Sunday, January 28, 2018

On the Influence of Wall Street in Congress: The Proposal to Distinguish Financial and Commercial Derivatives

In the process whereby financial reform legislation made its way through Congress after the financial crisis of 2008, the U.S. House and Senate had different approaches concerning who would be required to go through a clearing house to buy or sell deriviative securities. According to Michael Masters, "The clearing house would stand in the middle of the transaction and guarantee both sides of the trade. If one counterparty to the transaction fails, then the central counterparty absorbs those losses, protecting the system as a whole from collapse."  Masters claims that "Wall Street firms hate this idea because their prodigious profits will dwindle when derivatives are traded in the light of day, letting their counterparties see the true costs. So Wall Street is pushing hard to exempt as many transactions as possible."  Given the culpability of Wall Street in the financial crisis, they were in no position to "push hard." That they did nonetheless is a telling sign of the underlying character, or lack thereof, "on the street."  Furthermore, that the representatives and senators were listening to them ought to cause the voters some concern.  Yet because of the reality of the banks' muscle on the hill, the power of the banks to exploit any loopholes in the final legislation should have been salient as the legislation made its way through Congress. This can be seen in whether to favor the House or Senate version.

According to Masters, "The Senate version of the clearing house requirement, which is currently the base text for the bill, includes a narrow, well-defined exemption that allows commercial end-users a complete exemption from clearing, while denying this exemption to financial players. The House language, however, would exempt anyone hedging "balance sheet risk." Since every financial player has a balance sheet, it is estimated that more than 50% of the outstanding derivatives would go uncleared under the House plan, compared to just 10% under the Senate version."  One might say: Ah, 50% is a pretty wide door--better go with the Senate version (assuming it could resist threats and favors from the banking lobby).

Masters explains the rationale for the Senate's version. There "is a critical policy distinction that must be made between commercial end-users like airlines, and financial entities like hedge funds. For a commercial end-user, risk arises naturally out of the ordinary conduct of business. For a financial entity, pricing and managing risk is their core business. As an example, an airline cannot fly without incurring the risk of wildly gyrating jet fuel prices. Allowing them to hedge their jet fuel exposure without a clearing requirement would provide stability for the airline, confidence for airline investors and ensure that the broad U.S. economy benefits from reliable airline service. A hedge fund, however, starts with no inherent risk. Its mission is to evaluate investment options, balancing risk and reward. If a hedge fund enters into a jet fuel derivatives contract on a bet that prices will increase, then it's nonsense to say that they are "hedging" when they subsequently enter into an offsetting deal to reduce the risk they voluntarily took on in the first place. These semantic charades can easily be carried to such extremes that every transaction a hedge fund enters is "hedging" something. An exemption for hedge funds serves no social purpose and, in fact, it puts our entire financial system at risk."  In other words, there are good business reasons for non-financial companies to be able to use derivatives to hedge for risk related to price volitility even if the companies cannot meet the clearing requirements. Of course, it could be asked what proportion of commercial use should but would not occur were such use subject to the clearing house requirements.  I don't know the answer to this question. I contend, however, that even if it is significant, the danger that the loophole would be exploited such that the financial system would once again be at risk outweighs any such inconvenience.  In other words, in reaching too far for perfect efficiency, we could unwittingly be inviting the irrational exuberance of the market to destroy the market mechanism itself.  We ought not fly too close to the sun or we might get burnt and fall to the ground. Masters concludes that the Senate language is "superior to the House's simply because it forces far more derivatives into the open." This may be so, but what would prevent a financial player from using a commercial user as a front to bypass the clearing requirements? Furthermore, there might be legislative language in the exemption that allows financial firms to obviate the clearing houses without even needing such a front.

In short, I contend that having any loopholes, or exeptions, is an unwise practice when we know (as Sen. Dick Durbin said) that the banking lobby owns Congress. We also know that managers and their lawyers are oriented to exploiting loopholes.  To expect otherwise is to tell a shark that it should not be a feeding machine.  That is, we must accept the nature of business for what it is, and not do what can reasonably be assumed to be taken advantage of.  It is like saying to sharks: those of you who do not eat any swimmers can go through the hole in the net and into the shore area.  It is just too dangerous to have a hole in the first place, even if there are some benefits to having it.

Source: http://money.cnn.com/2010/06/23/news/economy/congress_derivatives/index.htm

Westboro Church's Anti-Gay and John Galliano's Anti-Semitic Opinions: The U.S. and E.U. Contrasted

The First Amendment protects free speech in the U.S. even if it is as hurtful as signs at a Marine funeral proclaiming "Thank God for Dead Soldiers," the U.S. Supreme Court ruled on March 2, 2011. The Westboro Baptist Church celebrated the death of Lance Cpl. Matthew Snyder in Iraq with signs such as "God Hates You," along with anti-gay messages at his funeral in Maryland in 2006. The late Marine's father sought damages for emotional distress. An appellate court had reversed the $5 million award granted by a district court, and the U.S. Supreme Court concurred with the appellate court's decision.  The Wall Street Journal notes that "Chief Justice Roberts nodded to the wrenching set of facts in the case, writing that 'the applicable legal term— 'emotional distress'—fails to capture fully the anguish Westboro's choice added to Mr. Snyder's already incalculable grief.'"  Crucially, however, the justices of the majority opinion would not fall to the temptation of acting on the emotion that naturally follows hearing of such harm.

Interestingly, on the same day as the American high court's decision, the designer John Galliano was being fired by Dior's CEO and investigated by the French police (for inciting racial hatred with anti-semitic statementsm, which is illegal in at least the French and German states of the EU) for having made anti-semitic insults to a couple with whom he was arguing late at night in a trendy bar (cafe) in Paris. There, the emotions got the best of both the designer and those who reacted to the video posted of his comments (albeit showing only a part of the argument). Perhaps a grieving father at his son's funeral reading signs that thank God for dead American soldiers can be likened to a Jewish couple at a bar hearing that they are lucky their grandparents or parents were not exterminated by the Nazis. It is difficult for the rest of us to know how either feels, or how to compare the pain.

In any case, that any human being would want to hurt another so much is truly a sad commentary on our species that otherwise vaunts itself as being in the image of God. Perhaps the question is what kind of God is being envisioned here. A vengeance is mine, sayth the Lord sort, which Nietzsche condemns in his writings as already discredited on account of having such a sordid divine attribute as vengeance?  The deed is done, according to Nietzsche.  So too, the pain has already been inflicted on the grieving parents and the Jewish couple.  The rest is merely mopping up. 

I contend that the impulsive reaction in Europe to the fashion designer's drunken anti-semetic slurs is inferior to the majority opinion of the American court in the Westboro case because the tolerance of reason is more in keeping with a free society than is vengeance or retribution against a disliked opinion. Chief Justice Roberts emphasized that speech on public issues (of which gays in the military is one) "cannot be restricted simply because it is upsetting or arouses contempt," USA Today reports. Roberts pointed out that the jury at the district court level of the case had been told that Westboro could be held liable for the intentional infliction of emotional distress if the picketing was "outrageous." The chief justice argues that that test is "highly malleable," which is to say, it can change according to what a given person happens to think is outrageous. An old man might think noice in an apartment hallway at midnight is outrageous while a few college students down the hall might simply assume that the party has begun. In such a case, outrageous may have a physiological determinant and thus be innately different depending on the person. Quoting the 1988 case of Hustler Magazine v. Fallwell, Roberts said that liability cannot be imposed on "the basis of jurors' tastes or views, or perhaps on the basis of their dislike of a particular expression." Rather, reason must trump passion in such matters. Regarding the Synder case, Roberts said that the small Topeka-based church's messages "may fall short of refined social or political commentary," but discussed "matters of public import," such as the nation's morality and gays in the military and thus are protected by the first amendment to the U.S. Constitution, which guarantees free speech.  A free society is only really free to the extent that we protect even the opinions of those we loath. Otherwise, society reduces to a primitive matter of excluding those we don't like. Such banal convenience is too decadent for a vibrant republic and society. Reason tells us this. The question is whether we have sufficient impulse-control to proffer the degree of tolerance that is requisite. So actually, the matter pivots on us--Americans and European generally--rather than on Westboro and Galliano. They can make us stronger in spite of themselves if we permit ourselves to rise to the occasion rather than satisfy our immediate gratification.  In the end, it is up to us, not them, what kind of societies we have.

In terms of federalism, the chief justice noted that states can regulate the time and place of the protests, and the church was already contesting some as too restrictive. As of the date of the court's decision, forty six states had enacted laws to minimize picketing near a cemetery during funerals. In terms of federalism, it might be that the states' respective Supreme Courts might have been the proper venue in interpreting the U.S. Constitution in such cases. Generally speaking, if there can be fifty different sets of regulations on protests, there can be fifty different decisions interpreting free speech. It would not be like fifty different foreign policies. As it is, even with fifty different regulations, the final decider is centralized in the U.S. Supreme Court.

Sources:

http://online.wsj.com/article/SB10001424052748703559604576176323629295598.html?KEYWORDS=first+amendment+protects

http://www.guardian.co.uk/lifeandstyle/2011/mar/04/john-galliano-dior-brand

Joan Biskupic and Kevin Johnson, "Westboro free-speech ruling has its limits," USA Today, March 3, 2011, p. 2A.

Friday, January 26, 2018

The Banking Lobby Amid Goldman Sachs' Culpability: A Danger to the Republic?

To simplify how Goldman Sachs got into trouble with the SEC: According to Annie Lowrey, the hedge fund Paulson & Co. handpicked mortgage-backed securities that were doomed to stop performing, being backed with subprime mortgages, and Goldman packaged them into a kind of bond. Paulson & Co. bet against the bond by buying short-sales, with Goldman acting as the broker. At the same time, Goldman sold the bond to other clients without disclosing that Paulson had engineered the bond to fail. The SEC filing notes that those other clients lost $1 billion. Goldman had no direct stake in the success or failure of the CDO. It made money either way. “This litigation exposes the cynical, savage culture of Wall Street that allows a dealer to commit fraud on one customer to benefit another,” Chris Whalen, a bank analyst at Institutional Risk Analytics, said in a note to clients on April 16, 2010. Someone at Goldman said on the same day that “the SEC’s charges are completely unfounded in law and fact.” If the SEC charges hold up (and it is doubtful that the agency would bring such charges without supporting documentation; it is more apt to miss something than go overboard), I am astonished that the people at Goldman simply dismissed the matter out of hand. It might make sense as their legal defense, but if the bankers are convicted, those lying ought to be fired even if they were not a party to the scheme. It also appears that the bankers lied about whether they made money in betting against the housing market. “The 2009 Goldman Sachs annual report stated that the firm ‘did not generate enormous net revenues by betting against residential related products,’ ” Senator Levin, chairman of the US Senate’s committee on investigations, said in a statement in April, 2010. “These e-mails show that, in fact, Goldman made a lot of money by betting against the mortgage market.” When a spokesperson for the bank says something in the future, a rational person will be wont not to trust him or her. Lying has (or ought to have) consequences rather than being dismissed as harmless PR or a legal defense. The bank’s credibility is at issue here. The SEC has accused Goldman of outright lying to customers in order to make money both ways on a deal. Even though this ought to reflect negatively on Goldman’s future business, bigger issues involved that ought to consume more of our attention than how Goldman fares.

Given the strength of the financial sector’s lobby in Washington, this case involving Goldman suggests that we, the American electorate, were unwittingly putting our financial system and our republics in danger by enabling the lobby to have such effect in watering down the regulatory reform in the wake of the financial crisis of 2008.

In the election cycle in which the US Senate’s agricultural committee took up legislation that would regulate all derivatives (2010), people and organizations affiliated with financial, insurance and real estate companies gave members of the committee $22.8 million. Wall Street firms raised $60,000 at two fund-raisers for the committee’s chair’s re-election campaign in the cycle before the committee took up the legislation. Many of the chairs constituents want a crackdown on the speculation. This put Blanche Lincoln in a difficult situation, ethically speaking. At the very least, accepting money from the firms that would be subject to the legislation involves the appearance of a conflict of interest. I contend that given human nature, even such an appearance ought to be avoided or even outlawed. At the very least, it is unseemly in a republic, and I would argue dangerous to its viability.

Furthermore, as if the banks’ culpibility in the crisis was not sufficient to cancel their reservations at the regulatory table, the Goldman case strongly suggests that the banks ought not to be trusted as contributors to regulatory reform. And yet they push ahead to reduce the regulatation, in spite of it all. A child who drops his milkshake doesn’t turn around and tell his mother that she better not clean it up and that she had better not get involved if it happens again. Rather, such a child stands back. As if there is not enough of a natural feeling of shame at having made a mess, there is, or ought naturally to be, an even greater sense of shame in presuming to be in a position to direct the clean-up according to one’s self-interest over objections that the person who caused the problem is not the one best suited to fix it. Even if corporations can enjoy the legal fiction of personhood, there are actual human beings running them, and it is telling when those people dismiss their innate shame in their presumption–even pretending that it is not presumption! We are to blame in not calling them on it, and relegating them. We must relegate them if they won’t do it for themselves, as would be natural for them to do. In other words, we ought to call the artiface for what it is and relegate it as a parent would naturally tell a spoiled and misbehaving yet dogmatic child to go to his room. We, the American people, are enablers; bad parents. We ought to look toward solving the bigger problem, which the case of the Goldman children intimates.

The theory of regulatory capture points to the government’s need for information that the industry being regulated can provide. This theory ignores the broader power-base that an industry is apt to have in lobbying the government (and supporting candidates). In other words, information is just small change from the standpoint of an industry’s ability to influence a government. A better theory would have its primary focus on the macro level, asking the question, in effect, whether (and how) a republic is compromised by its moneyed corporations and banks. Besides looking at campaign finance law and uncovering actual lobbying practices, we ought to look at how much the society in question values money, commerical gain, wealth and economic freedom. We ought not be limited to the managerial or technocrat perspective in ascertaining whether our financial system and indeed our very republics are in danger from being used by unscrupulous firms or industies according to that which fits their peoples’ desires. Once we have uncovered the real problem, we really won’t have any excuse for not fixing it, and we would be bad parents indeed if we let the children fix it.

Sources:
http://washingtonindependent.com/82571/sec-charges-goldman-sachs-over-subprime-tied-product  http://opinionator.blogs.nytimes.com/2010/04/16/goldmans-stacked-bet/?ref=opinion
http://money.cnn.com/2010/04/16/news/companies/sec.goldman.fortune/index.htm?postversion=2010041616 ; http://money.cnn.com/2010/04/16/news/companies/goldman_sachs_questions.fortune/index.htm?postversion=2010041615 ; http://www.nytimes.com/2010/04/20/business/20derivatives.html?hp
http://www.nytimes.com/2010/04/25/business/25goldman.html?ref=us

The Volcker Rule: Taking in Water on Proprietary Trading

Under the Dodd-Frank financial reform law of 2010, Goldman Sachs had to break up its principal strategies group, the trading unit that had been very profitable. Goldman was considering several options, including moving the traders to another division or shutting the unit altogether. Morgan Stanley was considering ceding control of its $7 billion hedge fund firm, FrontPoint Partners. At Citigroup, executives had sold hedge fund and private equity businesses and were discussing reducing proprietary trading, which relies on a bank’s own capital to make bets in the financial markets. JPMorgan Chase had already begun dismantling its stand-alone proprietary trading desk and was modifying the structure of some investments of One Equity Partners, its internal private equity business. “This is the real stuff,” said Brad Hintz, an analyst at Sanford C. Bernstein & Company. “It shows that if you squeeze Wall Street, like a balloon it will come out somewhere else, and we really are squeezing Wall Street. Their business models are changing.”

However, loopholes in the legislation may enable the banks to continue to trade on their own books, even apart from serving as a counterparty for client transactions. Citigroup and others, for instance, are considering moving proprietary traders to desks that handle trades for clients, although the traders would still be able to make their own bets in the markets. The Volcker Rule’s definition of proprietary trading is open to interpretation. At first blush, it looks watertight: the rule forbids banks from buying and selling financial products for their “trading account.” That, in turn, is defined as an account meant to profit in the “near term” from “short term” movements in prices. Besides not covering such long term bets as shorting in anticipation of a fall in the housing market, the rule states that banks can still trade government and agency securities for their own account. Some of the problems at the hedge fund Long-Term Capital Management stemmed from trying to arbitrage prices between Treasuries of different terms. And the Carlyle Capital Corporation, a heavily leveraged debt fund, crashed in 2008 when prices of Fannie Mae and Freddie Mac mortgage bonds dropped. So in allowing for continued proprietary trading apart from serving as a short-term counter-party for a client’s transaction, the Dodd-Frank Financial Reform law may not change Wall Street’s landskip all that much. This is hardly surprising, as members of Congress allowed the banking lobby to participate in the writing of the legislation in spite of the industry’s culpability in the financial crisis of 2008.


Sources:
http://www.nytimes.com/2010/08/06/business/06wall.html?_r=1&scp=2&sq=wall%20st%20faces%20specter%20of%20lost&st=cse
http://www.nytimes.com/2010/08/06/business/06views.html?scp=1&sq=anthony%20currie%20christopher%20swann&st=Search

The U.S. Supreme Court as Decider: A Conflict of Interest in Federalism Cases?

As to whether the supreme courts of particular American states, or republics, should be able to declare the general (U.S.) government’s health-insurance mandate unconstitutional in the sense of being an encroachment of the government of the union beyond its enumerated powers, it is typically presumed that the U.S. Supreme Court is the rightful and proper umpire--the court of last resort on disputes on federalism applied to particular legislation. Forgotten is the argument made by Thomas Jefferson against that court’s suitability owing to its institutional conflict of interest in contests between the U.S. Government, of which the U.S. Supreme Court is a branch, and a goverment of one of the several states.  Typically, we do not consider how the conflict of interest can be solved. We do not “think outside the box.” Rather, we feel resigned to have branch of one of the parties of the dispute act as the final decider short of a constitutional amendment.

We do not consider, for example, that perhaps a council of the States’ Supreme Court Chief Justices (or their attorney generals) might be a less problematic alternative. We need not throw up our hands and leave it to any state to nullify any federal law it doesn’t like. We can design an umpire of federalism in such a way that the the encroaching tendency of the center is counterbalanced by the interests of the states in deciding the question. That is to say, we ought to design the umpire mechanism in such a way that tilts in the direction of the states, given the tilt of power in the other direction historically and today. It is well worth reviewing Jefferson’s argument so this doesn’t sound so radical. Given our aversion to real change, the need for a constitutional amendment must be backed up by a mainstream figure.

Essentially, Jefferson maintained that there is a conflict of interest in one branch of the US Government–the US Supreme Court–being the ultimate umpire in federalism disputes between a State and the US Government. It is like having a member of one of the two baseball teams playing being the umpire. In college, I was a referee for intermural football. I was stunned when the coordinator of the refs, himself a student, assigned himself to referee the game involving his own fraternity. When I suggested that there is a conflict of interest in his self-assignment, he dismissed my concern out of hand. Sadly, this sort of attitude characterizes Americans in general with respect to institutional conflicts of interest in our government (and between business and government). I contend that we are blind to such ethical problems, and the viability of our federal system of public governance, which includes semi-sovereign States, is paying the price in the form of a massive imbalance.

One might counter that the separation of powers in the US Government make the US Supreme Court independent of the Congress and President. According to Thomas Woods, the separation of powers in the federal government cannot be relied on to distinguish the US Supreme Court’s interest from its basis as a branch of the US Government because the “three federal branches can simply unite against the independence of the states and the reserved rights of the people.”[i] In 1825, Thomas Jefferson wrote, “It is but too evident, that the three ruling branches of [the Federal government] are in combination to strip their colleagues, the State authorities, of the powers reserved by them, and to exercise themselves all functions foreign and domestic.”[ii] Jefferson believed that in a dispute between the states and the federal government, the resolution should not come from a branch of the federal government. With the US Supreme Court as the umpire on federalism questions, the states “would inexorably be eclipsed by the federal government.”[iii] Woods observes, “(S)ince the federal courts are themselves a branch of the federal government, how can the people be expected to consider them impartial arbiters? The [US] Supreme Court itself, after all, although usually pointed to as the monopolistic and infallible judge of the constitutionality of the federal government’s actions, is itself a branch of the federal government.”[iv] For one thing, US Supreme Court justices are selected by the US President and confirmed by US Senators. In this process, even an unconscious “similarity of perspective” is likely to be sought or welcomed even with respect to one’s vantage-point (i.e., perspective). Spencer Roane, a Virginia judge whom Jefferson would have nominated to the US Supreme Court, wrote, “the States never could have committed an act of such egregious folly as to agree that their empire should be altogether appointed and paid by the other party. The [US] Supreme Court may be a perfectly impartial tribunal to decide between two States, but cannot be considered in that point of view when the contest lies between the United States and one of its members… . The [US] Supreme Court is but a department of the general government. A department is not competent to do that to which the whole government is inadequate… . They cannot do it unless we tread underfoot the principle which forbids a party to decide his own cause.”[v] As a branch of the Federal government, the US Supreme Court justices have at the very least a perspective from the “whole”–meaning the US as a whole–which is the vantage-point of the US Government. This is a background basis of similarity; the nominating President and the confirming Senators are likely to ask questions of a nominee that would show the nominee’s attitude or opinion concerning the power of the US Government (i.e., the power of the President and Senators!). The conflict of interest is clear, yet no one points to it. This is very odd indeed–tantamount to a societal blindspot.

Not unexpectedly, the US Supreme Court has consistently and overwhelmingly decided federalism cases in favor of the US Government. Even the Morrison and Lopez cases on the reach of the interstate commerce clause in the 1990s allow for indirect economic effects from such commerce to justify the jurisdiction of the US Government over those of the States. An indirect effect is just the sort of loophole that the US Government has been using to expand its power. So even the Rhenquist court was pro-US Government vis a vis the States. Joseph Desha, governor of Kentucky in 1825, wrote, “most of the encroachments made by the general government flow through the [US] Supreme Court itself, the very tribunal which claims to be the final arbiter of all such disputes. What chance for justice have the States when the usurpers of their rights are made their judges? Just as much as individuals when judged by their oppressors.”[vi] What amazes me is not so much the historical trend; rather, I’m bewildered by how such an obvious conflict of interest could be allowed to fly for so long under the radar screen of American public consciousness. This really should tell us something about ourselves, and we ought not to be flattered by what we see.

————————————————————————————————————————
[i] Woods, Jr., Thomas E. Nullification: How to Resist Federal Tyranny in the 21st Century (Washington, DC: Regnery, 2010), 4.

[ii]Thomas Jefferson to William B. Giles, December 26, 1825, in The Writings of Thomas Jefferson, vol. 10, ed. Paul L. Ford (New York: G. P. Putnam’s Sons, 1899), 355.

[iii] Woods, Jr., Thomas E. Nullification: How to Resist Federal Tyranny in the 21st Century (Washington, DC: Regnery, 2010), 5.

[iv] Woods, Jr., Thomas E. Nullification: How to Resist Federal Tyranny in the 21st Century (Washington, DC: Regnery, 2010), 5.

[v] James J. Kilpatrick, The Sovereign States: Notes of a Citizen of Virginia (Chicago: Henry Regnery, 1957), 156.

[vi] State Documents on Federal Relations: The States and the United States, ed. Herman V. Ames (New York: Longman’s, Green, 1911), 113.

Wednesday, January 24, 2018

Balancing Company Rights and Worker Security through Public Policy

It would be a cruel joke were an airline to keep the extendable corridor back as the plane’s front door is opened and passengers are pushed out. Not even having a safety net below would neither be sufficient nor fair. When a government gives companies the flexibility to fire workers without yet having in place vocational safety nets, said government acts negligently and perhaps even with partiality to one side of the labor-management duality. At the very least, the flexibility to fire should be held off until the matter of economic security is finalized.
With the largest automaker in the E.U. state of France announcing the firing of 1,300, the largest supermarket-chain in the state set to cut 2,500, and 200 at a major clothing retailer in January, 2018, companies were already “taking advantage of new rules that make it easier to hire and fire. But the other changes, those designed to help cushion the blow like retraining programs,” were not yet in place, “leaving workers vulnerable to a coming wave of downsizing” in a state whose unemployment rate had been “persistently stuck at more than 9 percent for more than a decade.”[1] The Times goes on to point out that “the initial imbalance between employer rights and workers’ protections means the economic picture could get worse before it gets better.”[2] This way of expressing the matter highlights the possibility that the government officials were biased in favor of the business lobby (and cash).
I submit that protections for citizens—providing a safety net even if only for workers in transition—is more important than employer rights (i.e., property rights) because even just risking sustenance is a greater harm than holding on for a while to old rigid rules on firings. The case of an impending bankruptcy may be different, as firing some employees could save the jobs of the majority.
In this analysis, I am drawing on Bentham’s utilitarian ethical theory, wherein the greatest good in terms of pleasure (less pain) is the criterion. Generally, a public policy that restricts the choices of a company’s management creates less pain than the corresponding pleasure (without pain of losing sustenance) for the workforce. Opening up the choices creates pleasure (and reduces pain) for managements and stockholders, but the pain of being unemployed is more. Even given Bentham’s claim that such pleasure and pain could be put in quantitative terms, the pain from losing the means of livelihood and possibly having to do without even on the basics (food, shelter, and medical care) is high indeed—so high that even comparing it to the pleasure obtained by the companies seems an injustice. This is not a justification for regulation or socialism (i.e., the state owns the means of production); rather, I submit that balance, such as in the timing of the public policies on firings and worker-security, is a ripe additive to Bentham’s theory.




[1] Liz Alderman, “Newfound Freedom . . . to Fire,” The New York Times, January 24, 2018.
[2]Ibid.

Monday, January 22, 2018

The Strength of the Euro Bespeaks Normalcy for the E.U.

As 2018 was beginning its climb in the northern hemisphere toward eventually warmer days, the prospect for the E.U. through and after the secession of one of its largest states was perhaps brighter than commonly thought at the time. When the days are short, it is perhaps all too easy to be pessimistic. Signs of strength in the euro implicitly sent the message in January  of 2018 that the E.U. would be just fine without its foremost euro-skeptic state.
The first month of 2018 witnessed negative interest rates both for the euro and the yen, and stronger economic growth for the E.U. and Japan. Interestingly, however, the two currencies were heading in opposite directions as markets protected that interest rates would rise quicker in the E.U. than in Japan. In 2017, the euro had rallied by 14% against the dollar, while the yen had been up by only 2 percent. Against a bloc of trade-weighted international currencies, the yen had actually declined.[1]
The normalization of the E.U.’s context, and the E.U. itself, even as a large state was in the midst of seceding from the Union, can be inferred from the euro’s relative strength. “What we clearly have is that the expectation for normalization is giving the euro a boost, and that’s part of what’s moving the currency,” said Andreas Koenig of Amundi. Normalization is not a word that most Europeans would have probably been using at the time. Britain was still holding that it could avoid a hard border in Ireland and yet leave the single market and the customs union, as well as have diverging regulations. At the federal level was the expectation that the state’s intent on ending the free movement of E.U. citizens in and out of an independent Britain as no longer being subject to the ECJ, the E.U.’s Supreme Court would “point to a free-trade agreement little more comprehensive than those with South Korea or Canada.”[2] With the E.U. and one of its states holding such divergent expectations still in the dawn of 2018, normalcy is a word that people then likely were not applying for the E.U. for the year and indeed the next several to come.
Yet the secession of a state whose government had not only resisted transferring more governmental sovereignty to the federal level, but also wanted some back and even viewed the E.U. itself eschew as a network or mere trading “bloc,” could even then be reckoned as a good thing for the Union because a stronger, more internally aligned one would come out without even such a large state at the UK. For a house divided cannot long stand, and at the very least the vast majority of any political society, even a federal one, should agree on the basics of what the society is.



[1] Mike Bird, “Euro and Yen Tell Different Tales on Negative Rates,” The Wall Street Journal, January 22, 2018.
[2] “Now for the Difficult Bit,” The Economist, January 13, 2018.

Friday, January 19, 2018

Rule of Law in the E.U.: Implications for the Federal System

For a federal system to be viable over the long term, a core of basic values must be shared even though one of the main functions of federalism as a system of government is the ability to accommodate diversity from state to state. In the case of the E.U. and the U.S., the rule of law, democracy, and separation of powers as concerns the independence of judiciaries at the state and federal levels are non-negotiable; hence as these are compromised or thwarted outright, the viability of E Pluribus Unum can be expected to unravel. As 2017 came to an end, the E.U. found itself largely impotent as some of the eastern states violated the basic principles of rule of law and an independent judiciary with impunity. If the impunity was indeed real, the federal system itself was in desperate need of repair.
The expansion of the U.S. westward during the nineteenth century brought the rule of law to the “wild west.” Similarly, the expansion of the E.U. eastward in the early decades of the twenty-first century was meant in part to instill  the rule of law after decades of corruption under communism.  Yet in the state of Poland late in 2017, the state government fired more than a third of the judges on the state’s highest court. That government even ignored the ruling of the state’s constitutional tribunal, “prompting the European Commission to trigger a sanctions procedure that could strip Poland of its voting rights in the union.”[1] Making the weakness of the E.U.’s lopsided (i.e., state dominated) federal system transparent, the governor of the state of Hungary declared he would veto any such stripping. The conflict of interest is obvious, given Viktor Orban’s “increasing authoritarianism” in Hungary.[2] In particular, his Fidesz party had forced judges into early retirement and exerted control over the media, central bank, and data protection in the state after winning a supermajority in the state legislature in 2010. That the federal procedure for punishing the state government of Poland could be subject to a veto from another wayward state government points to weakness at the federal level. Specifically, not enough governmental sovereignty had been shifted from the states to the Union.
The compromised independence of state judiciaries cut into the core values of separation of power and of law, which are essential in any viable republic (i.e., representative democracy); for a democratic majority can oppress minorities and individuals and thus deprive them of essential liberties that in turn underpin a democracy. Although the state of Bulgaria, which began its six-month E.U. “presidency” in January, 2018, had made some progress against corruption, that state and Romania were said by the Commission to have not made enough progress to end a decade of special monitoring. To be sure, Malta too had issues with the rule of law. The same could be said of the Sicily region of the state of Italy, where the mafia was still vibrant, so the western states were not immune. Even so, an E.U. official said that people in the west felt betrayed by their fellow citizens in the east.
A house divided cannot long stand, it is said, yet institutions have an incredible amount of undeserved inertia. Even so, the gravity of the problem facing the E.U., which I contend is enough to warrant an additional shift of governmental sovereignty to the federal level with respect especially to the ability of the “feds” to come down on wayward states, is evident from E.U. Vice President Frans Timmermans’ statement that undermining the rule of law “is putting at jeopardy the very core of what holds us together.”[3] Perhaps the E.U. should have held off the accessions of the formerly Communist states or taken a greater role in ongoing monitoring in them, but the fundamental values of a political culture are slow and even resistant to change. The federal level of the E.U. needed more power with which to stave off inertia or back-sliding in the problematic eastern states. A federal FBI and adequate federal laws to go after individual wrongdoers in the state governments could have made a dent in the problem, in that E.U. citizens living in the east could have seen that participating in corruption does not pay even if it still does locally. The ECJ could have been empowered to take on a larger role with respect to the state governments and even their respective individual officeholders. Criminal law is not among my areas of expertise, however, whereas I can state decisively that the inability of a federal level to enforce basic principles against opposition in a few states points to a serious weakness in the federal system itself with respect to the relation of the federal and state levels in terms of authority. A viable federal system enables both the federal and state levels to act as checks against the other, and this requires something approaching a balance of power between the two levels. In the case of the E.U., as in the early U.S., the problem has been the insufficiency of power at the federal level.  


[1] Valentina Pop and Daniel Michaels, “EU Confronts Deep Divisions Over Legal Standards,”The Wall Street Journal, January 19, 2018.
[2] Ibid.
[3] Ibid.

Tuesday, January 16, 2018

BP and MMS: A Case of Regulatory Capture

In the U.S. Constitutional Convention, James Madison in particular stressed the nepharious quality of faction in relation to the public good. He argued that if a republic is extended in scope sufficently that there are more factions, none of them would be able to dominate and the public good would emerge. In a republic in which there are only a few major parties, the people's perspectives can become delimited by the parties' paradigms in an either-or dual macro-framework. That is to say, societal blind-spots can exist. To the extent that both BP and the relevant U.S. Government regulatory agency, MMS, were both culpable in the Deep Water Horizon rig explosion in 2010, both the Republican defense of business and the Democratic defense of government fall short. Even so, these respective defenses went on undaunted in the wake of the disaster and in the next year. To be sure, old paradigms die hard.

Albeit an oversimplification, it can be said that the Democratic party in the United States stresses the power of business as the problem, whereas the Republican party there views the problem as being government.  In campaigning for President in 1980, Ronald Reagan bluntly said that government was indeed the problem.  Deregulation ensued and industry self-regulation was like a fad. The idea was that the checks and balances in goverment that protect the liberties of the citizens could be applied at the industry level such firms would provide a check on eachother automatically. Lost in the buzz was the extent to which an industry would be willing to sacrifice its own long-term viability in order to protect even the bad among its own.

In 2010, the Republican paradigm whereas business is good and government is bad resulted in some Republican office holders defending a piriah (BP) and continuing to urge deregulation in order to excoreate against the US Government and frustrate the Obama Administration.  The ranking Republican on the US House Energy and Commerce committee apologized to BP’s CEO for the “shakedown” by Obama in extracting a $20 billion fund for the claims in the Gulf region. Meanwhile, Democrats were hard-pressed to admit that a goverment regulatory agency, namely MMS, could be so inept and corrupt.  It was not so much a matter of more regulations being needed; rather, the problem was government regulation itself.

Democrats could point to the encroaching nature of big business over the regulators, but absent a shakedown in the size of the biggest companies, the wherewithal of the regulators not to “partner up” with the regulatees may be an intractable problem in government regulation.  The traditional argument in capture theory that regulators depend on their respective industries for information doesn’t even break a sweat in what is needed to explain the extent of the power of big business over government regulatory agencies.  The imbalance of power is systemic: government officials being too feckless and corrupt. and big business being too powerful for the good of the republic.  In their letters, Jefferson and Adams agree on the need for a natural aristocracy of virtue and talent, rather than the artifical sort of wealth and birth.  Absent a natural aristocracy, systems whether business or government, cannot but be ineffective and corrupt.

In 2010, BP’s sordid safety record and its explosion in the Gulf of Mexico challenged the paradigms of both parties.  In actuality, business and goverment, as well as business and government, contain problems that exceed and transcend a particular paradigm. In treating the two party paradigms as a dichotomy, we miss the interaction effect that exists among the respective sectors’ problems.  It might be that the founders were correct in their suspicion of factionalism, as it does indeed detract from the common good.  Where a paradigm keeps one from acknowledging problems that are in the radar of an “opposing” paradigm, a person is not apt to serve the public interest.  In other words, both paradigms are limited.  The BP-MMS interaction and the subsequent explosion and responses exposed the delimited nature of the partisan paradigms.

For more on MMS, see Cases of Unethical Business, which is available in print and as an ebook at Amazon.

On U.S.Senators Being Elected

According to David Firestone of The New York Times, a “surprising number” of the Tea Party members were calling for the repeal of the 17th Amendment of the US Constitution during the election campaign season of 2010. That amendment, which was ratified in 1913, provides for direct election by the people of each state of US senators. According to Firestone, “allowing Americans to choose their own senators seems so obvious that it is hard to remember that the nation’s founders didn’t really trust voters with the job. The people were given the right to elect House members. But senators were supposed to be a check on popular rowdiness and factionalism. They were appointed by state legislatures.” That it may seem so obvious to us does not mean that we have it right. Yet Firestone presumes so in writing, “a  modern appreciation of democracy — not to mention a clear-eyed appraisal of today’s dysfunctional state legislatures — should make the idea unthinkable.” Should it really?  Firestone seems biased in his dogmatism.

For one thing, the delegates to the Constitutional Convention in 1786 didn’t want to restrict direct representative democracy in the US Government to the US House only out of fear of mob rule as Firestone suggests.  They thought the direct power of the state governments in the US Government would be necessary to keep the new empire from consolidating at the imperial level (i.e., in the US Government). Firestone himself admits that to most authors of the Constitution, “allowing states to appoint the Senate was the linchpin of the entire federalist system and the real reason there are two houses of Congress.” Whereas the British House of Lords represents wealth, the US Senate was to represent not only that, but semi-sovereign republics as well.  The latter likens the US Senate to the European Council rather than to the upper chamber of one of the EU’s states.  Firestone makes a category mistake where he avers that it “may be true that appointed senators, accountable only to state legislators, would never approve of many useful federal mandates designed to put the national interest above local parochialism — including everything from the minimum wage to the new health care reform law.” States commensurate with European kingdoms/countries are not local polities.  Furthermore, reducing the US Government to a “national” interest ignores the semi-sovereign nature of the states (and thus the international principles in the design of the US Senate as opposed to the US House, which is national in nature).

Firestone seems to misunderstand what the US Senate is.  In referring to returning to having the state legislatures appoint their delegates to the US Senate as an “elitist notion,” Firestone forgets that state legislators are elected by the people and in fact have smaller electorates than do US House or Senate members.  Empowering state legislators would ironically be to bring power back closer to the people.  ”Senate candidates have to raise so much money to run that they become beholden to special interests,” Tea Party members say according to Firestone.  The members ”argue that state legislators would not be as compromised and would choose senators who truly put their state’s needs first.” That in turn would restore checks and balance to federalism, wherein both the state and federal governments would be checked (by the other). This is not just a matter of state rights; rather, it is a matter of a viable federalism instead of consolidation. As Tim Bridgewater, who ousted Sen. Robert Bennett of Utah as the Republican candidate writes, “We traded senators who represent rights of states for senators who represent the rights of special interest groups.” By rights of the states, one can infer an empowerment of the representatives elected by the people of the states.  Such a change would hardly be anti-democratic or elitist; rather, it would reduce the power of the elitism in Washington DC.  A writer ought to be careful in dogmatically writing that something is ridiculous or unthinkable, for the lack of thought could come back to haunt him or her.  It is clear that Firestone is not very open to the possibility that he could be wrong.  The arrogance of centralized power at an empire-level is truly remarkable, even in its press.

Source: http://www.nytimes.com/2010/06/01/opinion/01tue4.html?hp

See American and European Federalism  and Essays on Two Federal Empires, both available at Amazon.

The BP Oil-Rig Explosion: Did the U.S. Government Over-Reach?

A month into the BP oil spill in the Gulf of Mexico, some commentators began to wonder out loud whether the US Government ought to take over for BP in stemming the leak. As frustrated as those commentators were at BP–after all, the oil company had shirked safety procedures and lied about having the technology to manage such a spill–they had to admit that the US Government did not have the technical expertise to divert or shut off the oil.  For better or worse, we had to rely on BP in capping the leaks.

Having to rely on the culprit to solve the problem and clean up the mess sounds a bit like how the financial crisis of 2008 was managed.  In other words, we have managed to become dependent on firms such as Goldman Sachs and BP even where they are the culprits.  To be sure, government is an authority or umpire in society, not a producer.  To treat government as a business evinces a category mistake of sorts. Were it to operate as a producer, there would be a conflict of interest in its governmental capacity because it would be inclined to favor itself even as its umpire function requires having an even hand. It is also a cateogory mistake to treat a business as having a governmental capacity.  Hence, we don’t want the banking or oil lobby running Congress.

Rather than become an oil company, the executive branch of the US Government ought to concentrate on better organizing itself in its umpire capacity. In particular, the Department of Homeland Security (i.e., the Coast Guard), the Energy Dept, and the Interior Department each had a ball in play as the oil spill unfolded. Hence the umpire could not speak with one voice, as the US President must rely on someone to handle the day to day umpiring.  We couldn’t very well have the President living on the Lousiana coast as the oil leaked.  Having too many cooks in the kitchen makes for confusion. The relevance of the Interior Department alone is debatable, as the spill did not take place in the interior. Even so, the administrators were falling over each other in positioning themselves. Advocating that the government take over from BP would only multiply the harmful effects from the confusion that is immanent in the branch’s structure.  I would even contend, moreover, that the US President should concentrate on governmental domains in which the several states cannot act (even if some won’t!), rather than wading into every problem.

In short, the US Government can’t do it all, hence it shouldn’t try. Where it is the only umpire in town, such as out in the Gulf, it should concentrate on being a good umpire. This includes not only simplifying its own organization (in the exec branch), but also keeping itself from being unduly influenced by business so it can be an effective umpire.  Allowing Wall Street to have influence over the writing of financial regulation (or oil companies in MMS) not only compromises the government’s umpire function, it also permits sordid companies to exist, and thus to potentially be relied upon in stopping the leaks whether in the financial world or in the Gulf.  The US Government ought to concentrate its power so it can be a viable umpire, rather than allowing itself to become a confused sieve.

Sunday, January 14, 2018

Hierarchy Hampered Down in American Business

Without going into either the labor or management camp, a person can viably critique the operation of hierarchy itself in business organizations. The notion is typically associated with the concentration of power at “the top,” rather than the relation of middle-level managers to “retail” managers and their subordinates. Efficiency of power at a corporate headquarters does not necessarily translate into “downward” efficiency at the level of middle management. I submit that precisely this efficiency is rather severely compromised in American business.
“The word hierarchy derives from ancient Gree (hierarchia, literally the ‘rule of a high priest’) and was first used to describe the heavenly orders of angels and, more generally, to characterize a stratified order of spiritual or temporal governance.”[1] The early focus on the situs of a high priest rather than all priests, and the heavenly orders rather than the relation between them and the earthly orders set the tone: the top matters most in a hierarchy. I am guilty in that my theory of organizational leadership applies exclusively at the top: the leadership of an organization. Supervisory management is in my view another animal. Yet it too is important, and I contend that it is woefully neglected in American business.
Customers, for example, of retail businesses will recognize the frustration in dealing with not only  a rude or stubborn employee—even acting at odds with a company policy!—but also that employee’s gatekeeping, or outright refusal to get a supervisor as requested. The sense of entitlement that a non-supervisory employee may have rivals the sense of importance of a CEO. Getting to a store manager can nonetheless require a lot of effort and patience; typically an assistant manager is sent to put out the little brush fires. Employees may know how to exploit this gap that exists between what the employees and a store manager are doing, such as by insisting that aggrieved customers first inform the indolent employee of what will be said to the manager (a conflict of interest to be sure!).
In short, retail-level managers tend not to be involved enough where customer-meets-employees; management by walking around is too easily sidelined by the endless list of things needing to be done behind a desk. Put another way, I contend that retail management is generally interpreted as being akin to upper management, rather than something unique. The situs one or even two levels above non-supervisory employees on the front line should be actively involved on that line, and the complaint access can be greatly improved such that customers do not have to depend on problematic employees for it and spend much time and effort in reaching accountability. Hierarchy is made for efficient accountability, whereas networks (e.g., organic organizational structures and flat inter-organizational relationships) may be overrated.[2] Yet the “lower” half of a company’s hierarchy is, I submit, underutilized and perhaps even unwittingly compromised in part due to the common association of hierarchy with “the top.”
Starbucks, for example, has a centralized customer service number, which can be used to register a complaint against a store employee. The offended customer may get a gift card for a few free drinks to compensate—and such compensation, rather than an apology alone, is important—but what about the distance from the centralized unit at headquarters and the store-level employee? The unit sends a communication to a regional or district manager, who in turn is supposed to communicate with the store manager, who in turn is supposed to have a talk with the employee. Considering the sheer number of links, and the distance involved, the intended message could be compromised both intentionally and unintentionally. A district manager, for instance, may just do enough to make it seem that a real correction has been made. A store manager might dismiss the charge, as it reflects badly on the store’s management. Rarely, perhaps, would a store manager tell a shift manager to listen to what the employee is saying to customers. I also doubt whether the typical complaint results in any actual and substantive negative consequences for the employee, especially if attitude is the culprit (which is not likely re-trainable).
For all that Howard Schultz’s CEOship of Starbucks has been lauded, I have been surprised at the number of times I have witnessed rude, close-minded behavior of employees at the store level. This is not to say that good employees have not worked in the stores. My point is rather that in the company’s hierarchy, the part between the district managers and the store employees seems weakest. In my booklet Bucking Starbucks’ Star, I argue that Schultz’s corporate social responsibility ventures “at the top” do not make up for managerial and employee deficiencies further “below.” I have never seen a store or even a shift manager “working the room” in stores to see how the customers were actually served, and such managers can confront centralized reports of complaints by rationalizing, the customer got free drinks, so there’s no need for me to take action against the employee. Management as walking around, even by district managers scheduling time to work along side the crews at the various stores, and in having direct access to complaining customers, could make a dent in shoring up hierarchy in business organizations where patching is most needed. Hierarchy can be a good thing, provided it is thought through in its various, distinct levels.


See: Cases of Unethical Business, Walmart: Bad Management as Unethical, and Bucking Starbucks' Star.



[1] Niall Ferguson, “In Praise of Hierarchy,” The Wall Street Journal, January 5-6, 2018.
[2] Ibid.

Thursday, January 11, 2018

The American City: A Police State in the Making

Crime in 2017 was down the 30 largest cities in the U.S, but police levels remained robust. Specifically, less crime did not result in fewer cops on the street. “In 2016, there were slightly more officers per capita than in 1991, when violent crime peaked,” according to the FBI.[1] American cities were on a trajectory toward becoming police states. A mentality of excessive dominance, I submit, lies behind the excessive show of force.
The notion that pruning a police force “inevitably raises the specter of more crime” does not hold, given the evidence of a more complex relationship.[2] For one thing, the actual size of a police force can be distinguished from the amount of police presence in the streets and in the air on a daily basis. I submit that the notion that a constant, ubiquitous police presence discourages crime is also problematic. In fact, blanketing a constant show of force can send the message of total societal distrust, which in turn can lead to crime as the social contract unravels. “The answer to fixing trust inside the community is to not put more distrust into it,” said Tre Murphy, a community organizer in Baltimore, Maryland. The sheer presence of police with guns implies distrust, and even a primitiveness in terms of aggression. “The answer to violence is not to put more violence into the community,” Murphy explains, “and that’s what they’re doing by increasing the police force.”[3] The additional violence here is mostly the passive aggressiveness of an excessive show of force, but also the incidents of police brutality. The latent passive and active aggression in an excessive police presence may be explained by the power vested in a police employee being too much for human nature to control.
It bears mentioning that quality of life also suffers for law-abiding citizens as a city becomes a de facto police state. When I lived in Tucson, Arizona, I was stunned to see low-flying police helicopters on a daily basis, even during weekdays, and this was on top of a myriad of police cars constantly on the major roads. Seeing a low-flying helicopter flying nearby in tight circles with a spotlight dotting here and there is downright creepy, and thus unnerving, especially on nearly a nightly basis. The city’s mayor’s office was oblivious. At the local university, both city and campus police, plus police aides, regularly circled within the campus, giving students and faculty the sense that they were being continuously monitored. The distrust in the air on that campus was so palpable I avoided it. It was not uncommon to see a campus policeman wearing a bullet-proof vest perpetually circling on a bike around the library and campus green, while police vehicles slowly pass by as if also necessary during the day.  
Such over-the-top policing especially during weekdays raises the problem of the culprits being wholly unaware that their conduct is excessive—more specifically excessively passive aggressive. It is precisely such being oblivious that prevents police forces from accepting the very notion of less rather than more. Downsizing is not in a police force’s DNA, according to Meghan Hollis, a criminologist. “Police departments, as long as they have the funds, they’re going to keep their force size the way it is or grow it, regardless of the crime rate. They can always adjust their statistics to make it look like they need the officers they have.”[4] Likewise, police forces can rationalize even what is an excessive daily police presence on the street and in the air such that the excessive amount can become normalized as the default. Hence even citizens feeling constantly monitored out in public spaces and even on their property can come to accept the fait accompli. The passive aggression inherent in the excessive show of force is, I submit, in the DNA of a police force. Perhaps mayors and university managers are afraid to reel in their respective police forces.  
Perhaps it bears mentioning that the quality of life in a city suffers from a constant police presence. This point is perhaps as obvious as the obliviousness of police forces regarding their own excessive show of force is hidden from the public as well as the police themselves. I submit that America is on the road to a police state, rendering “land of the free” into a farce. To deem oneself to have great liberty and yet live in—and implicitly tolerate!—a police state is to live in a state of denial: oblivious. This may have become the American unconsciousness.



[1] Jose Del Real, “Crime Is Falling, But Police Levels Remain Robust,” The New York Times, January 8, 2018.
[2] Ibid.
[3] Ibid.
[4] Ibid.

Thursday, January 4, 2018

CEO Pay: American and European Values

To what extent do inequalities in wealth accrue based on structural elements, such as tax deductions that only wealthy people can use, as distinct from factors pertaining to individuals, such as talent, sacrifice, and effort? The two clusters can build on each other, as people who have become rich primarily by exercising a talent and working hard use some of their accrued power to “reform” the system to their advantage at the expense of the poor and middle class. Such structural reforms in turn can make it easier for wealthy people to become even richer. In the context of a society in progress, structural and idiosyncratic factors doubtlessly interact—the trend being of an increasing chasm between the rich and poor. 
 
 
For example, as the graph above indicates, CEO compensation in the U.S. increased at a higher percentage rate than did corporate profits and factory worker pay every year from 1990 to 2005. In 2010, CEO compensation increased 27% while workers saw their compensation increase just 2.1 percent. Meanwhile, the poverty rate increased from 12% to 14%. CEOs in the E.U. were making comparably less. Foreign Policy in Focus reports that in 2006, for example, “the 20 highest-paid European managers made an average of $12.5 million, only one third as much as the 20 highest-earning U.S. executives. The Europeans earned less, despite leading larger firms.” I suspect that societal values have a lot to do with the difference, though changes in the make-up of American executive compensation should not be ignored.

Specifically, the ratio of pay between an American CEO and factory worker has been increasing in part to the growing proportion of executive compensation in the form of stock options. However, it is also true that Americans are relatively accepting of very high incomes (and inequality). A European is more likely to say, Enough is enough once a CEO has made far more than he or she could ever use. Politically, this is reflected in the fact that the Green Party and the Party of the Left are more powerful (and represented) in Europe than in America. Although the American two-party system acts to cut off the “extremes,” I suspect that the proportion of Americans who would agree with a European far-left party is less than in the E.U.

According to Foreign Policy in Focus, “In the United States, only 32 percent of the public [in 2007 supported] an outright pay cap on executive earnings. But average Americans [appeared] to be every bit as outraged over CEO pay excess as average Europeans. Indeed, 77 percent of Americans [said that] corporate executives "earn too much.” This disconnect, which I submit does not exist in Europe, reflects the American value on economic freedom and the association of freedom with putting up with someone else’s objectionable views or conduct.

In Europe, during and after the recession of 2008, “the idea of raising taxes on high-income earners” gained currency. New E.U. and state taxes were proposed, including a tax on financial transactions (E.U.) and a one-time levy on high-income individuals. In the state of Britain, the tax rate on the highest segment was increased from 40% to 50%, and in the state of Italy the government was considering in 2011 an additional 5% tax on annual incomes above 90,000 euros and a 10% on incomes over 150,000 euros. Considering the increasing fiscal demands being put on the E.U. Government and the pressing debt situations in many states, the recessionary risk of increasing tax on the rich may well be worthwhile. Indeed, Liliane Bettencourt and fifteen other billionaires made an open plea for a special tax on the European rich. Recognizing that they had benefitted financially from the European “structure,” they wanted to help preserve it.

As valuable as closing budget-gaps by revenue and spending reforms at the state and E.U. levels is, the matter of addressing a cycle of increasing economic inequality remains unanswered. If a given societal structure acts as a multiplier effect on a given inequality—exacerbating it, in effect—then something more than a new tax may be needed. In other words, any bias in the system that increases the inequality can be neutralized by the addition of a countervailing structure. For example, placing a strict limit, such as $1 million, on what an individual can inherit—with the rest going back to society via the state—would act to counter the “snowball effect” of “old wealth.” At least as of 2011, a person can live comfortably on $1 million; the surplus, being essentially surfeit with respect to what  person is apt to consume, would be better used as a corrective of the tendency of wealth to further accumulate among the rich. In other words, just as banks with assets over $1 trillion are too big to fail, a billionaire getting richer may not be worth the “cost” to society in terms of the increased inequality—to say nothing of the probable compromise to a republic form of government (which can often be too easily bought).

In short, income and even accumulated wealth can reasonably be considered as applying generally to one’s life (and those of one’s kids and grandchildren) and more particularly to being used (i.e., spent). If one’s wealth vastly exceeds what can be spent on things one can consume, this might be an indication that the concentration has gotten out of hand, at the expense of society itself. In other words, if you have a bank account with a balance of $15 billion, do you really need $5 billion more?  Will you ever use it? There is an opportunity cost—part of which being contributing back to society and reducing the economic inequality. Even so, this way of thinking reflects a value on solidarity that is much more European than American, at least in terms of being valued. In other words, the typical American would be more likely to object to any limitation on economic freedom, even if the playing field is tilted in the direction of the wealthy being able to take disproportionate advantage of that freedom, irrespective of whether the additional wealth is usable.  

Sources:

David Gauthier-Villars, “Wealthy French Push for Extra Tax,” Wall Street Journal, August 24, 2011. 
Matt Krantz and Barbara Hansen, “CEO Pay Sours While Workers’ Pay Stalls,” USA Today, April 4, 2011. 

Sarah Anderson, “Executive Pay Debate Raging in Europe and the United States,” Foreign Policy in Focus, August 28, 2007. 







Banking on Buffett’s Bank

Beyond wondering what could Ken Lewis have been thinking when he ok’d Bank of America’s purchase of Countrywide, it might be worth pondering why the Dodd-Frank Financial Reform Law of 2010 did not mandate splitting up banks such as Bank of America, which with over $1 trillion in assets are too big to fail. In other words, is simply increasing their reserve requirements tantamount to gambling with the financial system in a reckless manner? Should the elected representatives of the people and the states in the U.S. House and U.S. Senate, respectively, have displayed more fortitude in resisting the banking lobbyists even when that industry was known to have been culpable in the 2008 credit crisis?

The risk still remaining in August 2011 was evident when Bank of America’s stock price went down to $6. According to the New York Times, “the speed of the descent and the surge in the cost of insuring the company’s debt awakened memories of the financial crisis, when companies like Bear Stearns and Lehman Brothers found themselves short of capital.” To be sure, BOA’s capital held at $218 billion at the end of June 2011 by one key measure, though some investors did not trust the bank’s numbers. Of course, when there is a run on a bank, a capital figure is almost irrelevant, as are claims that additional capital are not necessary. Fortunately, Warren Buffett ignored such an asseveration from Brian Moynihan, the bank’s $9 billion loss over the previous 18 months, and the bank’s increased reserves ($18 billion from $4billion in January 2010) for investors of soured CDOs. Not wasting time scheduling a meeting with Moynihan, Buffett went to the board and soon had a deal wherein the investor would put down $5 billion in exchange for preferred stock paying a guaranteed 6% annual dividend and warrants good for ten years for 700 million shares. Like Buffett’s $5 billion deal with Goldman Sachs, which netted the investor over $1 billion as of mid-2011, the BOA deal looks like a money-maker for him. In exchange, the bank gets a huge vote of confidence, which regardless of any capital needs, was of great value to the bank (as the other deal had been to Goldman even though that bank had not yet needed $5 billion in additional capital).

Tossing around $5 billion to Goldman (and $3 billion to GE, which had been relying on the repo market) and $5 billion more three years later—in both cases to buttress a bank too big to fail—ought to make clear to the rest of us that merely allowing the $1 trillion club of banks to continue to exist is itself of such systemic risk that high stakes gambling is necessary to avoid catastrophe. My point is that through our elected representatives, the American electorate has a choice; we need not accept the presupposition that economic liberty requires that even banks whose very existence represents systemic risk have a right to continue to operate as going concerns. To put it differently, Warren Buffett was 80 years old when he put together the BOA deal.

Isn’t there something precarious about an empire the size of the U.S. relying on an old man to keep a major bank from imploding due to the financial fallout stemming from a stupid decision to acquire a mortgage servicer on steroids? Had anyone from BOA bothered to do what Larry McDonald did while he was at Lehman—Dick Fuld’s Lehman for Christ’s Sake!—namely, simply going a restaurant near Countrywide’s headquarters in California to chat at lunchtime with a few of the many brainless salesmen wearing gold watches and driving new sports cars bought from the double commissions on the known-to-be junk mortgages—BOA’s managers and board would (hopefully) never have agreed to ingest the leprosy, let alone play with it and touch it. Strangely, Ken Lewis had a reputation at the time as an expert on M&A; after all, that is how he had expanded BOA. Nevertheless, Lewis on Countrywide seems a lot to me like Lee at Gettysburg (what could possibly been in the confederate general’s head as he disregarded Longstreet’s objections to Pickett’s charge?—Lee might as well have used a firing squad on the division and saved the Union army the trouble). I think we are too enamored with authority that comes with position, whether in corporations, government or religion.

In summary, relying on one rich old man to prevent the financial system from imploding from the demise of a bloated, misguided bank like BOA does not sound very prudent to me. We might as well make every American city into Las Vegas and paint the towns red. Forgive me but I have to ask, Do we really know what we’re doing, folks? Minding the store might mean slapping some hands (or worse) when our elected representatives get to playing too much with the self-absorbed banking lobby.

Sources:

Nelson D. Schwartz, “Buffett to Invest $5 Billion in Shaky Bank of America,” New York Times, August 26, 2011. 

Ben Protess and Susanne Craig, “Buffett’s Bank of America Stake Viewed as a Seal of Approval,” New York Times, August 26, 2011.