The U.S. Supreme Court: Too Much Ideology in Jurisprudence?

Should the electorate in a republic be able to remove Supreme Court justices due to their past decisions on particular cases? Can this basis be distinguished from removing a justice for judicial incompetence? One thing is clear: the general public does not have the technical expertise to perform a “supervisor’s evaluation” on a judge. Obviously, anyone can see that someone who skips work on a regular basis is not fit for the job, but this is different than evaluating a job by the technical criteria of the profession. Distinguishing between a particular decision and general judicial approach, for example, is more difficult. Moreover, it can be difficult to balance the rights of popular sovereignty (i.e., rule by the people) against the rule of law without respect to majority opinion.

The justices of the U.S. Supreme Court in 2012.

To the extent that a justice’s interpretation of the law involves his or her political ideology given the discretion or latitude involved in jurisprudence, the electorate in a republic has a claim on who should serve as a justice. To be sure, constitutional amendment is another means by which the people can overcome a supreme court, though this route is cumbersome and limited to a particular case or area of law. The element of political ideology in a constitutional-law decision means that a clear line of separation does not exist between politics and constitutional jurisprudence. Accordingly, the following view can be criticized.

“I think it’s a mistake for a party, as a party, to state a position that a certain judge should be thrown out, because then you are introducing partisanship into a system that is supposed to be nonpartisan,” said Bob Martinez, a prominent Republican lawyer who was once the United States attorney for the Southern District of Florida. “And when you have elected officials, on the right or left, criticizing judges publicly it can become very dangerous and it can undermine the public’s faith in the judiciary.” It is also very dangerous to have a very few number of unelected citizens serving as justices making de facto final decisions involving political ideology. Moreover, the ideological differences frequently present on a bench means that partisanship is already present, even if it is subtly filtered through the prism of jurisprudence.

In the case of southeastern Florida, the institution of justice itself can be subject to severe repute—that is, whether it exists at all. Once when visiting Miami, I tried to enter a local bus at the bus-transfer-station at a regional train station. I say tried because just as I was stepping into the bus, a large black man of about 25 years old who was standing to the side just outside the bus body-slammed me against the opened bus-door to force me out of the doorway. Not all the black people had entered, and the man presumed the right to force me out with a slam. The bus driver saw the violence, and yet refused my request that he contact his company and the police. “That’s just the way it is here,” the black driver told me. "You should not have gotten on then." The sheer blatant nature of the violence and the driver’s reaction gave me the impression that anti-white racism is systemic in Miami and that the system of justice there is at best partial, or prejudiced. Days later, I mentioned the incident to a Miami Beach policeman. “We have cameras on every bus; it didn’t happen.” His attitude being obviously corrupted, I thanked him for his time and walked away. The decadence or corruption of a society is systemic in nature; it is best, therefore, simply to avoid such places even for a brief stay.

Given the corruption and anti-white racism in Miami, a political party may have good reason to target three justices sitting on Florida’s Supreme Court for presuming that the criminal justice system can afford to be sacrificed to legal technicalities. That the three justices had “judged” legal technicalities as sufficient to free a man who had tied up and lit someone on fire suggests that the plight of the justices can be tied indirectly (as enablers) to the systemic injustice in Miami-Dade. That is, Floridians looking unfavorably at the decadence in Miami "culture" may judge Florida’s justice system to be inadequate and thus in need of justices who view it as such. It can even be said that removing the justices was a duty of Floridians who oppose outright aggression in public and enabling by county employees.

The notion that political ideology, including whether the system of justice is sufficient for there to be the rule of law in a society, is somehow absent in a constitutional court’s decisions is perhaps one of the most invisible or unknown naiveties in modern Western civics. One does not have to go back to Gore v. Bush (2000) to detect the presence of an ideological agenda in constitutional court decisions. The Citizens United (2010) case, for example, also decided by the U.S. Supreme Court, involves the ideological view that money is speech and corporations are legal persons and thus having the right of free speech. These positions are not founded in jurisprudence, but rather in ideology concerning wealth and power.

Typically, a justice seeks to portray his or her ideological positions through the lenses of his method of interpreting the constitution, as if such a device rendered the moral values as judicial interpretation. For example, Justice Scalia calls his method “originalist,” “original intent,” or “textualist,” meaning that he applies the words in the Constitution as they were understood by the people who wrote, proposed, and ratified them. It so happens that this method is consistent, at least to Scalia, with his social conservatism. Capital punishment was allowed in 1787, so that practice could not have been viewed, at least by the majority of the conventions’ delegates, as cruel and unusual punishment.

The sheer ease with which Scalia claims he can make decisions on cases in which conservative social ideology is salient suggests that something more is going on than constitutional interpretation. Speaking at the American Enterprise Institute in 2012, for instance, he said, “The death penalty? Give me a break. It’s easy. Abortion? Absolutely easy. Nobody ever thought the Constitution prevented restrictions on abortion. Homosexual sodomy? Come on. For 200 years, it was criminal in every state.” At the very least, Scalia’s own statement does not privilege judicial interpretation; rather, he describes the possible cases in terms of social issues rather than constitutional doctrines. Put another way, if the cases involving such issues are so easy, then they could (and should) be put to the electorate as referendums. Scalia belies his own (and his colleagues’) relatively unique claim to technical expertise, and thus winds up making my point for me—more is going on in U.S. Supreme Court decisions than simply applying methods of constitutional interpretation to legal doctrines and the facts of particular cases. That “something more” can be excised and assigned to legislatures or the people.

As still another example, the U.S. Supreme Court once again weighted in on affirmative action in October 2012. The Wall Street Journal reported that the "80 minutes of intense argument revealed deep fissures among justices' views on the pursuit of diversity in higher education." The fissures just happen to go along with how liberal or conservative the justices were on social issues. In my view, whether the state governments have a compelling interest in diversity in higher education is not a judicial matter because diversity itself is an ideological value. Elected representatives, or the electorate itself, could decide the matter with more legitimacy than in relying on Justice Kennedy's view on affirmative action.

It is not impossible that a constitutional court itself could put to the electorate questions oriented to the ideological element. This would enable justices to concentrate instead on technical judicial matters, which constitute the “turf” on which the juridical expertise is based. In other words, in not being so greedy or “over-reaching,” the justices and the court itself would have more legitimacy. To those who say that putting a referendum to the people, say on whether capital punishment is cruel and unusual punishment, would introduce politics into the decision, I submit that politics are inherent in the decisions already, given the element of political or social ideology. In short, a direct relationship is possible between a supreme court and the people, bypassing the other branches of government. Just as the U.S. Government can bypass the state governments to have direct effect on the people, the U.S. Supreme Court could talk directly with the people via adding questions to the ballot. Alternatively, a court could direct the chief executive or legislature to decide or put to the people questions concerning ideology that bears on a decision. Not being elected, justices do not have legitimacy in determining such questions. Scalia’s statement reads like one that one might hear in a barber shop (or so I would imagine).

In Iowa after its Supreme Court’s decision on gay marriage, the republic’s electorate voted to remove three of the justices who had joined in the majority opinion. In effect, the majority of those citizens who voted were saying that the decision was not just one of judicial interpretation. To be sure, the court’s decision included the juridical matters of constitutional rights irrespective of majority rule, and constitutional method or interpretation more generally.  Nevertheless, the ideological question of whether marriage as an institution should be extended to couples of the same sex was also in the mix. Separating two elements in one decision and weighing the qualitatively different (though not disparate) strands is very difficult, to say the least.

A conflict of interest exists in majority rule weighing its own right against the rights of individuals or a minority faction, but it is also problematic to rely on nine unelected people to decide a society’s meaning of marriage unless there is also constitutional language on language itself (rather than more general clauses that might pertain). Interpretation without the ideological element presupposes more direct constitutional language than “due process” or “equal protection.” Accordingly, the court and the people, as well as their elected representatives, all have a role in what is regarded as “legal opinions” in constitutional law.

Sources:

Lizette Alvarez, “G.O.P. Aims to Remake Florida Supreme Court,” The New York Times, October 3, 2012. 

Mark Sherman, “Antonin Scalia: Death Penalty, Abortion, ‘Homosexual Sodomy’ Are Easy Cases,” The Huffington Post, October 5, 2012.

Jesse Braven, "Justices Clash on Affirmative Action," The Wall Street Journal, October 10, 2012.

Questioning Universal Basic Income

The gist of basic income is that a government “distributes cash universally. As the logic runs, if everyone gets money—rich and poor, the employed and the jobless—it removes the stigma of traditional welfare schemes while ensuring sustenance for all.”[1] The “logic,” I submit, is flawed even if the basic idea is solid.

The notion of a basic income sprung from the desire to “reimagine capitalism to more justly distribute its gains.”[2] Justice here translates into the ideological belief that sustenance itself is a basic human right, and thus should be guaranteed to everyone. The obligation of government follows from this right. Interestingly, the laissez-faire economist, Milton Friedman, “embraced the idea of negative income taxes that put cash in the hands of the poorest people.”[3] But as the poorest may not fill out tax returns, cash payments by governments may more fully realize the objective of a basic income-floor (i.e., no one gets less than the floor-amount).

I submit that just as making sure that every adult has the basic, or floor, income, the notion of such a floor does not justify a government giving cash to everyone—rich or poor, employed or jobless. Adults whose income already exceeds the income-floor do not need additional income to get up to the floor, for such people are already above it. As for the stigma of welfare, which is very real in states like Arizona, the notion of a basic income can appeal to people whose income is above the floor, for they would be free of the anxiety of possibly falling through the cracks of a checkered social net should even a high income end amid continued high expenses. In the wake of the financial crisis of 2008, for instance, many people whose income exceeded a basic floor oriented to sustenance lost their homes when they went under water as real estate markets collapsed—especially in Florida and California.

Orienting the give-out of cash only to adults whose existing income is zero or otherwise below an established floor (i.e., a floor sufficient that sustenance can be achieved) would render such a program more fiscally stable. Whereas Stockton, California, began a test program in 2018 whereby 100 families would get only $500 a month—an amount clearly below sustenance—the requirement of a full-fledged program wherein only adults below the floor would get cash could more easily afford to set a floor that truly allows for substance.  Then nobody, rich or poor, would have to fear not being able to survive.

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1. Peter S. Goodman, “Inequality? California City Is First in U.S. to Try,” The New York Times, May 30, 2018.

2. Ibid.

3. Ibid.

Free Speech in the E.U.: Criminalizing Denials of Genocides

While the world continued to look on—like an impotent rich man who cannot afford Viagra—as a genocide was taking place in Syria (i.e., the systemic killing of a group—in this case, of pro-democracy demonstrators), France’s state senate approved a bill on January 23, 2012 criminalizing the denial of officially recognized genocides, which according to the state includes the Nazi Holocaust and the Turkish killing of Armenians beginning in 1915. In the twenty-first century, fining people and putting them in prison for not wanting to remember things so horrible evinces the same kind of nationalist thinking that had led the twentieth to be the bloodiest century. In contradistinction to that decadent century, turning a new leaf following the Arab spring in the twenty-first is a far better strategy.

Beyond the obvious matter of free speech, which admittedly is not absolute even in America, it should be asked whether law is an efficacious means of barring or changing thoughts. On the day of the vote, a study was released at the Bundestag in Berlin reporting that twenty percent of that state’s population was still anti-sematic. I don’t believe penalizing that prejudice itself (i.e., as a belief apart from any conduct) by the state’s police power forces any change at that level. At most, people would simply hide it—and how would such repression burst out in conduct? I submit it would be better simply to ignore the thoughts and concentrate on conduct.

Europe has had a tendency to codify thoughts as if they belong to the state. In America, that realm is province of the “thought police” that sprang up (as self-appointed) during the 1990s as “political correctness.”  At least with political correctness (such as in saying humankind rather than mankind, and Native American rather than American Indian), the self-appointed enforcer can be told to go to hell. The natural reaction to being accosted in such a presumptuous and pernicious way is to say precisely that which is not desired by the aggressor. Adding the police power of the state to enforce certain beliefs by penalizing others is dangerous not only for society itself, but also for individuals in terms of our quality of life free from anxiety. The over-reaching may even be immoral; it is certainly weakness.

A person may be able to control one’s own conduct more than one’s ideas or beliefs. Besides the futility of law in going after a person’s interior mental life, that domain is inherently beyond the unwanted control of another person. The French law would include up to a year in prison and a fine of about $58,000 for anyone who denies an officially-recognized genocide. Is the reach of the law limited to public speeches or published writings, or are people of France to feel anxious at private parties in their own home? In terms of general anxiety, the law could cost the state’s entire population. Is effectively adding the Turkish killings nearly a century before to the German Holocaust worth this in France? It is not as if that E.U. state borders Turkey.

Therefore, behind the 127 to 86 vote is a rather basic category mistake with respect to jurisprudence. Taking the law beyond its native domain to enforce one’s agenda using the police power of the state undercuts law itself, and thus contributes to the downfall of its legitimacy, even in its proper realm. In other words, in over-reaching, a government can wind up with even less influence over its people through even criminal law.

Additionally, a refusal to respect another’s inalienable right to have certain ideas or beliefs is to treat the rational nature (i.e., thoughts or beliefs) itself as merely a means to one’s own designs, rather than as an end in itself. According to Kant, this is immoral because of the value that is rightfully in reason because it is the assigner of value and thus has absolute value. Treating that which has essentially undefined value (as the source thereof) as having value only in so far as it fits with one’s own ideas or beliefs is wrong.

Might it be, Nietzsche would surely add, that modern moralizers are immoral rather than what we take ourselves to be? Who are the aggressors—les esprits méchants et perniceux? Might it be that human beings are far too presumptuous in what we think we know to venture into any other man’s head with impunity? Am I understood? This medicine is not meant for the weak, Nietzsche warns, who nonetheless have an uncontrollable urge to dominate. These new birds of prey are not entitled to dominate, and yet they somehow convince the strong—through thou shalt not—to be ashamed of those thoughts come out of their innate, self-confident strength. Be ashamed of who you are. The strong self-overcome their most willful instincts in order to experience the pleasure of power that naturally goes with their strength. The weak who seek to dominate, on the other hand, are driven by their instinct to overcome the resistance of others by passive aggression (owing to the weakness of the instinct, which they can’t seem to resist anyway) and cruelty (including genocides). Hitler was weak, but so too is the presumption to punish others for their beliefs in retaliation. Birds of a feather, these new birds of prey most certainly are. It is amazing they can even fly.

“By aiming at more [in pride],” Augustine proclaims in City of God (bk 14, ch.13), “a man is diminished.” Pride, by the way, is not self-confident strength, for self-overcoming is blocked by self-idolatry. Perhaps expressing the belief in over-reaching, which is an idea of the immoral and weak, should itself be punishable by a year in prison. This would probably only strengthen the belief, which in turn would weaken the believer even as he or she presumes to be more moral as a self-denying martyr. Lest the advocates of victims become ourselves victimizers (e.g., the Crusaders), it is a good policy for a general population to keep an eye on us too, for we can get quite carried away as moral zealots without realizing how we are affecting others (i.e., rational nature of others). That there have been (and will be) victims of horrible things in the world, does not give anyone the right to punish others for their thoughts or beliefs, for such intangibles are our inner castles, not to be treated like sand by pushy waves.

Fortunately, good sense prevailed and the French Constitutional Council struck down the law that would have criminalized the denial of the Armenian genocide by the Ottoman Turks. “We consider the annulment of the legislation by the Constitutional Council as a step that complies with the principles of freedom of expression and research, the rule of law and international law in France,” the Turkish Foreign Ministry said after the Council’s decision. This statement is ironic, given that the accession of Turkey into the E.U. had been held up in part out of concern in Europe that Turkey was not yet sufficiently ensconced in Western values. Perhaps it should have been asked whether France should be a state of the E.U.

Sources:

Scott Sayare and Sebnem Arsu, “Genocide Bill Angers Turks as It Passes in France,” The New York Times, January 23, 2012. 

Scott Sayare, “French Council Strikes Down Bill on Armenian Genocide Denial,” The New York Times, February 29, 2012. 

The U.S. Federal Reserve as a Regulator of Banks: An Institutional Conflict of Interest

According to the Wall Street Journal, the Federal Reserve “has operated almost entirely behind closed doors as it rewrites the rule book governing the U.S. financial system.” The paper notes that this has been in sharp contrast to the trend at the Fed toward greater transparency in its interest-rate policies and emergency-lending programs. The complaint of a dearth of public meetings misses, however, not only the scripted nature of such displays, but also the more fundamental question of whether a central bank buffered from political pressure should play such a salient role as regulator. At the very least, the democratic deficit and a lack of accountability may be exacerbated by the Fed’s greater role as a regulator of banks—particularly after the major investment banks become commercial banks, and thus subject to the Fed’s regulations.

“While many Americans may not realize it,” the Journal continues, “the Fed has taken on a much larger regulatory role than at any time in history. Since the Dodd-Frank financial overhaul became law in July 2010, the Fed has held 47 separate votes on financial regulations.” This was as of February 22, 2012. In the process, the Fed was “reshaping the U.S. financial industry by directing banks on how much capital they must hold, what kind of trading they can engage in and what kind of fees they can charge retailers on debit-card transactions.” Unlike other regulatory agencies, not even the Fed governor’s votes were made public. Considering the contact that Fed officials had with their regulated banks on these issues and the Fed’s ties to banking itself, the lack of public meetings (only two on the 47 votes) suggests an opportunity for a conflict of interest to operate below the radar in the interest of the banks while the public holds the risk.

On the Volker Rule, which was to be the part of the Dodd-Frank law that prohibits banks from proprietary trading using their own funds because doing so is too risky for a bank too big to fail, Fed officials met with bankers at JP Morgan Chase sixteen times, Bank of America ten times, Goldman Sachs nine, and Barclays and Morgan Stanley seven each. On the Dodd-Frank provision on regulating derivatives—something a dissenting Fed governor claimed has exemptions that are too wide—Fed officials met with JP Morgan Chase fourteen times, Deutsche Bank and Goldman Sachs twelve each, and Bank of America, Barclays, Morgan Stanley and Wells Fargo eleven each. Even just in relying on these banks for information and feedback, the Fed risks getting biased input on which to make judgments.

Morgan Stanley may have insisted that the regulation of commodity derivatives would put farmers who rely on the futures market at risk. Moreover, the bankers could have insisted that an exemption would not be abused, or they could coordinate their own pressure with a farming lobby and U.S. senators from farm states. The bankers’ intent was obviously to minimize the cost to them in the regulations that are put in place. The public interest, or risk to the public, was beside the point.

The banks played a similar role in the late 1990s as they lobbied the White House and Sen. Phil Gramm to keep derivatives unregulated. That unseen monster winded up biting us in the ass in 2008. Therefore, putting the public interest at risk is not just part of some theory; giving the regulated too much influence in the writing of regulations involves a conflict of interest that can literally result in the collapse of the global financial system. A public-level perspective, rather than that of a firm or industry, must be primary among regulators or the system itself is put at risk.

Pointing to the lack of public meetings in the Fed’s approach as a regulator, Sheila Bair, former chair of the FDIC, stated, “People have a right to know and hear the discussion and hear the presentations and the reasoning for these rules. All of the other agencies which are governed by boards or commissions propose and approve these rules in public meetings.” Fed officials point out that open meetings tend to be scripted and even perfunctory. As if to state good intentions are sufficient, Fed chair Bernanke said in a 2010 speech, “As an agent of the government, a central bank must be accountable in the pursuit of its mandated goals, responsive to the public and its elected representatives and transparent in its policies.” However, a central bank is closer to its banks in many ways that it is to the public or its elected representatives. In fact, a central banks is supposed to be buffered from political influence. While this makes sense in terms of monetary policy, regulating is a separate function and a democratic deficit there is problematic.

I think the public meeting issue is a red herring. The real problem lies in a central bank going beyond monetary policy and acting as a bank for the banks to also be a regulatory agency. That the Fed’s regulatory process differs from those of the “real” agencies suggests that the Fed officials do not even seen the Fed as such an agency. As Bernanke said, “a central bank is . . .” This is the Fed’s identity. It is distinct from a regulatory agency. Accordingly, Congress should establish a separate regulatory agency to cover the banks, leaving the Fed officials to concentrate on their core functions in operating a central bank. It is not as if Bernanke “got it right” leading up to September 2008. Even in 2007, he did not think the declining housing market would cause much of a problem. He had no idea that the swap and derivative markets were about to implode. This is not a good basis on which take on additional responsibilities, particularly writing new banking regulations. In other words, it is not like much would be lost were banking regulation written and enforced by a regulatory agency rather than the Fed. In addition, such an agency would not be so closely tied to the banks as the Fed is, as hinted at by its myriad of meetings with them. Such an agency would not be explicitly distanced from political pressure as the Fed is.

There is nothing wrong with elected lawmakers and executive branch officials making sure that the laws they have passed and are enforcing, respectively, are being operationalized and enforced by regulators who keep the public interest foremost in mind. As a central bank, the Fed is neither under the U.S. President in the executive branch nor under Congress. Meanwhile, Fed officials are very close to the banks they regulate. The problem of accountability that is in the Fed’s independence from the two branches added to the conflict of interest of the Fed being so close to the banks it regulates sets the public up for the sort of thing we saw in September 2008. That crisis did not come out of nowhere, and the reasons for it go beyond the housing market. At the very least, relying so much on an “agency” (and chair!) that failed to anticipate September 2008 and then geared a bailout to the banks rather than to the millions of foreclosed borrowers (hint: conflict of interest!) to write and enforce additional banking regulations on an industry that does not want them is beyond stupid; it is suicide. Meanwhile, the issue was presented as one of public meetings, which were scripted anyway and did not prevent the Fed from meeting with its bankers.

Source:

Victoria McGrane and Jon Hilsenrath, “Fed Writes Sweeping Rules From Behind Closed Doors,” The Wall Street Journal, February 22, 2012.

Related books: 

Essays on the Financial Crisis

Institutional Conflicts of Interest

Limiting Bank Size: Crude But Advisable

In February 2012, Tyler Cowen claimed in the New York Times that people across the political spectrum were “talking about splitting up America’s large banks.” At the time, I could discern no such talk, although this does not mean that it was not going on. As the Dodd-Frank financial reform law was being written in 2010, the option of splitting up banks like Bank of America, Goldman Sachs, and JP Morgan Chase was quietly but assiduously kept off the front burners. It is difficult to believe that the big banks would have relaxed in their efforts to relegate such threats in early 2012 as if the passage of the legislation in 2010 meant that more astringent options were no longer possible. In his article, Cowen includes some other questionable claims. Reading between the lines, he seems to have been “playing by the rules” in support of the big guys.

Even as Cowen notes that “before its collapse, Lehman had a capitalization of about $60 billion, compared with the $143 billion capitalization of JPMorgan Chase [in early February 2012],” he goes on to characterize breaking up the biggest banks as penalizing size rather than failure. In doing so, he is conflating a regulation with the market mechanism. Whereas the latter is supposed to penalize failure, there is nothing wrong with a regulation limiting size, as it is often correlated with market (and political) power at the expense of competition (and democracy). Moreover, limiting size is not to penalize it. As Cowen himself admits, “banks are usually wealthier, nimbler and smarter than their regulators, at least when it comes to finding loopholes in the regulations or making their moves more opaque.” Limiting the power of bankers by limiting their respective bank’s assets makes perfect sense in protecting the regulators from being unduly pressured from their regulatees.

Furthermore, Cowen conflates bailing out a big bank with bailing out its parts after a spin-off as if a small bank failing were somehow as damaging as a big one going down. He argues that “if the resulting parts of a divided bank cannot turn a profit, the split-up may prompt the very bailout it was trying to avoid.” This is not true, as “the very bailout” to be avoided pertains to that of the big bank rather than any of its parts.

Cowen also assumes that the smaller banks would necessarily be bumping their heads against the maximum size allowed. He argues that “the incentives for the new, smaller banks would be unhealthy. Those banks could make mistakes or take on bad risks without being punished very much in terms of capitalization or revenue, because of their legally capped size. Even if they made big mistakes, these banks would probably be pushing on the frontier of maximum allowed growth.” In other words, he assumes that a limit on size would somehow eclipse any remaining market mechanism. Perhaps he is assuming an overly astringent limit, such as 50 employees. There is a lot of room for limits below a $143 billion capitalization without eviscerating the market mechanism.

In fact, Adam Smith would doubtless maintain that a market with smaller competitors functions better in terms of competition “rewarding” good performance and “penalizing” incompetence. It is as if we are so used to corporate capitalism that we assume that Adam Smith’s version cannot work. I would argue that Smith’s version is actually superior with regard to the market mechanism. Because that mechanism can “freeze up” rather than price-adjust for added risk, we should not rely exclusively even Smith’s competitive market. Given the downsides of the market mechanism itself, limiting the size (and thus power) of the participants is certainly justified. It is not “penalizing size.” I do not believe that Cowen has a firm grasp on either the market mechanism or the nature of government regulation.

Source:

Tyler Cowen, “Break Up the Banks? Here’s an Alternative,” The New York Times, February 11, 2012. 

Losing the Middle Class: An Educational-Industrial Policy

Beneath the headlines showing new figures on unemployment (which do not include the unemployed who are no longer looking for work or applying for unemployment compensation) is the story of the changing distribution of jobs in the American economy. That distribution in turn can give rise to cultural or societal changes. When the jobs in the economic middle are disproportionately lost, American society increasingly resembles a tale of two cities—and by this I do not mean Augustine’s heavenly and earthly cities though the realms of the “haves” and “have nots” could admittedly be called as such by materialists.

According to CNBC, a “report looked at 366 occupations tracked by the Labor Department and clumped them into three equal groups by wage, with each representing a third of American employment in 2008. The middle third — occupations in fields like construction, manufacturing and information, with median hourly wages of $13.84 to $21.13 — accounted for 60 percent of job losses from the beginning of 2008 to early 2010.” The job market turned around since then, but those fields represented only 22 percent of total job growth. “Higher-wage occupations — those with a median wage of $21.14 to $54.55 — represented 19 percent of job losses when employment was falling, and 20 percent of job gains when employment began growing again. Lower-wage occupations, with median hourly wages of $7.69 to $13.83, accounted for 21 percent of job losses during the retraction. Since employment started expanding, they have accounted for 58 percent of all job growth. The occupations with the fastest growth were retail sales (at a median wage of $10.97 an hour) and food preparation workers ($9.04 an hour).” By mid 2012, each category had grown by more than 300,000 workers since June 2009.

Essentially, the job expansion in the wake of the 2008 recession proceeded on two fronts—the high and low ends, rather than in the middle. Microsoft, Google, and Facebook represent high-end employers, while McDonalds, Walmart, and Starbucks hire at the lower end. The wealthy increasingly shopped at Whole Foods while the service industry employees bought their food at Walmart. This rendering is of course simplistic, but separation of two distinct cultures based on wealth is clear as gated communities were becoming increasingly popular among the upper middle-class and the rich in the first decade of the twenty-first century.

In terms of education, the wealthy can send their kids to an Ivy League college, while the pro-profit colleges give a training-based inferior education to the service employees. In actuality, those employees are being trained rather than educated. The lack of education can be seen by the reliance on scripts for employees at many retail establishments. The unthinking herd mentality can be observed from the ubiquitous “have a good one!” which is grammatically incorrect and generally vacuous in meaning. A good what? The antecedent is never specified. The sheer reliance on scripts suggests that were the customers to gleam the true condition of the employees, there would be shock and awe, as in, how could we as a society have so failed the younger generation? Put another way, the centralized training of the chains (we are born free but chained to the culture invented by retail) supplants the education (not training!) that every young person should have. The eclipse of the value of education is a salient though invisible feature of the earthly city, while the inhabitants of the heavenly city make sure that their kids are well-educated. In the earthly city, the blind are leading the blind, and nobody believes he or she can be wrong. Yet how different is the actual condition on the ground!

In the post-industrial society, government policy can emphasize education for the masses, such that the higher-end vocations are “filled to the brim” and the lower-end jobs minimized. The United States can and should orient its citizenry to areas of comparative advantage rather than simply relying on the labor market to assign the distribution of jobs. For example, after its import-substitution policy, India stressed “home grown” computer science and engineering vocations in line with the view of G.D. Birla and J.N. Tata that British India needed to replicate British industry rather than be dependent on it (Gandhi opposed this strategy). In the United States of the twenty-first century, expanding excess to college and university education that is not immediately eclipsed by training would ironically enable people entering the workforce for the first time to go into the higher-end professions. In short, America needs an industrial policy that highlights education such that the upper- and middle-income professions expand proportionately at the expense of the lower-end jobs.

Source:

Catherine Rampell, “Majority of New Jobs Pay Low Wages, Study Finds,” The New York Times, August 31, 2012.

On Leveraging the U.S. Debt-Ceiling: How the Market Mechanism Handles Trust

On May 9 2011, U.S. House Speaker Boehner insisted “on trillions of dollars in spending cuts, and no tax increases, as the price for rounding up enough votes to allow more borrowing and prevent the country from defaulting on its debt,” according to the Huffington Post. The Ohio Republican had “said failure to increase the borrowing limit [in the summer of 2011] would trigger a financial disaster for the United States and the world.” On May 12^th in Congressional testimony, Ben Bernanke, chairman of the Federal Reserve Bank, cautioned against using raising the debt ceiling as leverage for getting a particular partisan policy-prescription on federal spending enacted into law. Richmond Fed President Jeffrey Lacker had told Reuters, “I do share the chairman’s concern that going up to the edge and playing chicken on the debt ceiling is not a wise strategy.”

Meanwhile, GOP U.S. Senators and House Representatives had been hearing from constituents warning them not to raise the debt ceiling.  “Enough is enough!” such citizens were saying. This pressure was geared to getting the U.S. Government to live closer to its means rather than resorting to its power to increase the debt it can issue without limit. Even so, U.S. Senate Majority Leader Harry Reid said on May 10^th that tax increases may be needed, along with spending cuts, to help rein in the deficit. Moreover, he warned against ultimatums. “We shouldn’t be drawing lines in the sand,” he said according to The Wall Street Journal. This was not stopping Sen. Bob Corker, who was urging an automatic spending cap of 20.6% of GNP (when the fiscal 2011 figure was estimated at 24.3%) as a condition of passing an increase in the federal debt limit.

Given the existence of contending policy prescriptions, using default for leverage on one side is faulty. Aside from the implicit presumption that one side of the debate has a monopoly on truth, playing with fire where the viability of the financial system itself could hang in the balance does not evince much statesmanship and it could imperil the operation of the market mechanism itself.

Trust is vital in the very nature of a market. If trust is up for grabs, the increased volatility can freeze the market mechanism itself. Rather than simply increasing a price to account for the added risk, a market mechanism can simply close down even if trust is questioned. The reason is that the mechanism reflects human nature itself. Trust does not behave along a continuum as does risk/reward. Rather, people trust someone or something only to a point at which an implicit “all or none” mental calculation or feeling occurs. Beyond that point, the picture itself is fundamentally different. A shift in risk/return does not come into play because fear is choking off any action. In other words, human beings in fear or lack of trust freeze up rather than slow down. The market mechanism’s interval of risk/return tradeoffs reflecting in adjusting price is inconsistent with this feature of human nature as manifested even in a market mechanism. There is thus a fundamental flaw in the mechanism where it diverges from how human nature reacts to fear as lack of trust.

According to Alan Greenberg, former Chair and CEO of Bear Stearns, “Without reciprocal trust between the parties to any securities transaction, the money stops. Doubt fills the vacuum, and credit and liquidity are the chief casualties. Bad news . . . has an alarming capacity to become contagious and self-perpetuating. No problem is an isolated problem” (Greenberg, p. 3). Money simply stopping trumps price adjusting to reflect the increased risk from less trust because trust in human terms does not function as intervals of degrees. Accordingly, market theory itself, specifically in its risk/return tradeoff running the gambit, contains a flaw with respect to increased levels of volatility due to “trust issues.”

In using the debt ceiling as a bargaining chip for political leverage, the Republican lawmakers in the U.S. Government were risking the flaw being triggered. In other words, those politicians were implicitly assuming that the market would simply adjust to the added risk rather than shut down. Besides the problem in the lack of statesmanship—a political problem—the market mechanism itself contains a fundamental flaw in need of being addressed. Specifically, higher risk that kicks in even just close to the lack-of-trust-threshold can freeze the mechanism itself due to how human nature handles trust as a more of an “all or none” than “matter of degrees” phenomenon even as we wrongly suppose the market handles trust along an interval of prices. Unfortunately, we love the beauty of the latter even after having realized in September of 2008 that it does not hold.

Sources:

Alan C. Greenberg, The Rise and Fall of Bear Stearns (NY: Simon & Schuster, 2010).

Janet Hock and Carol E. Lee, “Democrats Oppose Spending Cap Plan,” The Wall Street Journal, May 11, 2011, p. A4.

The Huffington Post, “John Boehner, GOP Seek Leverage in Talks Over Raising Debt Ceiling,” May 12, 2011.

Strategic Thinking beyond the Business Plan

“When smart people came up with ideas for well-conceived business opportunities, we said go for it. As always, organizational charts, management consultants, and business plans played virtually no role in any of this. My own strategic thinking I did mostly while showering or shaving.”

—Alan C. Greenberg, former Chairman and CEO of Bear Stearns

Similarly, when I write an essay, I inevitably pass on first constructing a formal outline and go instead off of what I have worked out in ratiocinating while exercising, in transit, or showering. Freeing the mind up to search for and try out connections between ideas, and working a theory over and over—like kneeding dough or forming a clay pot on a wheel—are inconsistent with too much structure.

The human mind needs its own space to solve abstract or applied problems needing considerable thought. Subjecting the processes of theory-construction and problem-solving (“critical thinking”) to too much structure is simply not in line with the nature of the mind itself. Human reasoning, it turns out, is not a linear process that necessarily fits within the confines of a business plan or consulting diagnostic tool. Particularly if creativity and innovation are to be encouraged, mechanistic structure must succumb to organic process.

For example, I did a consulting project as part of an organizational design senior seminar that I took in college. The professor had developed a structured organizational audit—a diagnostic tool geared to detecting discrepancies between an organization chart and actual communication. As he had developed the instrument, we were naturally to rely on it in making our recommendations to the clients. I used the tool on a computer retail store and proffered recommendations from it. Because the business was family-owned and operated, I could see that the communications were in part a function of the family dynamics, which the professor’s organizational audit failed to pick up. So I asked some additional questions and made some supplemental recommendations, which the business owner/manager found quite useful—unlike those that came from the audit.

Even though the professor graded me lower for adding the recommendations, the client went so far as to call him to urge that an A be given to me for the project. From what the client told me later, the professor was perhaps too attached to his “organizational audit” tool (which he used in his own consulting practice). My orientation as a novice consultant was neither to my grade nor to the tool; rather, I wanted to help the owner/manager by proffering him insight that he could use to solve his problem. Although I cannot be sure at this point, I might have come up with my final recommendation to him on the way to a class, during a run, or even while shaving.

So I can totally understand Alan Greenberg’s aversion to organization charts, business plans and “professional” consultants. A true consultant comes from a perspective of expertise that clients do not have. For example, a consultant could be an academic or a nearly-retired practioner. In either case, the advice should be viewed as supplemental to the client’s focal situs “on the ground”—that is, consulting advice is something for a client to digest and possibly integrate with his or her larger considerations outside the range of the consultant.

Being geared to helping a client, a consultant should be able to let go of his or her “black bag” if the tools therein fall short in diagnosing the organizational dysfunction, or “illness.” I suspect that one's “gut” can come into play, effectively transcending the mechanistic tools, only if the consultant cares, because only then is he or she intrinsically oriented to the client’s situation rather than the consultant’s own bag of tricks as ends in themselves. In the end, consulting is interpersonal—helping others who are suffering from a problem. Such problems typically involving human beings, it should be no surprise if a consultant should approach them from more than one level.

Therefore, both strategic and consulting thinking ought to be accommodated in the sense of giving them some organic free range. Treating business plans, organizational charts, and diagnostic tools as ends in themselves, as if they were rational beings (i.e., Kant's kingdom of ends), is ultimately self-defeating, if not suffocating. Just as managing can sometimes be informed by simply wandering around, so too the strategic mind needs some room to roam.  

Source:

Alan C. Greenberg, The Rise and Fall of Bear Stearns (NY: Simon & Schuster, 2010)

The Financial Crisis of 2008: On the Role of Negligence Breaching Fiduciary Obligation

Roger Lowenstein laments that “New York Times columnist Joe Nocera lamented that ‘Wall Street bigwigs whose firms took unconscionable risks … aren't even on Justice's radar screen.’ A news story in the Times about a mortgage executive who was convicted of criminal fraud observed, ‘The Justice Dept. has yet to bring charges against an executive who ran a major Wall Street firm leading up to the disaster.’ In the same dispassionate tone, National Public Radio's All Things Considered chimed in, ‘Some of the most publicly reviled figures in the mortgage mess won't face any public accounting.’ New York magazine saw fit to print the estimable opinion of Bernie Madoff, who observed that the dearth of criminal convictions is ‘unbelievable.’ Rolling Stone, which has been beating this drum the longest and with the heaviest hand, reductively asked, ‘Why isn't Wall Street in jail?’”

Lowenstein interprets these sentiments as implying “that the financial crisis was caused by fraud; that people who take big risks should be subject to a criminal investigation; that executives of large financial firms should be criminal suspects after a crash; that public revulsion indicates likely culpability; that it is inconceivable (to Madoff, anyway) that people could lose so much money absent a conspiracy; and that Wall Street bears collective guilt for which a large part of it should be incarcerated.”

Lowenstein argues that “(t)hese assumptions do violence to our system of justice and hinder our understanding of the crisis. The claim that it was ‘caused by financial fraud’ is debatable, but the weight of the evidence is strongly against it. The financial crisis was accompanied by fraud, on the part of mortgage applicants as well as banks. It was caused, more nearly, by a speculative bubble in mortgages, in which bankers, applicants, investors, and regulators were all blind to risk. More broadly, the crash was the result of a tendency in our financial culture, especially after a period of buoyancy, to push leverage and risk-taking to the extreme.”

Lowenstein also ticks off a loose monetary policy (i.e., extremely low interest rates), unaccountability at Fannie Mae and Freddie Mac, weak financial regulation, and an overconfidence in “risk management” methods in arguing that we should not be reductionist in ascribing the crisis to fraud alone or even primarily.  

Analysis:

Lowenstein is undoubtedly on firm ground in labeling the crisis a “multi-causal” affair. In a general sense, the positive feedback loop wherein everyone benefitted from a rising housing market turned to a negative feedback loop once that market decided to take a hard landing. However, even though he makes a good point that criminal fraud was probably not pervasive on Wall Street, he downplays the litigation that is still possible in going after senior managers at Wall Street banks for negligently breaching their fiduciary obligations to stockholders—the negligence being in the sheer recklessness (which I suspect is a function of individual personalities).

For example, Richard Fuld essentially ignored his risk committee at Lehman Brothers as he added leverage up to forty times value in order to continue buying CDO’s and commercial real estate by the bucketful—his ultimate objective most likely being to bring the bank up to the big league (e.g., with banks such as Goldman Sachs). Would not such recklessness based on egotism constitute fiduciary negligence? It is as though Fuld were under the illusion that the stockholders’ wealth in the bank was his own because of how much of the stock he himself held.

As another example, even Alan Greenberg over at Bear Stearns may have been negligent in not alerting the board as Jim Cayne, the CEO at the time, became “more aloof and full of himself” even as two of the bank’s hedge funds were going down in July 2007 (Greenberg, p. 145). Incredibly, Cayne was playing in a card-game tournament in Nashville for over a week as the executive committee labored daily over whether to liquidate the two hedge funds at the bank that were losing money from their mortgage-related securities and the ensuing redemption calls from nervous investors. Virtually everyone in the senior management of Bear Stearns should have informed the board of Cayne's conduct (i.e., his priorities, which evinced immaturity befitting the man's pot-smoking at the tournaments and even at work). If the directors would have failed to act (e.g., being too cozy with Cayne), the board too should be held by stockholders as woefully negligent.

Furthermore, being on the risk committee, Greenberg may have been negligent in deferring to Warren Spector on the risk issuing from the fixed-income area (e.g., mortgage-backed securities). Claiming that Spector was “imperious” in that area is no excuse for Greenberg failing to exercise diligence given the amount of business the bank was doing in CDOs. Greenberg recounts that “multiple variables contributed to an extremely complex dynamic, yielding consequences that I hadn’t previously encountered” (Greenberg, p. 156). However, he admits to have told Warren a few years earlier to unload CDO’s within 90 days because of the risk involved. Greenberg simply gave up in pushing back from the financial pressure of the large profits being made. Accordingly, he gave up on due diligence on the risk committee and should be held accountable by Stearns stockholders. 

Incidentally, I admire Greenberg for his straightforward recounting of the events leading up to the collapse of his bank, even though I do not buy his account of his role on the risk committee. Perhaps the lesson is that even an ethically solid and competent person is fallable, and may even inadvertantly fall into a negligent pattern of complacency in the midst of momentary profit. The depth of the causes leading to the financial crisis may be evinced, moreover, in that a person such as Greenberg became unintentionally complicit. As Greenberg himself observes, Jamie Diamond at Morgan had urged his bank out of the mortgage-related securities business altogether as far back as 2006 as the housing market was peaking. From this vantage-point, Greenberg himself must surely know in hindsight that he had fellen short.

Whereas Lowenstein claims that one of the causes of the crisis was that risk management methods were followed, I contend that they were relegated or ignored even by the risk averse because the standards stood in the way of large profits. To be sure, Greenberg and others on risk committees relied on the AAA ratings from Moody’s and S & P (though Greenberg had been sufficiently worried to urge quick sales of the bonds). Even so, it should have been prime facie evident that a mortgage-based bond is not a Treasury bond. Furthermore, the rating agencies’ managements should not be held blameless, as they did the bidding of Bear Stearns and Lehman in exchange for lucrative fees;  there was undoubtedly fraud or at least negligence in this conflict of interest.  

Whereas fraud may have been limited largely to salesmen at mortgage brokerage firms and the rating agencies, breaches in fiduciary obligation were, I suspect, running rampant on Wall Street. In other words, money being easy and regulation being light (or non-existent in the case of the CDOs) did not give the banks’ managements a pass on their fiduciary obligation to exercise a duty of care over stockholder’s equity in the banks. Whereas cheap leverage and lack of oversight are context, recklessness with others’ wealth may constitute the principal cause—the lack of concern for risk being part of it.

Generally speaking, boards allowed senior managements—as evinced in the persons of Dick Fuld and Jim Cayne—far too much rope with which to hang themselves. It is astounding to me that people like Fuld and Cayne were able to get anywhere near the authority of a CEO. Their glaring immaturity and incompetence may point to a systemic problem in corporate governance going far beyond what even institutional stockholders realize. It would seem that the boards of Lehman and Stearns were either asleep or in somebody’s pocket (which involves at the very lease a stark conflict of interest). Although holding the managers accountable for their recklessness leading up to the financial crisis of 2008 would be a step in the right direction, stockholder interest warrants systemic reforms to corporate governance itself such that “upper” managements are given much shorter leashes (and stature).  

Sources:

Roger Lowenstein, “Why No Wall St. Bigwig Has Been Prosecuted,” MSNBC.com, May 16, 2011.

Alan Greenberg, The Rise and Fall of Bear Stearns (NY: Simon and Schuster, 2010).

The Electoral College: A Check on Excess Democracy

As a delegate in the U.S. constitutional convention, Governeur Morris stated on July 19, 1787 that the proposed National Executive (i.e. the U.S. President) should be “a firm guardian of the people and of the public interest.” (1)  Given this role, Morris maintained that it “cannot be possible that a man shall have sufficiently distinguished himself to merit this high trust without having his character proclaimed by fame throughout the Empire.” (2)   In other words, presiding requires a requisite credibility or stature that may be difficult to find in a territory on the scale of an empire.

The E.U. has obviated this problem by having presidencies of particular E.U. governmental bodies the a state government serving in the E.U. Presidency, a figure-head “office” based on a six-month rotation. The U.S., on the other hand, put all of their eggs in one basket in terms of having one president with substantial power in being commander in chief and having a legislative veto as well as a “bully pulpit.” Considerable emphasis is thus placed on the office’s selection process.

In the constitutional convention, Morris believed that the people at large “would be as likely as any that could be devised to produce [a President] of distinguished Character.” (3) Morris was assuming that at least one candidate can be found whose character has been proclaimed by fame throughout the Empire. Differing from Morris, Gerry argued on July 19 in the convention that the “people are uninformed, and would be misled by a few designing men. He urged the expediency of an appointment of the Executive by Electors to be chosen by the State Executives.” (4)  In other words, suitable candidates could exist, but the people would not be sufficiently aware of their characters to discern the wheat from the chaff.

Electors selected by the governors and presidents of the States would be of lesser number and thus able to come to know the candidates and thus avoid electing a lemon. However, Williamson, also on July 19, “had no great confidence in the Electors to be chosen for the special purpose. . . . They would be liable to undue influence.” (5) Even so, the convention voted that the President would be appointed by electors to be chosen by the State legislatures.

Williamson turned out to be right; the political parties have had tight influence on the States’ electors. The electors would also prove to be excessively subject to the influence of the  citizens who vote for them, rather than being a check on the passions and ignorance of the wider public.  In other words, the selection process has come to enervate an intended check on the democracy of the moment (e.g., the flavor of the month).  Presidential elections have become virtual popularity contests.  The matter of finding someone with sufficient maturity and credibility to preside over the common good has been lost.  Accordingly, the presidents have been highly partisan—even going against their campaign promises for political expediency. My point is that we can look beyond the individual presidents and find that the selection process itself is perhaps biased against producing good governance.

It seems to me that a better alternative would be to have the governors of the States meet together to select the U.S. President. The governors are apt to know the candidates (or can meet them), and could assess them from the standpoint of presiding and executing law. Lest this alternative be thought to slight representative democracy, it could be pointed out that governors are popularly elected and thus accountable to the people.

In actuality, the alternative is both rooted in democracy and capable of providing a check on some of its drawbacks (e.g., popularity contests). Perhaps having the governors select the office would prompt voters to take their governor races more seriously. Additionally, this alternative might provide a needed check on the encroachment of the Federal Government onto the domains of the States (i.e., beyond the enumerated powers in the US Constitution), since the State governments lost their involvement in the U.S. Government in 1913 when U.S. Senators were no longer appointed by the State governments.

In short, the move would strength democracy as well as federalism. This is merely one alternative; doubtless other good ones exist as well.  My main point is that such alternatives should be dug up and debated using the American media and our representatives as conduits. We ignore the bias in the selection process at our own peril. Slighting the problem is itself indicative of the danger in the current process.

1. James Madison, Notes in the Federal Convention of 1787. New York: Norton, 1987, p. 324.

2. Ibid.

3. Ibid., p. 327.

4. Ibid.

5. Ibid., pp. 328-29.