. I called the company’s customer service on one occasion to report that a veteran (i.e., not new) employee didn’t know what a pull-over is.  Adding insult to injury, she refused to ask her manager. “No, we don’t have those,” the employee said, scolding me with her tone merely for ordering a French-roast pour-over because none was brewed.  It is Starbucks policy that if a roast is not brewed at the time, it is to be made by the pour-over method. The customer-service representative in Seattle said after I relayed the account, “You’re right; that really is beyond the pale—she doesn’t know what a pour-over is and she is not in training? Yeah, that is bad.” I agreed, adding, “That’s how it is here in Miami.” At another Starbucks, a manager explained that South Florida is challenged in the service industry. In other words, so many people are rude it is difficult to find nice people to hire. Several people living in the metro area told me that employees in the service sector there are notoriously rude, so I concluded that the culture must be really bad.

Doubtless the sordid reputation had reached many ears in North Florida by the time of Stoddard’s resolution in South Miami. He was conveniently ignoring this point when he sought to have South Florida play the victim role. They would just love to float us off into the Caribbean. Northern Floridians might want to send the commissioners there a thank you note, and not because much of the problems stemming from the rising sea-level would be obviated; rather, it may be more a question of culture—a decadent, pathological culture wanting out and neighbors to the immediate north willing to help them along to make their wish come true. In other words, the resolution might be a case of “be careful what you wish for; you might get it.”

[1] Adrienne Cutway, “Officials Want South Florida to Break Off into Its Own State,” The Orlando Sentinel, October 21, 2014.
[2] Ibid.

China’s Increasing International Role: A Historical Departure

Historically, China was isolationist. The Opium Wars in the mid-19th century is a good illustration of why. From this context, China’s announcements of a series of international trade and finance initiatives by which China would assume a larger leadership role internationally are stunning. Doubtless the enhanced role is in line with China’s geopolitical and economic interests. After all, political realism is hardly a dead theory in the 21st century. Even so, the impact of the reversal on the culture is significant, and thus worthy of study. Specifically, the traditional mistrust of foreigners is likely to diminish. As it does, the Chinese will be more likely to consider and even advocate for economic and political principles, such as liberty and rights, that are valued elsewhere in the world but not so much in China. The result could be increased political instability. In short, the initiatives timed to coincide with the Asia-Pacific Economic Cooperation (APEC) meeting in November 2014 could eventually weaken the Chinese government’s grip on power.

The full essay is at “China’s Increasing International Role

Monday, November 10, 2014

Sen. Mitch McConnell Re-elected: A Washington Insider Sustained by the Establishment

The human brain is likely hard-wired to assume that tomorrow will be like today. This coping mechanism effectively narrows the window of our cognitive and perspectival range. The status quo not only endures; it is dominant, whereas reform must push hard to see the light of day. In politics, establishment interests, made wealthy in the status quo, bet their contributions on the political insiders—the establishment politicians who embrace the status quo. As a result, an electorate is manipulated and mislead by branding ads to the extent that it cannot be said that the real will of the people is done. The ensuing public policy is also not of that will; rather, legislation protects the vested interests in return for their contributions. A republic in the grip of this self-sustaining cycle can be said to suffer from a kind of hardening of the arteries. As times change, such a ship of state becomes increasingly unmoored from its people. Eventually, the ship sinks, after the pressure of incongruity has reached an unsustainable level. I contend that the 2014 U.S. Senate election in Kentucky between the Senate’s minority leader, Mitch McConnell, and his Democratic challenger, Alison Grimes, illustrates this political illness in action.

In a Louisville Courier-Journal poll conducted January 30 through February 4, 2014, only 27 percent of registered Kentucky voters viewed Mitch McConnell favorably, while fifty percent had an unfavorable opinion of the minority leader.[1]  President Obama’s approval rating came in 2 percentage points above that of McConnell’s.  With a 3 percent margin of error, the poll gave McConnell 42 percent to Grimes’ 46 percent—meaning that were the election held then and the actual turnout was not skewed, Grimes would be the next U.S. Senator from Kentucky.

With the U.S. House and the president deadlocked through the midterm election in November, legislative achievement cannot explain how McConnell’s 27 percent turned into the 56.2 percent who voted for him. Similarly, Pat Roberts of Kansas had had low favorability ratings only to come up with 53.3 percent of the vote. Both senators were Washington insiders who had strayed from their respective home states. Yet in the end, this is what saved them.

According to the New York Times, McConnell’s campaign benefitted from $23 million in spending from independent groups including the National Rifle Association, the National Association of Realtors, and the National Federation of Independent Business. The Kentucky Opportunity Coalition, registered as a social welfare organization, spent $7.6 million on attack ads against Grimes.[2] That organization ran more political ads in Kentucky than any other outside group, which means that Grimes could not counter the critical ads sufficiently. In short, McConnell’s strategy was at least in part to bring in out-of-state money to get a chunk of Grimes’ favorable rating.  Although positive correlation is not causation, the widening spread between the two candidates through the summer and fall, with McConnell on top, coincided with the onslaught of outside-group spending on attack ads against Grimes. 

It is possible that the people of Kentucky sent their incumbent senator back to Washington in spite his low favorability rating. In other words, Kentucky’s electorate may have been manipulated and mislead, deprived in effect of making the choice.

The implications in terms of public policy are just as bad. Contributors to the “social welfare” organization are not publically listed, so they have cover should anyone accuse the incoming majority leader of paying them back with favors. Whereas Grimes as a freshman senator would have much less power with which to make the favors happen, McConnell’s position as majority leader attracted the contributions like a tall beacon on a clear night. The establishment money, in other words, backed up the Washington insider, effectively protecting the status quo and thwarting real reform.

[1] James Hohmann, “2014 Election Poll: Mitch McConnell Trails Alison Lundergan Grimes by 4,” Politico, February 6, 2014.
[2] The Editorial Board, “Dark Money Helped Win the Senate,” The New York Times, November 9, 2014.