The Federal Reserve’s Housing Bubble

During one of his lectures to a class at George Washington University in March of 2012, Ben Bernanke, the chairman of the Federal Reserve, claimed that the central bank’s lower interest rates did not trigger the housing bubble that began in the late 1990s and ended in 2006. For one thing, the Fed did not start cutting interest rates until a few years into the twenty-first century. Also, home prices rose after the Fed later began raising interest rates. Bernanke also cited Europe, where housing booms have not been associated with either tight or loose monetary policy.

                         Ben Bernanke lecturing at Washington University       European Pressphoto Agency

The full essay is at "Essays on the Financial Crisis".

Batting Better Than Goldman Sachs on Corporate Governance

Companies differ on how they handle personal and institutional conflicts of interest. This difference may reflect disagreement over whether a conflict of interest is inherently unethical, or whether one must be exploited for any conduct to be unethical. I take the former position: that to be in a conflict of interest is indeed inherently unethical. At the very least, being in a conflict of interest can trigger or spawn additional conflicts of interest. I point to Goldman Sachs’ response to an institutional stockholder’s corporate governance proposal as a case in point. That case can be contrasted with how the BATs board reacted in terms of corporate governance to bad public relations and a failed IPO.


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

The Federal Reserve’s Housing Bubble

During one of his lectures to a class at George Washington University in March of 2012, Ben Bernanke, the chairman of the Federal Reserve, claimed that the central bank’s lower interest rates did not trigger the housing bubble that began in the late 1990s and ended in 2006. For one thing, the Fed did not start cutting interest rates until a few years into the twenty-first century. Also, home prices rose after the Fed later began raising interest rates. Bernanke also cited Europe, where housing booms have not been associated with either tight or loose monetary policy.

The full essay is at "Essays on the Financial Crisis".

Batting Better Than Goldman Sachs on Corporate Governance

Companies differ on how they handle personal and institutional conflicts of interest. This difference may reflect disagreement over whether a conflict of interest is inherently unethical, or whether one must be exploited for any conduct to be unethical. I take the former position: that to be in a conflict of interest is indeed inherently unethical. At the very least, being in a conflict of interest can trigger or spawn additional conflicts of interest. I point to Goldman Sachs’ response to an institutional stockholder’s corporate governance proposal as a case in point. That case can be contrasted with how the BATs board reacted in terms of corporate governance to bad public relations and a failed IPO.


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

Efficiency and Ethics: On the Fairness of High-Speed Trading

Two months into 2012, the SEC announced that it had been examining the trading activities of high-frequency trading firms.  According to the Wall Street Journal, the SEC was “examining, among other things, whether high-frequency firms benefit from delays in the dissemination of prices from various corners of the markets. . . . High-speed firms use direct feeds from exchanges that can give them a leg up on slower traders.” High-frequency traders “can access prices a split second faster through their access to direct feeds.” This is accomplished by placing the trading computers in the same data center that houses the exchange’s computer servers. Just over a year later, the Wall Street Journal reported that high-speed traders were using “a hidden facet” of the Chicago Mercantile Exchange’s computer system “to trade on the direction of the futures market before other investors get the same information.” Even getting the confirmation of a high-speed trade just one to ten milliseconds faster can enable a computer to know the direction a commodity is going and trade on it. According to the Wall Street Journal, the “ability to exploit such small time-gaps raises questions about transparency and fairness amid the computer-driven, rapid-fire trading that increasingly grips Wall Street and confounds regulators.” Both the increasing use of high-speed trading and the problem of accountability from a regulatory point of view raise the stakes in determining the ethics of the practice. 

The full essay is in Cases of Unethical Business, available in print and as an ebook at Amazon.com.  

Wickard vs. Filburn: Federalism vs. Congress

If you are wondering how the Congress got away with taking over so much from the state legislatures, you need look no further than Wickard v. Filburn, on which the U.S. Supreme Court unanimously decided that the interstate commerce clause can reach all the way to penalize a farmer for growing his own wheat.

Filburn and his wheat.  (Mary Lou Spurgeon  NYT)

The complete essay is at Essays on Two Federal Empires.

Fraudulent Foreclosures

Looking at foreclosures from 2008 to 2010 of federally-backed mortgages serviced by five major banks, federal investigators at the Department of Housing and Urban Development (HUD) found that bank managers “ignored widespread errors in the foreclosure process, in some cases instructing employees to adopt make-believe titles and speed documents through the system despite internal objections.” Generally, the banks engaged “in a pattern of unfair and deceptive practices.”[1] This finding contradicts the self-serving statements by managers at the banks that blamed low-level employees. The investigation found that the managers had actually been the active agents. That is, the shortcuts were in many cases formulated and directed by managers. The inspector general at HUD pointed to “simple greed” to explain how so many people could have participated in the misconduct.[2] Considering that millions of Americans were tossed out of their homes as a result, I would sociopathic indifference or even callousness to the mix. Additionally, the rush to sign documents may have undercut the banks’ own positions with respect to both the foreclosure process and the homeowners—adding incompetence to the mix.

                  Four million foreclosures in the US during the 2007-2011 period.      Spencer Platt/Getty

The full essay is in Cases of Unethical Business, available in print and as an ebook at Amazon.com.  

1. Nelson Schwartz and J.B. Silver-Greenberg, “Bank Officials Cited in Churn of Foreclosures,” The New York Times, March 13, 2012.

2. Ibid.

Spain’s Deficit: Violating E.U. Law

In early March, 2012, Spanish Prime Minister Mariano Rajoy announced that Spain’s budget-deficit target would not be the 4.4% that had been promised by his predecessor to the E.U. Commission in 2011. Instead, the anticipated deficit in 2012 would be 5.8 percent.[1] That announcement put the state of Spain on a collision course with the enhanced enforcement of deficit limits by the Commission and the ECJ. Even though Rajoy had signed onto the added-enforcement “pact” a month before, he said of the 5.8 percent, “This is a sovereign decision made by Spain.”[2] A few days after his announcement E.U. finance officials met and accepted a 5.3% target.[3] Although it comes with a “tough deficit target” for 2013, one wonders whether the proposed strengthening of the “fiscal pact” will ever be enforced—and in a way that is fair to all of the states.

The complete essay is at Essays on Two Federal Empires.

1. Stephen Fidler, “Spain’s Move Tests Europe’s Mettle on Deficits,” The Wall Street Journal, March 10-11, 2012.

2. Ibid.

3. Matthew Dalton, “Euro-Zone Ministers Press Spain for a Deal on Deficits,” The Wall Street Journal, March 13, 2012.

Justice as Fairness: Writing Down Greek Debt

In 2012, 80% of Greece’s private creditors agreed to “voluntarily” convert their Greek debt into debt of a bit less than half the face-value (plus a lower interest rate). With such a proportion having agreed to the swap without triggering credit default swap insurance payouts, Greece could get the E.U. to agree to force the remaining 20% to involuntary write-downs. That would trigger the credit default swaps, at least in theory.

The full essay is at "Justice as Fairness: Greek Debt."

A Democratic Spring in Russian Cities

The “Arab Spring” of 2011 might have given the world an over-optimistic notion of what political protest can engender in terms of “regime change.” A year later, the Egyptian military was still in control, which suggests that removing one particular dictator had constituted real change. In Myanmar, soldiers still dominated the parliament even after the opposition party won a landslide victory in by-elections in March 2012. Meanwhile, Assad in Syria was getting away with teaching the protesters in his country a bloody lesson while both the Arab League and the UN looked on. Meanwhile, Putin viewed his fraudulent presidential election victory as a mandate to deal more severely with the Russian protesters. The notion that a brave new world of democracy had somehow sprung to life in the Arab Spring suffered an cold snap of sorts from the cold winds of real politik. I suspect that real change happens more incrementally, and from the bottom up. This was evident in Russia in March, 2012.

Under the radar given all the attention being paid to Russia’s presidential election, 71 members of a coalition of independent and opposition activists won seats on Moscow’s 125 district legislative councils, where Putin’s United Russia Party lost ground.[1] The newly elected deputies “take up grievances closer to home, such as lack of parking space, spotty garbage collection and rundown neighborhood parks.”[2] This laundry list is less exciting than planning a protest march, but according to one such newly-elected deputy, Vera Kichanova, it “can be a beginning for our generation, a way to train ourselves to run the country.”[3] The 20 year-old student is wise beyond her years. Although she planned to continue to join the protests, she realized that setting up a web-site by which her constituents could communicate with her would build not only grass-roots support, but tacitly convince United Russia supporters that there is another tangible alternative. Activity like cleaning up parks and increasing parking spots is only the tip of the iceberg.

 

 

Tamara Kornilyeva at a training session for activist candidates in Moscow WSJ

Additionally, independents including ruling-party defectors won several mayoral victories, including Yevgeny Urlashov, an anti-corruption candidate for mayor of Yaroslavl, a city of 600,000. He was supported by opposition leaders. He won a landslide victory with 70% of the vote over the Kremlin-backed opponent. “We have something to say to Mr. Putin,” he said. “Change is coming. Let democracy spring from the city of Yaroslavl.”[4] It was not only in that city. Opposition candidates won in other large cities, including Toganrog and Togliatti. Independent candidates won 10 out of 15 mayoral elections held across Russia in March 2012, according to the Central Election Commission.[5] Fueling the trend was increased grass-roots political activism triggered by the protesting of the parliamentary elections in December 2011. It remained to be seen just how high the opposition might get. If it does not get co-opted, the independents could eventually percolate up to give Putin’s United Russia Party a run for its money.

There are lessons for Americans. Rather than focusing exclusively on Congressional or U.S. Presidential races, Tea Party activists and candidates might concentrate foremost on the precinct level and go from there. Once they reach Congress, they would be firmly ensconced back at home and thus better able to withstand pressure even from the Republican House and Senate leadership.

There is plenty to do at the local level to open up democracy. Once mayor, Urlashov plans to fire corrupt officials and reform the electoral law to prevent mayors from serving more than two terms. In Moscow, some of the independents have been lobbying to shift the city’s power from the City Council and the unelected mayor to the 125 neighborhood councils.[6] This reform would strengthen democracy because it is easier for new parties and independents to get elected at the neighborhood level where door-to-door campaigning can really pay off (this is also a good reason for the principle of subsidiarity). The local and regional levels are in principle most fertile for democracy because the electorates are smallest in size and the entry costs can be lower.

Furthermore, because Russia is itself a federal system, as is the E.U. and U.S., increasing the power of neighborhood councils could be part of an effort to “do federalism” all the way down. This is Althusius’s 1604 theory in his Political Digest, where individuals are represented by their guilds and neighborhood councils, which in turn are represented at the City Council level. A provincial council is a federation of city councils, and a kingdom (or republic) is a federation of provincial councils. The imperium, or empire, is a federation of kingdoms or republics (e.g., the U.S., E.U. and Russia). Each level has the same form, and represents only the next lower level. It follows that a neighborhood council would not be a mere advisory body to a city council. All of the federation-levels are equally legitimate. In terms of modern democracy, viewing both the neighborhood and city levels as federations would strengthen democracy itself by making it easier for new faces to become politically active beyond the protest marches.

1. Richard Boudreaux, “Russian Protester Finds Another Path to Change,” The Wall Street Journal, March 10, 2012.
2. Ibid.

3. Michael Schwirtz, “Mayoral Votes Give Russia Opposition a Boost,” The New York Times, April 3, 2012.

4. Ibid.

5. Ibid.

Pardons in Mississippi: On the Role of the Supreme Court

In a 6-to-3 decision, the Mississippi Supreme Court ruled in 2012 that pardon procedures lay outside of its constitutional authority—that to interfere even in cases where those procedures were flouted would violate the separation of powers. Section 124 of Mississippi’s Constitution “gives pardon power exclusively to the governor, but also requires applicants to have their petitions for pardon ‘published for 30 days, in some newspaper in the county where the crime was committed.’”[1] This is constitutional language, and yet the Supreme Court refused to determine whether Haley Barbour had acted unconstitutionally in all but 22 of the 200 pardons he had granted in his last days in office. In other words, the Court’s function in interpreting the constitution is at odds with the principle wherein the three branches of the Mississippi government are separate—none being directed by any of the other two.

In his majority decision, Justice Jess Dickinson wrote, “While this court clearly has the constitutional duty to interpret the content of laws passed by the Legislature and executive orders issued by the governor, we decline—as we have so many other courts before us—to assume for ourselves the absolute power to police the other branches of government in fulfilling their constitutional duties to produce laws and executive orders, unless there is alleged a justifiable violation of a personal right.”[2] In a dissent, Chief Justice William Waller argued that the Constitution puts limits on the governor’s pardon power, and the court is obliged to make sure those limits are not crossed.  As those limits are set in the constitution rather than by statute, the Supreme Court as interpreter of the Constitution is justified—indeed even obligated—to determine whether an executive order violates the language and is thus unconstitutional.

If judicial review were subject to the separation of powers doctrine, then the Supreme Court of Mississippi could only assess the constitutionality of the judiciary’s decisions and protect the rights of individuals from governmental action—though even here such protection could be interpreted as being at the expense of the legislative or executive branch and thus violating the separation of power between the three branches. Furthermore, assuming that the chief executive of Mississippi might somehow police the constitutional limitations on himself puts him in a conflict of interest with respect to himself. A conflict of interest is also in play, by the way, in Haley Barbour pardoning prisoners who worked at the governor’s mansion.

To be sure, a conflict of interest also applies when a Court applies constitutional interpretation to itself. It would be advisable, therefore, for Mississippi to create a constitutional court whose role is only to interpret the Constitution. Such a court could thus apply constitutional scrutiny to other courts in Mississippi without so much of a conflict of interest (there still being some, the Constitutional Court being in the same branch).

In short, the referee should not do anything else with respect to the game, and none of the game rules should be off limits simply because it applies to one of the other players. To rely on the legislature to keep itself within constitutional bounds or likewise in the case of a joint figurehead and chief executive of a government does not take seriously the function of a constitution to keep a government within certain limits of power. To expect power to police itself is sheer folly.

1. Campbell Robertson, “Highest Court in Mississippi Upholds 9 Pardons,” The New York Times, March 9, 2012. 
2. Ibid.

A Rigid Refusal to Renegotiate: Blaming the Greeks

As Greek party leaders struggled to put together a government in May 2012 after a splintering election, a major (and contentious) issue was whether to demand a renegotiation of the bailout agreement. Alexis Tsipras, leader of the Coalition of the Radical Left known as Syriza (which made large gains in the election), was declaring the agreement null and void given the mandate implied by the gains made on the far right and left (both being opposed to the austerity program). Tsipras believed he “had changed the debate to the point that the formerly dominant parties that had signed the loan agreement were . . .  indicating they might agree to demand it be renegotiated.”[1] His statements were enough to prompt a firm Nein! from Angela Merkel in Berlin and a related “tightening of the screws” from the committee of the European Financial Stability Facility.

The full essay is at Essays on the E.U. Political Economy, available in print and as an ebook at Amazon.

1. Rachel Donadio and Niki Kitsantonis, “ContinuingLeadership Deadlock in Greece as Its Lenders Watch and Wait,” The New York Times, May 9, 2012.

The SPD in Germany: Holding the Euro Hostage

Because the so-called “fiscal pact” amendment that would strength the E.U.’s enforcement of state government deficits and debts involves a shift of more state sovereignty to the E.U. for the states that ratify the informal amendment, the ratification in Germany requires a two-thirds majority in both the Bundestag and the Bundesrat. The latter body represents the German regions, or Länder, which in Texas or California would be counties. Generally speaking, the process of European integration has involved a succession of shifts of governmental sovereignty both from county and state governments to the E.U. itself as a federal government that includes an executive branch, a parliament, a council or upper chamber, and a supreme court that has a supremacy clause.

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

Scott Walker’s Recall in Wisconsin: Mob Rule?

In early March, 2012, unions and conservative groups had already “turned Wisconsin’s battle over labor rights into a national, multimillion-dollar war.”[1] In 2011, the two sides had spent $44 million in it. The unions began an effort in that year to recall Scott Walker, the government’s figurehead and chief executive, and several senators in Wisconsin’s Senate “after they pushed through legislation restricting the collective-bargaining and organizing powers of workers belonging to government-employee unions.”[2] While this depiction is cogent—a battle over labor rights involving legislation restricting collective-bargaining rights for government employees—I contend that the assumed linkage between the battle and the recall is deeply flawed.

It is one thing to contend politically over labor rights, and it is quite another to recall a sitting head of state (and senators). To cut short the term of an elected official simply because he or she favored legislation that one opposes is to violate one of the main pillars of representative democracy. Specifically, terms of office exist to enable representatives to act or vote for what they believe is in the best interest of the people even if it is not favored by popular passions of the moment. In other words, removing an elected representative from office because he or she supported or voted for legislation that one opposes is to reduce representative democracy to whatever passion happens to be felt strongest by the mob.

There is a reason why Plato and Aristotle depict two kinds of democracy in their respective typologies of government. The good form of democracy is “rule by the many” while the bad is “mob rule.” Electing representatives and giving them a fixed term of office is a principal way in which “rule by the many” (as opposed to the one or the few) is protected from sliding into the decadent “mob rule.” Seized by an ideological and partisan fever, the pro-recall Wisconsinites have been blind to their own culpability in violating a basic tenet of representative democracy.

In other words, there is a reason why the U.S. constitution requires “high crimes and misdemeanors” rather than mere legislative or ideological disagreement for the impeachment and removal of office of a U.S. President. Were disagreement itself over a piece of legislation sufficient to remove a representative from office—even if as in Scott Walker’s case the office-holder had campaigned on the issue by taking the position in question—then elections themselves are relegated. “Elections have consequences” only holds if it is agreed that the winner is not justifiably removed from office as soon as he or she starts to act (lawfully) on the campaign promises. Even if the proposal or vote had not been something mentioned in the campaign, it is not sufficient to remove a representative simply out of disagreement with his or her proposal or vote. Besides eviscerating representative democracy itself, such a recall is utterly unfair to the particular officeholders.

Were I a Wisconsinite in 2011, I would have opposed the proposal to balance the budget by restricting collective bargaining rights. Besides there being other ways, the proposal seemed like a subterfuge for union-busting to me. Not being a citizen or even resident of Wisconsin, I was merely a bystander as the recall effort, or “battle over labor rights,” unfolded given the nature of federalism and the fact that Wisconsin, like France, is a semi-sovereign republic. Generally speaking, it is inappropriate that people and organizations outside of Wisconsin contributed so much money to intervene on a political matter that was properly for the citizens and residents of Wisconsin to decide. The over-reaching by outside vested interests only added to the conflation of the issue of a recall with that of union bargaining rights.

The question for Wisconsinites was whether Scott Walker and the senators abused their respective offices by signing and voting for a piece of legislation. As their respective offices include signing and voting on legislation, doing so cannot constitute abuse of office or criminal behavior. Otherwise, it would be penalize someone for doing what they are supposed to do. It is like shooting a bird for flying. “What the hell else should I have been doing?” such a bird might wonder in loud chirps while falling to earth. It is obvious that to shoot a bird simply for flying is not fair to the bird because it is designed to fly, and yet it was difficult for many Wisconsinites to grasp that sheer disagreement with the choices made by elected officials as per the design of their respective offices does not justify removing the officials as if they had acted improperly.

Looking in from the outside, I do not think much of the strategy Scott Walker and the Republican legislators used to balance Wisconsin’s budget (though I give them credit for balancing it). Even so, it would have been highly unfair to them, were I—assuming I were a Wisconsinite—to have urged Walker’s ouster simply because he signed a law he had campaigned on (the same holds even if he had not done so). I believe in representative democracy as against mob rule more than I cherish my own ideology.

It is a pity that there were not more adults in Madison and Milwaukee in 2011. As John Adams and Thomas Jefferson wrote in their letters to each other, an educated and virtuous citizenry is vital to a viable republic; otherwise, it is apt to slide into mob rule where simply being disliked is enough to mean the end of a person. There is a reason why the delegates to the U.S. constitutional convention in 1787 distrusted partisanship. I do not believe that ideological disagreement ought to have so much sway over representative democracy itself as it has in Wisconsin.

“Elections have consequences” and “rule of law” may seem like strong pillars in Western civilization, but under the weight of vice they can quickly become woefully pliable, given the self-serving denial that is possible in human nature. Perhaps the struggle here boils down to the necessity that is in law as against the vicissitude that is in human nature. Do we respect law more than our own likes and dislikes? That is to say: as moderns, are we as civilized as we presume we are? Can presumptuous children self-govern as a people simply because they claim to be mature? These are questions for all of us who live in republics to ponder and reflect on, for they are being played out in our own day and not necessarily on some distant galaxy.

1. Alicia Mundy, “Wisconsin Recall Realigns Campaign Spending,” The Wall Street Journal, March 6, 2012.
2. Ibid.

E.U. Staving Off War: Statehood for Serbia

On March 1, 2012 when Serbia formally became a candidate for statehood in the European Union, it had been over 50 years since a state was added to the U.S. So from an American standpoint, watching the E.U. expand “in real time” from “across the pond” might be like a person in our solar system watching the unfolding of a new solar system light-years away and thinking, “So that is how it must have looked when it happened here.” Of course, the accession of additional states in the E.U. reflects the distinct time and culture of twentieth and twenty-first century Europe rather than of the world in the late eighteenth century. Even so, certain commonalities can be discerned.

The complete essay is at Essays on Two Federal Empires.