Monday, June 27, 2011

The European Council: Head of State of the E.U.

Concerning the European Council and the Council of the E.U., it can reasonably be asked whether such similar nomenclature is really necessary. It can be quite confusing. For example, I didn't realize that the European Council does not legislate; I had assumed that the Council of Ministers (a.k.a. the Council of the E.U.) handled the technical aspects of E.U. legislation while the European Council votes on broad and highly significant legislation.  Instead, the European Council "sets the EU's goals and the course for achieving them. It provides the impetus for the EU's main policy initiatives and resolves issues that cannot be settled at the ministerial level. It does not legislate."[1] In contrast, the Council of the EU (aka the Council of Ministers) "adopts EU laws, a responsibility it shares with the European Parliament in most policy areas."[2]  The Council of the E.U. also "concludes international agreements between the EU and other countries . . . ; plays a key role in the development of the EU's Common Foreign and Security Policy (CFSP), based on guidelines set by the European Council."[3] It is the Council of the E.U., rather than the European Council, that corresponds to the U.S. Senate. Beyond both bodies representing state governments, the unique foreign policy role is shared by both “upper chambers.” An implication is that cabinet secretaries in the American state governments could replace U.S. Senators (and, conversely, the people of the European states could elect delegates or senators to represent their states in the Council of the E.U.).  In my view, the use of state cabinet secretaries (and having the governor’s association set the U.S. agenda) would be an improvement on senators (and the U.S. President in setting the Union’s agenda).  Such a change would reinvigorate American federalism against continued consolidation.


The complete essay is in Essays on Two Federal Empiresavailable at Amazon. 

1. “How the EU Works,” Foreign Policy, May/June 2011.
2. Ibid.
3. Ibid.

Friday, June 24, 2011

On the Belgium Stalemate: The E.U. to the Rescue?

On June 22, 2011, Philip Claeys, a representative in the E.U. Parliament, once again repeated his demand for Flemish independence, calling for the "orderly break-up" of Belgium. His call came as Belgium was entering its second year without a viable state government. It is no wonder, therefore, that a E.U. legislator would get involved. Repeated attempts had been made in Belgium during the previous year to resolve the political disagreements between Flanders and Wallonia—getting nowhere.


TheParliament.com


The full essay is at "Essays on the E.U. Political Economy," available at Amazon.


Saturday, June 18, 2011

Banks on Reserve Requirements: An Institutional Conflict of Interest

As regulators were getting close to an international agreement on how much additional capital large banks that are deemed too big to fail should hold. In 2010, international policy makers met in Basil and agreed to 7 percent. The Dodd-Frank law passed in that same year in the U.S. meant that the Federal Reserve Bank would have to “impose tougher capital standards on ‘systemically important financial institutions’.”[1]  Hence, American officials wanted “to coordinate with global regulators so that U.S. firms aren’t put at a disadvantage.”[2] Not wanting to divert more capital to protect themselves from losses, banks were busy lobbying the regulators to reject the proposed 2.0 to 2.5 percentage points above the 7 percent set at Basil.


The full essay is at Institutional Conflicts of Interestavailable in print and as an ebook at Amazon.

1. Deborah Solomon and Victoria McGrane, “Lenders Dig in on Rules,” The Wall Street Journal, June 16, 2011.
2. Ibid.

Friday, June 17, 2011

Amtrak’s Conflict of Interest

On June 15, 2011, U.S. House Republicans called for the breakup of Amtrak’s de facto monopoly of intercity and interstate passenger-rail transport in the United States. Specifically, Republican lawmakers proposed that the lucrative northeast routes be opened to private providers. For example, Richard Branson’s Virgin Trains had been seeking to provide service between Boston and Washington. Of course, letting one of the providers build and own the tracks even as other providers use the tracks would put that owner-provider in a conflict of interest in charging the other providers for their use of the track, so it would be preferable to have the U.S. Government supply the tracks and charge all of the private providers of train service.


The full essay is at Institutional Conflicts of Interestavailable in print and as an ebook at Amazon.

Long Term Capital Management: An Institutional Conflict of Interest

By 1997, “after three years of strong profits for LTCM, the opportunities were drying up. There was too much money chasing the same investments. . . . In early 1998, LTMC decided to give a large portion of its capital back to its original investors because profitable opportunities were so hard to find. At the end of 1997, LTCM had nearly $7.5 billion under management, compared to $1 billion when it started, and it now returned $2.7 billion of that to investors. The partners also figured that they could, if necessary, simply leverage their portfolio further to compensate for the loss of capital, which would compound their personal gains. Greed was at the heart of what turned out to be a disastrous decision. . . . Unable to reproduce the returns of the first three years, LTCM took increasingly more risk, abandoning its purer arbitrage for the kinds of ‘directional’ investments Soros made and LTCM had so long disdained—such as trying to forecast interest rate and currency movements. More and more of these trades were unhedged.”[1] Furthermore, “LTCM’s risk models—VAR and related statistical tools . . . –were misleading.”[2] For example, diversification was little protection if there was a run on the banks. When Russia defaulted on August 17, 1997, LTCM’s hedges against its Russian investments were worthless. Furthermore, because all fixed income assets fell sharply in value, “diversification, it turned out, did not matter. The finely calculated relationships on which LTCM was built and which the firm always believed would hold started to come apart. VAR could  not account for such an unlikely but sweeping event—an event in which everyone wanted out at the same time and almost all investments fell significantly in price. The use of VAR itself precipitated much of the selling. Commercial banks under the jurisdiction of the Basel Agreements, which . . . set capital requirements based on the level of VAR (the lower the VAR, the lower the capital required), were forced to sell assets to raise capital.”[3] LTCM lost $1.9 billion that August. Eventually, fourteen banks, organized by the Fed, put together loans of more than $3.5 billion to purchase 90 percent of the firm.” LTCM “did manage to sell down assets in an orderly fashion and by early 2000 it was essentially out of business”[4] 


The full essay is at Institutional Conflicts of Interestavailable in print and as an ebook at Amazon.

1. Jeff Madrick, Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present (New York: Alfred A. Knoff, 2011), 277-81.
2. Ibid.
3. Ibid.
4. Ibid.

British Banking Regulation in the E.U.

Before the financial crisis of 2008, the British government was light on banking regulation compared to other E.U. state governments. Oddly, some Europeans imagined an “Anglo-American” connection or likeness, as the American states had been on a deregulation kick since Carter’s airline and thrift deregulatory laws in the late 1970s. Reagan and the second Bush in particular extenuated the movement, which applied to the entire U.S. common market. After the crisis, however, even as Republicans in the U.S. House of Representatives, which is commensurate to the E.U. Parliament, were still voicing support for still more deregulation as though 2008 had not happened, the regulatory tussle in the E.U. reflected the greater involvement of the state governments (i.e., the stronger federalism than the lop-sided variety in the U.S.), with the British government in particular pushing for stronger banking regulation—if not at the E.U. level, then in the state of Britain. “British officials are waging an increasingly aggressive fight to impose banking regulations as they see fit, even if they go further than rules elsewhere in the European Union,” according to The Wall Street Journal. From this quote, we can unpack two distinct though interrelating strains: a desire for tougher banking regulation and an anti-federalism wherein the state governments of the E.U. can go beyond the federal government in terms of the regulation. Both of these points are significant.


The complete essay is at Essays on Two Federal Empires.

Friday, June 10, 2011

Weakened U.S. Federalism as a Cause of the Financial Crisis

Weakening federalism in the name of preemptive deregulation played a major role in enabling the financial crisis of 2008. Specifically, Carter’s Depository Institutions Deregulation and Monetary Control Act of 1980 abolished Regulation Q (over time), which had limited thrifts’ deposit interest rates, and preempted “the many state usury laws that placed a ceiling on mortgage and credit card rates.”[1] Consolidation at the expense of federalism thus contributed as a risk factor.


The complete essay is at Essays on Two Federal Empires, available at Amazon.


A Health-Insurance Mandate Consistent with Federalism

On June 7, 2011, according to the Huffington Post, “three judges on the 11th Circuit Court of Appeals panel questioned whether upholding the landmark law could open the door to Congress adopting other sweeping economic mandates.” Chief Judge Joel Dubina, who had been appointed by President George H.W. Bush, "struck early by asking the government's attorney 'if we uphold the individual mandate in this case, are there any limits on Congressional power?' Circuit Judges Frank Hull and Stanley Marcus, who were both appointed by President Bill Clinton, echoed his concerns later in the hearing.”


The complete essay is at Essays on Two Federal Empiresavailable at Amazon.

Word-Games Obfuscating Britain Losing a Region: Too Many Bagpipes

Following the Scottish National Party’s victory in the Scottish region's elections in the United Kingdom) the question of whether the E.U. state of Britain would or should be partitioned received a lot of press. Plenty of word-games were in the mix. “Scottish National Party” alone is problematic, as Scotland has not been recognized as a country, nation or a nation-state since the beginning of the eighteenth century because Scotland is in the UK and is thus not an independent political unit. If a specific cultural identity alone were sufficient to connote national, then the word would be applicable at virtually any scale of territory from a town on up. Even Britain, being a semi-sovereign state in the E.U., is only a country (and nation) if Virginia and California are so as well, as they are also semi-sovereign states in a union and thus not independent political units. 

Furthermore, it is also misleading for union to pertain to Britain and the Netherlands, and even Deutschland (i.e., Bundes) because they are states in a union that treats them as unitary members of the European Council. The root of the problem here is that the United Kingdom, the Netherlands and Germany had each been formed out of medieval kingdoms that were once sovereign. Even if they the three E.U. states are decentralized or federal in governance, they are equivalent to other E.U. states.


So to refer to the E.U. state of Britain as a union of countries is incorrect and utterly misleading in the modern world in which "union" refers to empire-scale federal polities.  To refer to a state in one modern empire-scale (and level) union as somehow commensurate with another modern empire-scale (and level) union evinces not only pretention, but an illogical category mistake as well, and to think that Britain is somehow equivalent to the E.U. is logically contradictory because the United Kingdom is a state in the E.U. 


To be sure, U.S. Government officials enable this category mistake by refusing to correspond to their counterparts in the federal executive and legislative branches of E.U. So we should not blame just the Europeans for being able to get away with playing word-games in discussing whether a region of the United Kingdom should break off. 


Scotland is no more a nation or country than is Normandy, Holland, Flanders, or Bavaria. Although some of the American states have particular regional cultures too, such regions are also not nations. Republics like California, New York, and Illinois are so heterogeneous that they, like Britain, should perhaps consider devolution or even partition. Indeed, California and Illinois have each had more than one secession or partition movement on account of internal cultural and political differences. This doesn't mean that Northern California is somehow a nation--or, for that matter, that Scotland is one. 


The importance of a state in the E.U. or U.S. splitting into two is mitigated if the two resulting states are to be in the same union. Of course, this wouldn't hold if one of the resulting states does not stay in the union. However, as independent states like Switzerland do not enjoy much international weight precisely because they are not in a union of modern states, the partition of a state that is in a union is likely to result in two states in place of one in the same union (which the other states in that union are apt to resist as the two-for-one reduces their power in the empire-level union body wherein states are represented).


Therefore, the importance of whether the United Kingdom decentralizes further or splits into two states is less now that the E.U. has gained some governmental sovereignty that has been delegated by the states. This should sound familiar to American constitutional lawyers. Lest it be thought that Scotland enjoys any such sovereignty, the Telegraph reported that “Cameron has overruled . . . Moore's insistence that there would have to be two referendums before Scotland should break away.”[2] According to the paper, “Salmond wants to give Scots a number of options in his referendum – a choice between the status quo, more devolution or giving his administration approval to negotiate the terms of independence. The Prime Minister is deeply unhappy about this prospect, believing it to be confusing and unlikely to lead to a clear – cut verdict. Instead he wants the voters to be asked a simple question, along the following lines: ‘Do you wish Scotland to remain part of the United Kingdom?’ [A source at Westminster] commented: ‘Mr Salmond must be honest and straightforward with the Scottish people in his phrasing of the question for the referendum. If he isn't we will conduct the referendum.’”[3]


However, giving voters a choice of the status quo, more decentralization, and partition is hardly confusing; to contend so is to have no respect for popular sovereignty. In other words, if citizens in a representative democracy cannot understand this simple tripartite choice, how can the elected representatives claim to have any respect for their constituents who elected them? Cameron was engaging in word-games, deliberately obscuring the issue by claiming he was avoiding an ambiguity.


I would counter that to refer to Britain as a nation even as Scotland is one, while California and Texas are not, is also inconsistent. The world is no longer in the medieval times; England and Scotland came to parts of the host kingdom (and now state) in an empire. Today, neither England nor Scotland (nor Holland or Bavaria) is a country or nation. Being a region or province in a modern-kingdom-scale state connotes a particular cultural identity within that of the state. To claim that Scotland is a nation or country while Holland is a province in a nation or country is short-sighted and presumptuous, as well as utterly self-serving. The same applies to claiming that Britain, a state in the E.U., is somehow equivalent to the E.U. or U.S. as yet another union of semi-sovereign states. Here's how I would word the referendum for the Scottish region of Britain: "Do you think Scotland should break off from the U.K.? If Scotland does break off, should it become a state in the E.U.?"


In conclusion, the problem with word-playing in the context of politics is that the resulting category-mistakes preempt useful comparisons and ensuing lessons. In regard to the Scottish region of  the E.U. state of Britain, Salmond’s referendum proposal proffering the choice of status quo, more decentralization, or breaking off seems reasonable. Salmond could even add another question, whether the United Kingdom should, like the E.U. state of Germany, be itself federal. States of federal unions being federal is in line with Althusius’ (Political Digest, 1604) theory of federalism, which is based on the Holy Roman Empire and has the province, kingdom, realm, and imperial levels each being federations. The large American states might thus want to consider adopting the federal governance system for themselves, wherein their respective regions would become semi-sovereign. Applied political theory is in great need of logic to act as a check on cultural and political ideology.


1. Alan Cochrane, “David Cameron Might Take Scottish Independence Referendum Off Alex Salmond,” The Telegraph, June 10, 2011.

2. Ibid.

3. Ibid.

A Health-Insurance Mandate Consistent with Federalism

On June 7, 2011, according to the Huffington Post, “three judges on the 11th Circuit Court of Appeals panel questioned whether upholding the landmark law could open the door to Congress adopting other sweeping economic mandates.” Chief Judge Joel Dubina, who had been appointed by President George H.W. Bush, "struck early by asking the government's attorney 'if we uphold the individual mandate in this case, are there any limits on Congressional power?' Circuit Judges Frank Hull and Stanley Marcus, who were both appointed by President Bill Clinton, echoed his concerns later in the hearing.”


The complete essay is at Essays on Two Federal Empiresavailable at Amazon.

Tuesday, June 7, 2011

On the Arrogance of Power: Greenspan, Rubin, and Summers in the Clinton Administration

Over two years after the financial crisis of 2008, a commentator on Fox News said that the banks should not stop the foreclosure process because that would not be good for the free market. He said that people who cannot afford their houses should lose them. Another commentator remarked that there was still too much government in the financial sector. This, according to the commentator, is “the problem.” It is particularly striking that Alan Greenspan’s stark admission to a U.S. House committee in 2008 that the deregulated laissez faire market paradigm contains a fundamental flaw was lost on the two commentators. In May 2011, House Speaker Boehner charged that business is over-regulated. This comment too is remarkable given Greenspan’s realization. If a people disowns its own lessons, history is destined to repeat itself.


The full essay is at Essays on the Financial Crisis.

Scotland: From a Region to a New E.U. State?

In early May 2011, “the Scottish National Party (SNP) won 69 out of 129 seats in the Scottish Parliament, with about 45 percent of the vote, up by more than 12 percentage points. Their three main rival parties — Labour, the Conservatives and Liberal Democrats  — all lost ground."[1] Whether to shift was so the region might break off from the United Kingdom, an E.U. state, is doubtful. 

 David Cheskin (AP)

The complete essay is at Essays on Two Federal Empires.

1. Ian MacKenzie, “Scottish Pro-Independence Party Wins Majority,” MSNBC.com, May 6, 2011.

Monday, June 6, 2011

Wall Street Banks: Price-Making and Law-Breaking?

The U.S. Senate Permanent Subcommittee on Investigations found in 2011 that “two Goldman employees, Deeb Salem and David Swenson, tried to manipulate prices of securities used to bet against mortgages. Both tried to help Goldman pile on larger bets against the mortgage market, and they wanted to be able to buy such negative bets more cheaply, the report said. Goldman, as a broker, was able to affect prices in the market through the bids and offers it gave out. Mr. Swenson wrote in May 2007 that the bank should try to ‘start killing’ prices on certain positions so that Goldman would be able to ‘pick some high quality stuff,’ according to the Senate report. The strategy, Mr. Swenson wrote, would ‘have people totally demoralized.’ The pair were unsuccessful in their attempt, and both denied making it to the Senate committee. Mr. van Praag said last week that the report had no evidence of manipulation. Still, the Senate report said that ‘trading with the intent to manipulate market prices, even if unsuccessful, is a violation of the federal securities laws.’”[1] I submit that it was also unethical. 


The full essay is in Cases of Unethical Business: A Malignant Mentality of Mendacityavailable at Amazon.com.

1. Louise Story and Gretchen Morgenson, “S.E.C. Case Stands Out Because It Stands Alone,” The New York Times, May 31, 2011.