Tuesday, June 12, 2018

Judge Allows ATT Purchase of Time Warner: Vertical Integration Escapes Anti-Trust Objection

Typically horizontal mergers, as when one company merges with another that makes similar products, have trouble when it comes to anti-trust, restraint of trade, objections. The go-ahead of the ATT merger with Time Warner in mid-2018 suggests that vertical combinations, such as when distributor buys a content-creator, survive on anti-trust grounds. Even if trade is not restrained, another problem is present—that of conflicts of interest. Anti-trust law is oriented to preventing restraint of trade rather than such conflicts. Accordingly, just because the ATT merger survived on anti-trust grounds does not mean that a regulatory gap did not exist at the time.
In 2016, a U.S. judge had blocked the merger of Staples and Office Depot because it could have left consumers with “only one dominant retailer” focused on office products.[1] In other words, such a retailer could easily have been a monopolistic price-setter rather competitive price-taker (from the market). The market itself should be dominant, anti-trust theory claims.
The case of ATT, which was known still in 2018 as a cellphone provider, would add the owner of programing content, including HBO, Warner Bros, and CNN by buying Time Warner. ATT was not trying to corner the market, in other words, on cellphones. The problem lies elsewhere. In this case, ATT could privilege its own devices over other means of watching the content. Although such a privileging could restrict trade at the distributor level, the underlying problem is that of an institutional conflict of interest: privileging one’s own distribution over other means of seeing the content.
Yet the obligation to maintain other means of distribution may be illusionary. That is to say, ATT may not have any such obligation. If the company’s strategy is to purchase the content (e.g., HBO and CNN) exclusively to be distributed through ATT products, no price differential would exist between ATT’s means and those of other distributors. The ethical problem exists if ATT allows other distributors of the content, for the temptation would then be to charge those others more in order to privilege ATT’s own means of delivering the content. My point is merely that ATT could ethically restrict its own acquired content to its own devices; the ethical problem bumps up against the human nature of business only if ATT adds its own distribution devices to others in providing the acquired content. Anti-Trust law has another orientation, and is thus ill-fitted to this problem. Put another way, unfair pricing (of distribution) is different than, though possibly related to, undue restraint of trade. Both of these market imperfections warrant regulation, so relying solely on anti-trust law is sub-optimal in terms of public policy.

[1] Cecilia Kang, “Why the AT&T-Time Warner Case Was So Closely Watched,” The New York TimesJune 12, 2018.

Slovak Resistance to Expanding the E.U. Bailout in 2011

Richard Sulik, Parliament Speaker of the Slovakian legislature, argued that the only real solution to the debt crisis in the E.U. was rigorous enforcement of the E.U. regulations on budget deficits and public debt. He had been particularly angered by his state, the second poorest in the E.U., having to bail-out a richer state that had consistently violated the E.U. regulations. Additional debt, he insisted, was not a way out for the PIGS. Slovakia, after all, had to adhere to strict limits on everything from budget deficits to inflation rates in order to be able to adopt the euro. “Now when I see what is being allowed for Greece and Italy, it really makes me angry,” Sulik admitted. “We have to pay because of this double standard. It’s a real injustice.” Indeed it was. Bailing out Greece so the state would not default effectively rewarded that state government for profligate spending and tax avoidance in violation of the E.U. regulations.  

Solely from the standpoint of debt, adding more was not a viable way out, according to Sulik. “The more we let [states] violate the rules, the worse things will get,” he said. So he opposed expanding the bailout. Undoubtedly putting a chill in the halls of banks in rich states such as France and Germany, he bluntly stated, “Greece has to go into bankruptcy.” This would demonstrate that the E.U. was not an agency of the big banks holding questionable semi-sovereign state debt.

At the very least, having a state government official resist the interests of the big banks and their politicians in the “core” states was in the interest of a fuller debate within the E.U. as a whole on how to deal with “bad” states. In fact, potentially at least, a state like Slovakia could serve as a check on plutocracy gaining a foothold in the E.U. According to Sulik, it simply was not fair to ask poor Slovaks to bailout the big banks and richer states—even apart from the latter’s violation of the E.U. regulations. In short, the E.U. should not have been run in the interest of French and German banks. At the same time, giving each state government a veto would have been a recipe for E.U. impotence at the federal level.

If the bailout had to be expanded to obviate a financial collapse of the E.U., then having one hold-out could have been a very expensive price to pay to avoid giving the E.U. additional competencies in fiscal matters. Were a qualified majority needed to augment E.U. competencies, Sulik's argument could still win the day--but his points would have to be sufficiently persuasive among the poorer states. If the banks' interest must be satisfied in order to avoid financial collapse, enough of the neutral states could turn from Sulik, who might otherwise be able to prevent the E.U. from avoiding catastrophe.


Gordon Fairclough, “Slovak Official’s Delay of Rescue Fund Vote Poses Problem for Euro Zone,” Wall Street Journal, September 6, 2011. 

Balancing Budgets: Italy vs. Wisconsin

In what could be dubbed a tale of two states, Scott Walker of Wisconsin bragged about bringing the budget into balance without raising taxes while Silvio Berlusconi broke his pledge not to raise taxes in order to balance his budget for 2013. Walker relied on spending cuts and constricting the collective bargaining of government employees, while Berlusconi agreed to a package of tax increases, spending cuts and fewer labor protections to make up for $76 billion (54 billion euros) by 2013. The tax increases include raising the value-added tax from 20 to 21 percent and imposing a “solidarity tax” of 3 percent on state residents who earn more than $420,000 (300,000 euros). The latter tax would run through 2013. At a news conference in August, 2011, “Berlusconi acknowledged that he had pledged never to raise taxes, but that the attention of world markets had forced him to do so.” Was breaking his pledge a vice or a virtue?

Scott Walker would undoubtedly say “A VICE!” To be sure, there is merit in Walker’s feat in balancing a government’s budget without asking more from residents in terms of taxes. However, there is also merit in Berlusconi’s decision to “spread the pain” fairly even to the rich. Solidarity is a value that implies that we are all in it together so everyone sacrifices—not just those least able to do so. Choosing a spending-cuts-only approach wherein sustenance of the poor is compromised while the rich are not asked to contribute evinces not only a certain set of priorities, but also a certain value-set, which is antipodal to the principle of solidarity. From this standpoint, Berlusconi’s breaking of his pledge can be pardoned.

However, if excess government spending (i.e., not affecting the sustenance level) exists, it may be unnecessary to raise anyone’s taxes to balance a budget. To be sure, legislatures can pad lobbyists’ pockets by inflating budget items, and it is virtuous to cut such spending particularly to balance a budget. Also, labor unions can gain excessive power and demand too much from governments as well as workers. For example, in Wisconsin even part-time temporary instructors at public junior colleges must pay union dues amounting to a significant part of their pay per class. Someone teaching one class for one term only has different interests than a career instructor who teaches full-time at a college, yet the teachers’ union does not discern this difference. The problem comes in when a supermajority in government goes beyond correcting for such excess power in seeking to balance the budget on one segment of the population while another segment is allowed to go unaffected. The basic principle of fairness is violated in such a case.

The core principle not to be violated by any government may be put as follows: Instead of affecting the safety net on the sustenance level, taxes should be raised on those residents able to afford the additional tax. Being able to afford a tax justifies not depriving the poor of basic living requirements such as food, shelter and medical services. Contributing where one is able without undue hardship and a human right to sustenance can be said to be the two pillars of the principle of solidarity. Without this principle, a society is merely the sum of parts—a mere aggregate wherein selfishness rules rather than bows to a higher good. That is to say, solidarity thwarts misordered concupiscence while being necessary for genuine society.


Rachel Donadio, “Italian Senate Approves Austerity Plan,” New York Times, September 8, 2011.

Was U.S. President Obama the Antichrist?

In the twentieth century, Christian apocalypticism thought it saw the end of days in the midst of baleful signs, including historical biblical criticism, the return of the Jews to the Holy Land, evolutionary science, and the United Nations. In the United States, the consolidation of power in the federal government at the expense of federalism (and, theoretically, liberty as well) was apocalyptically taken as a precursor to the end. According to Matt Sutton, “As the government grew in response to industrialization, fundamentalists concluded that the rapture was approaching.” The trajectory, in other words, was viewed as headed toward a global super-state under the thumb of a seemingly benevolent ruler. Franklin D. Roosevelt’s “consolidation of power across more than three terms in the White House, his efforts to undermine the autonomy of the Supreme Court, his dream of a global United Nations and especially his rapid expansion of the government confirmed what many fundamentalists had feared: the United States was lining up with Europe in preparation for a new world dictator. This “leader would ultimately prove to be the Antichrist, who, after the so-called rapture of true saints to heaven, would lead humanity through a great tribulation culminating in the second coming and Armageddon.”

Thanks to Obamacare and the Dodd-Frank financial regulation law of 2010, some of the anti-state apocalyptic voters viewed Barak Obama during his first few years as president as possibly being the antichrist. Questions about Obama’s birth only fueled the speculation. According to Sutton, the “specious theories about his place of birth, his internationalist tendencies, his measured support for Israel and his Nobel Peace Prize fit their long-held expectations about the Antichrist. So does his commitment to expanding the reach of government in areas like health care. In 2008, the campaign of Senator John McCain, the Republican nominee, presciently tapped into evangelicals’ apocalyptic fears by producing an ad, ‘The One,’ that sarcastically heralded Mr. Obama as a messiah.” On the Fox News network, one host regularly referred to Obama as “the anointed one.” This reference was not lost on evangelical apocalyptic voters.  


The sheer paradigmatic distance between twenty-first century secularists and evangelical apocalyptics may go a long way in explaining the blockages between the U.S. House Republicans and the U.S. Senate Democrats (and the president). In other words, the voters represented by the two parties are not only on different pages—the two groups are reading different books. Indeed, beyond having radically different theological assumptions and beliefs, the two groups may differ even on whether religion is legitimate. For example, a modernist secular voter might characterize the apocalyptics as superstitious. The voter could point to the failure of the world to end in the twentieth century in spite of all the signs of the impending rapture and period of tribulation. Indeed, “the sky is falling” Christian reading goes back to the pre-Constantine persecutions. 

In spite of the problems with the apocalyptic interpretation (which seems to have been applied in any decadent or disruptive period in the history of Christianity), definite trends can be identified, such as the U.S. Government’s increase of power at the expense of the several states. Furthermore, increasing global interdependence—such as in regard to health, nuclear weapons, and climate—has indeed increased pressure on politicians to increase the power of the U.N. The proliferation of empire-scale federal unions beyond that of the U.S.—as evinced by the E.U. and even the A.U.—can also be viewed as a trend toward globalized governance (i.e., a federation of regional federations, which themselves are made up of kingdom-level states).

How such trends are interpreted is what triggers the gulf between the apocalyptics and the secularists (and even the mainline churches). My main point is that political intransience can be expected with such divergent views of social reality and its basis. For instance, does society (and government) result from a social contract (e.g. Hobbes, Locke, Kant) or a divine decree (e.g., Augustine and Aquinas)? Is increasing statism a sign of the Antichrist or simply a response to problems of industrialization? The interpretations go beyond whether the trends are good or bad. Accordingly, discourse itself can be expected to be extremely difficult. It is not, however, impossible, and solutions are possible.

For example, federalism can accommodate such divergent views as long as the federal units have enough autonomy from the general government. The E.U. is in a better condition in this respect than is the U.S., though the European Union risks dissolution (e.g., the state debt crisis) because the E.U. Government does not have enough competencies to effectively manage the integration already accomplished.  However, federalism should not be viewed as a panacea. It is possible that the fundamentally disparate differences between the apocalyptics and the secularists regarding the role of government are such that political separation is the only suitable solution. This may be why Texas under Rick Perry flirted with succession in Obama’s early years. In any case, as difficult as discourse between the representatives of the two groups may be, being in political union demands tolerance and discussion, which in turn require humility (including a recognition that one can be wrong). Yet even here, Biblical inerrancy throws in a wrench, making discourse tortuous for both sides.

The distance between the parties is indeed formidable and perhaps even intractable. Even deciding whether to separate would be daunting. A union containing a very deep cleft is thus what we Americans suffer to manage amid political paralysis, finger-pointing, and shouting. God must surely be diverting his eyes in utter disgust and ultimately sadness—not about the signs or trends necessarily, but, rather, concerning the sheer anger being evinced in such tight quarters. Were there any adults willing to come to the fore, a secular voter might lightheartedly proffer in generosity, God shines His light on this city on a hill. Otherwise, we are together in quite another place.


Matthew A. Sutton, “Why the Antichrist Matters in Politics,” The New York Times, September 25, 2011. 

A Trader Dreamed of Economic Collapse

Call it over-confident bravado or perhaps a lapse into utter transparency; trader Alessio Rastani’s comments on BBC give the rest of us a glimpse of the power behind the world’s thrones and how prone “the system” is to collapsing without a sufficient force geared to the viability of the system itself. In other words, it is amazing that the financial/governmental systems go on without more attention to them as systems rather than to micro self-interests. One might ask whether powerful self-interests are sufficient to keep the system from hitting the rocks. Apparently the answer is yes, though this is astonishing nonetheless. It is like a car somehow making its way down the street with one person in the car looking at pedal, another at the steering wheel, and still another at the speedometer. It is amazing if the car does not crash, yet somehow it managing to stay on the road.

As for a dash of reality, Rastani said on September 26, 2011 on BBC TV that Goldman Sachs rules the world and the Euro zone is poised to crash. "This is not a time right now for wishful thinking that governments are going to sort things out," Rastani said. "The governments don't rule the world, Goldman Sachs rules the world." Beyond the disciplining of egos within the bank, Goldman’s reach is multiplied by forays made by its alumni into governments and other banks. For example, when Merrill Lynch executives were finally facing the prospect of needing to sell to Bank of America in September 2008, John Thain relied on his fellow Goldman alums who he had lured to Merrill—sidelining Merrill’s own. In the U.S. Government, both Henry Paulson and his assistant at Treasury who ran TARP were Golden. It can therefore be surmised that the Eurozone was poised to crash because Goldman’s execs had determined that they could profit from it. The state-heavy E.U.’s government only appeared to be capable of protecting the viability of the euro financial system.

I suspect that Rastani was overplaying his hand. The financial interest of the rich states of the E.U. (and their respective banks) cannot not be written off in favor of a Golden hegemony unless Goldman Sachs controls the European banks. To be sure, at the time of Rastani's interview, there were players poised to benefit financially from the collapse of the Eurozone. Even so, powerful vested financial interests not limited to Europe surely had a financial interest in the continued viability of the Eurozone. Of more value to us than Rastani's crystal ball is his mentality and values, which were on full display during his interview. We have a rare snapshot of what sort of people rule the world in terms of real power. 

The crash will be good news for traders, Rastani told stunned BBC anchors. "For most traders we don't really care about having a fixed economy, having a fixed situation, our job is to make money from it," he said. "Personally, I've been dreaming of this moment for three years. I go to bed every night and I dream of another recession." Rastani said traders aren't the only ones who can benefit from the crisis. "When the market crashes . . . if you know what to do, if you have the right plan set up, you can make a lot of money from this." Whether or not such opportunities rule the day, Rastani’s mentality itself is startling (or should be). In other words, we should also be stunned.

 Rastani's dreaming of a recession (like Bing dreamt of a white Christmas?) even as he was predicting that the “savings of millions of people are going to vanish” in less than a year might strike us as insensitive, even sadistic—and at the very least, rather selfish. Would he cheer the death of an uninsured man who could not afford medical treatment if money could be saved by a hospital in Rastani’s portfolio?  If so, could we give any credence to his “deathbed conversion” should he fall on bad times? Beyond the obvious moral questions, does the child deserve his amassed power, wealth and position? Moreover, can we continue in good conscience to respect him now? The respect that we give to offices or positions may be exaggerated, and thus due an "adjustment." Just because a Wall street player has power on account of his or her position (and wealth) does not mean that he or she is due respect accordingly.

In fact, if traders such as Rastani have a financial interest in the collapse of an economic system, it could be asked whether they have enough power to make that catastrophe happen. If Wall Street bankers—the real power-brokers—are focused on such financial payoffs, is anyone of sufficient power looking out for the system itself? Again, Rastani may have been overplaying his hand.

In 2008, the U.S. Government enacted TARP to stave off financial collapse. Of course, even Goldman was vulnerable, so it was in its own financial interest that Treasury contain the contagion. The experience demonstrated that the American federal government is capable of safeguarding the financial system, but what if Goldman were to face no downside from a collapse and would in fact benefit from it? Could Goldman alums in strategically-placed government offices sabotage the government’s own efforts to protect the system? As Sen. Dick Durbin said in 2010, the banking lobby owns Congress. The U.S. Government acting against the interests of Wall Street might be akin to that government putting some air between itself and Israel. Elected representatives and their appointees know enough not to screw the sacred cows.

So the trader has a point, though beyond the content of his predictions, the transparency of his mentality and the mentality itself warrant reflection by the rest of us. I suspect that we have a naïve view of the type of people pulling the strings. Were we to get to know those people (even the CEOs), an obvious question might be whether they deserve the power, position and wealth that they have gained. In a plutocracy, there is unfortunately little that we can do about it, as they hold the strings. In a republic, on the other hand, the financial and business sectors are subordinate to the public good, and the representatives of that good can reform the selection and promotion rules in those sectors. In saying that the rest of us will have no other choice but suffer because it is in his financial interest, Rastani was essentially informing us that our so-called democratic republics are actually plutocracies. Our systems depend, in other words, on the particular financial incentives of the Golden traders. This is even worse than the prospect of a recession. 

It means nothing that you or I might conclude that the system itself is broken, as we do not pull the strings; we merely pull the levers on election-day, lulled by the illusion that popular sovereignty lies with us. Even if Rastani’s interview wakes some of us up, little difference can be expected short of a major shift in power—but how can the less powerful overcome the kings of the hill to gain the hill itself? That would be like water flowing upstream as if gravity no longer held. Yet somehow, for people such as Rastani to be so respected and powerful in spite of the kind of persons they are seems to go against gravity itself. Like ignorance that is arrogant, one must wonder how the thing manages to stand at all. Perhaps all that is necessary is a gust of realization by us that the emperors are indeed trading in the nude, and are thus unworthy as de facto rulers. But can we act on the basis of a new awareness?


Bank of America: Downsized From Smallness?

Three years after the near-meltdown of Wall Street in September 2008, Bank of America announced that 30,000 jobs would be eliminated. That amounts to nearly 10% of the bank’s total work force. Over all, BOA was planning to cut $5 billion in annual expenses. The reason is transparent: continued losses stemming from the bank’s acquisition of Countrywide in January 2008 in spite of the fall of the U.S. real estate market and the related losses on sub-prime mortgage-backed CDOs. What could Ken Lewis have been thinking? At least in the case of his acquisition of Merrill Lynch, which was agreed to in principle in September 2008, the investment bank had already sold its $30 billion of toxic assets for over $7 billion in July 2008.
While the $29 per share price for Merrill seems excessive given that the investment bank was trading at only $17 at the time of the agreement, Fleming’s negotiating strategy (stressing the long run value over the short term market volitility) on Merrill’s side, Thain’s preference for a 10% stake/$30 billion line of credit from Goldman, and the sheer strategic fit between BOA and Merrill can explain Lewis’s offer-price being at a premium over the market price. Even so, with Lehman poised to file, the Goldman option would have been insufficient (or would likely have dissolved on the Monday of Lehman’s filing as the market tanked) and Thain would have taken $17 (or even down to $10) in the wake of Lehman’s filing.

According to reporter Greg Farrell (p. 183), Bank of America tended to deal with problems “by finding the quickest, near-term solution and lunging in that direction.” BOA “was not an organization that had the patience for deep, strategic thinking. It was an opportunistic company that preferred action of any kind to inaction.” Although much of the bank’s empire-building had taken place under McColl, the preceding “legendary” CEO, Ken Lewis’s acquisitions of LaSalle, Countrywide and perhaps even Merrill Lynch (to some extent) evince the sort of short-sighted and opportunistic lunging-without-thinking that can go with empire-building. Cutting 10% of the work force may be interpreted as a response to the market’s implicit verdict on Lewis’s shopping spree following Fleet. The losses stemming from Countrywide are evident enough; the case of Merrill Lynch is a bit harder to weigh.

Although Merrill proffered great synergy with BOA and could be picked up on the cheap, Lewis’s rushing to a deal over a weekend (with only about 12 hours for due diligence!) can also be considered as excessively risky, especially considering the history of hidden CDOs at Merrill (Semerci hid $30 billion then unfairly blamed them on his predecessor at Fixed Income). Had Merrill unloaded all of its toxic assets back in July? If so, what caused the $15.31 billion loss of Merrill Lynch announced only after the BOA shareholder vote on the acquisition in December 2008? Furthermore, did Lewis knowingly keep the mounting losses at Merrill from his shareholders as they were preparing to vote? At the very least, failing to disclose the mounting losses in real time was risky, even reckless, given what could be expected—namely,  the $50 billion potential liability that would face the bank from a stockholder suit. Even if Lewis decided not to disclose “non-material” losses because they were in line with Merrill’s results in 2007, was the CEO manipulating his stockholders while puffed up in the vainglory of empire-building? Furthermore, the condition of the market in September 2008 was not exactly ripe for making a deal to acquire a major financial institution. Lewis and Thain knew Lehman would go belly up when signed their agreement at 1am on Monday, September 16, 2008. 
As risky and perhaps even foolhardy as the Merrill acquisition may have been for Lewis, his acquisition of Countrywide defies any good sense. That he was being paid millions of dollars at the time suggests that the dysfunction at Bank of America may include corporate governance. Specifically, deferring too much to the CEO at the expense of the shareholder interest evinces a lack of accountability. Although BOA had a history of duality—splitting the chairman and CEO positions between two people—still the CEO may have too much influence.
Finally, a vital matter of public policy should not be ignored. Although it could be argued that Bank of America is being forced by its own history and the market to downsize, the question can legitimately be raised whether the market can or should be relied on to take faulty banks too big to fail down a notch. The very existence of Bank of America may involve more systemic risk than we should be prepared to accept. Relying exclusively on the market for the correction is, I contend, insufficient. The market can be insufficient in downsizing to a suitable size, or irrational exuberance can take hold such that a 10% reduction becomes a free-fall. That a bank such as Bank of America of over $1 trillion in assets is allowed to exist as a concentration of capital is itself a systemic risk. In other words, something is seriously wrong with the market mechanism for a bank such as BOA to have been able to become so big in spite of its modus operendi or corporate culture.


Greg Farrell, Crash of the Titans: Greed, Hubris, the Fall of Merrill Lynch, and the Near-Collapse of Bank of America (New York: Crown Business, 2010).

Steven M. Davidoff, “For Bank of America, a Looming $50 Billion Claim of Havoc,” New York Times, September 28, 2011. 

Friday, June 8, 2018

Is Modern Banking Fundamentally Flawed?

Jamie Dimon, CEO of JP Morgan Chase and board member of the New York Federal Reserve (a banking regulatory body), advocates not only that financial regulation reform is not necessary, but also that deregulation is the best course for the American financial sector. Meanwhile, JP Morgan lost $2 billion in an effort to reduce risk. President Obama quickly pointed out that if one of the smartest bankers in the room can preside over such a massive loss, then a deregulated financial sector would likely present us with an unacceptably high level of risk to the entire financial system (and economy). Elizabeth Warren suggested that relying on bankers to regulate themselves would not reduce the systemic risk. The alternative would seem to be strengthening financial regulation, even though—according to Sen. Dick Durbin—“the banks own Congress.”

Perhaps the problem with systemic risk in modern banking goes deeper—beyond how it can be effectively regulated—meaning made regular in line with the public good—and, moreover, beyond what our reigning modern perspective will permit us to acknowledge, let alone see. In ecclesiastical terms historically, lending was classified as a kind of charity, specifically to the poor, as the rich presumably are not in need of lent funds (by definition). In other words, the leverage assumed by the wealthy and corporations is unnecessary. Starbucks needs the funds to build four hundred more stores in China. Wal-Mart needs additional money to buy land for new stores in major American cities. Capital from stockholders is presumably not good enough. The capped cost of leverage relative to a lack of limit on profit attracts greed to favor borrowing over raising capital through stock. The vested interests of existing stockholders (often including the executives who control their corporate boards) seals the deal on leverage as the drug of choice, even if it is not in the long-term best interests of the respective companies. Such a view of borrowing and paying (and earning) interest is worlds away from the original purpose of lending.

Viewing a loan as alms to the poor, lending with interest was originally thought to be unjust. At the very least, it was viewed as unseemly to profit in the giving of charity (although modern corporations do it all the time and get tax deductions for it, besides good public relations). Furthermore, the property (i.e., the substance of the money) lent was viewed as being inseparable from its use (i.e., as a means of exchange). The substance of money is its use, according to that view, so charging more than the money itself (i.e., the principal) is undeserved surplus. Such profit was historically reckoned as being theft. It is not good form to steal from the poor to whom one is giving alms. It is like biting someone while handing him a $20, which he needs to buy lunch (and will return later).  “Hey, I forgot my wallet today and I didn’t bring my lunch. Can you help me out? I’ll pay you back tomorrow.” If of charitable good-will, the acquaintance would reply, "Sure, here you go." If of ever greater (i.e., self-less) good-will, the lender would add, "and don't worry about paying it back." This is lending at its finest. Demanding that the borrower pay more than simply returning the $20 would represent far less than accepting the principal back. Beyond unfairness, taking interest regardless of the borrower's circumstance evinces self-idolatry.

Specifically, for a lender to receive surplus (above the principal) without labor or uncertainty (having transferred the risk to the borrower by requiring repayment) is not only unjust because it violates the risk/return relationship (i.e., a higher return is justified by assuming more risk), the certainly assumed (artifiically) by refusing to accommodate or share in any losses incurred by the borrower is rightfully only that of God. That is to say, it is self-idolatry to assume a divine quality like certainty. Furthermore, the power that some lenders presume to have over delinquent borrowers can be interpreted as an attempt to claim God's power (omnipotence) for oneself. Altogether, arrogance and the infliction of harm come from making oneself an idol (i.e., as if divine).

That which usury risks in terms of morals and self-idolatry is utterly foreign to us moderns. The original charitable purpose of lending is also lost to us in part because we are so used to our own view of lending being the default and the necessary of commercial lending in our economy. Moreover, we assume our assumptions cannot be wrong, and so we do not question whether merely charging interest is inherently unjust and a sin against God. We assume we know the purpose of lending as if it had no history.

In 1612—exactly 400 years before this writing yet late enough that commercial lending was already well-ensconced in the economy—Roger Fenton, a Puritan divine in England, opined strenuously that the sin of usury is inherently unjust. “Where we finde no iustice, what hope can there be of charitie?” Salomon puts mercy as the opposite of usury. “Wherefore vsurie may well be termed a biting . . . it eateth out the very bowels of compassion.” Usury perverts the act of charity, “turning it into an act of selflove.” Usury is against “the Canon of that Charitie which seeketh not her owne, to respect the good of others; [usury] is turned to his owne proper lucre and gaine.” (Fenton, 1612, p. 106)

Injustice does not admit of mercy manifesting as charity. We moderns are so wrapped up in our self-love that we can scarcely imagine lending as an act of compassion. The Canon of Charity to which Fenton refers is the Golden Rule, whose equity guides the Calvinist view of justice as love and benevolence to all. Such benevolence is fueled by selfless love (agape), rather than higher self-love (caritas) directed to God. We moderns can scarcely recognize this theory of justice, so used are we to strict legal justice which limits one’s duty to paying for one’s crime. That the other theory of justice might be applicable to lending is apt to strike us as odd at best.

Nevertheless, the problem behind even the best bankers of today being reckless even as they advocate for deregulation may extend beyond the antiquated debate on regulation to include the making of something borne of something natural (compassion) into something artificial. That lending was designed to be a species of charity may mean that problems are necessarily entailed in using banking for leverage.

By analogy, a person might have been brought up one way and therefore have considerable trouble in adjusting to a way of life that is at odds with that upbringing. The problem facing the person would go beyond simply regulating the new life because a basic inconsistency is in such a drastic change. Were the person to know only the new life, having forgotten one’s upbringing, she would have no clue as to why she feels fundamentally ill at ease. She would look for things in her new life to assuage the difficulties, which nonetheless transcend that environment and therefore require a more basic solution.

Besides relying too much on debt for personal and business use, we as a society are cut off from the original (i.e., designed) use of lending as a means of mercy rather than to profit. Perhaps our perspective is more limited than we think, and the problem much deeper than we realize. Given that “cloudie conceits do hang in the braines of men, which cast a dye and tincture vpon the vnderstanding,” seeing usury “so much practiced of all sorts . . . men are euen thereby without further examination much moued to thinke it lawfull.” (Fenton, pp. 108-9). Yet further examination demonstrates just how limited our tiny window in modernity is—even in spite of our lauded technological development. Our “advancement,” in other words, may blind us to being so wrong about lending even as it is ubiquitous in our world.

By 2012, for example, $1 trillion in student loan debt had accumulated in the United States. Rather than the mercy of charity in waiving interest and even the principal in particular cases of dire need, such a load on poor students represented the hubris of a society run amuck on its own conceit and greed. Such a disparity exists between such selfishness and charity that the notion of debt forgiveness even for the poor is thought of as an unforgivable unfairness rather than as charitable equity that is essentially agape seu benevolentia universalis.


Fenton, Roger, A Treatise of Usurie (London, 1612). In The Usury Debate in the Seventeenth Century: Three Arguments (New York: Arno, 1972).

Market or Government: Which Should Reduce Systemic Risk in the Banking Industry?

If the five largest banks—JP Morgan, Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley—are too big to fail and yet substandard operationally on account of their respective complexities (e.g., investment banking added to commercial banking), might it be that the market-based decisions of investors will relegate the giants, which by the way had price-to-book value ratios of between .37 to .77 in May 2012, thereby solving the problem of systemic risk?

Smaller banks may be favored by investors because such banks do not “suffer a conglomerate discount,” according to the Wall Street Journal. “They also don’t have big investment-banking or trading arms.” These “arms” are relatively volatile and opaque businesses, and they may be more susceptible to the E.U. debt crisis due to the trades in derivatives. Finally, being less complex means being easier to value, and this can give investors added confidence, particularly as risk management has not exactly been done well at the largest U.S. bank by assets (i.e., JP Morgan)—though Goldman did well in hedging against the bear housing market (and its derivatives).

Therefore, investors could swing the balance away from the biggest banks, though such a shift would take time—barring a herd-like mentality. Regardless of their numbers, the biggest banks can run on the sheer solidity of a well-known name. The shock at the $2 billion loss demonstrates just how much reputational capital had been in the name, “JP Morgan Chase.” Indeed, Jamie Dimon, chairman and CEO of that bank when the huge loss took place, has argued nonetheless that being big allows the bank to compete globally, make large investments in technology and provide broad services to multinational companies. Even though his self-serving pitch omits the problem of risk (e.g., losing $2 billion trying to reduce risk), discounting the inefficiencies and risks that go with greater complexity can take a while, at least in terms of the market as a whole, because the big guys are not exactly going to lay down and give it up to the smaller guys without some pushback. Indeed, the big guys have considerable market and political power that can translate into hidden advantages written into regulations.

Even if the object is merely apparent, given the power of the big banks, it makes sense then that the U.S. Government sought to help at least “level the field” between the large and small by instituting capital surcharges for systemically important (i.e., large) banks. “We are creating incentives right now for institutions to get simpler, less complex and less volatile, and the market is going to be pushing people in that direction,” says William Isaac, FDIC chair during the 1980s thrift crisis and now head of Fifth Third. The question before us here is how much the market’s push can be relied on to get us to a place where systemic risk can be tolerated.

Even with a level playing-field, will investors favor smaller banks with higher price-to-book values sufficiently to cause the biggest banks to lose some lift and float closer to the ground? Even with the capital surcharges, is the playing-field level? Finally, is “level” enough for investors to favor smaller banks, which represent less systemic risk?

In the 1980s, the market-based approach to regulation, such as in the arrangement in which pollution permits could be bought and sold, sought to fuse public policy objectives with the efficiency of the market. I remember well having been steeped in that ideology in business school. Any objection to the approach in class quickly got a sarcastic, “Ok, Ted”—short for Ted Kennedy (or “you socialist!”). As an MBA student, I volunteered to assist a professor on a paper singing the praises of the efficiencies possible in self-regulation applied to securities dealers (NASD). In retrospect, I view my approach and that of the broader ideology as incredibly naïve, even if the efficiency aspect was well-intentioned. A solution allowing for efficiency “automatically” had a certain intellectual beauty to it, which I suspect some advocates experienced as akin to an unexpected good orgasm at a French whorehouse.

Rather than police bad boys, an industry will naturally seek the lowest common denominator if the government allows the industry to be regulated by self-regulation. The industry itself can then benefit by everyone cutting corners. In other words, short-term profit outweighs the long-term reputational capital to the industry itself from policing bad apples rather than joining them. Government is uniquely situated with regard to the common weal, or public good, to guard and protect it from short-sighted encroachments by aggrandizing players and even entire industries.

Therefore, it would be a mistake to think that systemic risk could be reduced by the biggest banks regulating themselves and their industry. It would be a case of wolves guarding the hen house. The question thus boils down to whether government regulation (uncaptured by the regulatees) or the market mechanism should be relied on to reduce systemic risk, or whether some combination of the two (i.e., government regulation "encouraging" the market) is optimal. If regulations unimpaired by bank lobbying are even possible in the U.S., it might be that the market has the final word anyway. The question then would be whether the market naturally seeks to reduce systemic risk, or is such risk an externality to the market and thus within the reach only of government.


David Reilly, “Bank Investors Bail onToo-Big-To-Fail,” The Wall Street Journal, May 16, 2012. 

Toronto Police as Aggressors at G-20 Summit

Police employees “ignored basic rights,” jailed people illegally, used excessive force and escalated violence at protests surrounding the G-20 meeting in Toronto in 2010, according to the Office of the Independent Police Review Director. The report could lead to charges against police employees and strengthen the hand of civil lawsuits filed against the police department. Because the police employees acted with an attitude of impunity, anything less than stiff prison sentences would be insufficient as a deterrent.

After a small group of violent protesters went on a “looting rampage” through Toronto’s shopping district without being confronted by police, the department’s deputy chief ordered his subordinates on the force to “take back the streets.” The incident commander in charge at the time told investigators that the deputy chief “wanted the streets that had been made unsafe by the terrorists that were attacking our city to be made safe again by restoring order.” This statement itself evinces a problematic attitude.

Specifically, looters are not terrorists. To claim otherwise demonstrates distorted perspective, which in turn points to an underlying psychological bias. Although not against the looters, the police nonetheless sprung into action, arresting peaceful protesters and even passers-by.  Other people were arrested in homes and other residences without proper warrants.

According to the report, the deputy’s orders were followed in ways that not only broke the law but often involved excessive force. The attitude of the police employees includes a presumption of impunity with regard to using excessive force. This is the most damning aspect of the report, for such an attitude is extremely difficult to change.  That the people arrested were held for hours in cells without toilets, food, or even water attests to possible sadism in the department.

Given the underlying attitude, the culprits on the police force must be severely punished for their aggression or they will be enabled to commit further abuses as though with the impunity they assume is the case. That decent police employees put their lives on the line to protect even citizens they don’t like does not mean that the sort of attitude described here should be tolerated and enabled rather than firmly thwarted by firings and stiff prison sentences. With the privilege of using force legally comes great responsibility. The penalties for acting at odds with it should be severe, given the significant possibility of undetectable abuse (given the huge differential in power). In other words, police employees are well aware of this differential, and given human nature, even this awareness can be dangerous.


Ian Austen, “CanadianPolice Violated Laws in G-20 Sweep, Inquiry Finds,” The New York Times, May 16, 2012. 

Thursday, June 7, 2018

The 2012 U.S.Trade Deficit: An Analysis

Coming in at 2.7% of GDP, the U.S. trade deficit fell to $107.5 billion in the third quarter of 2012—down 9 percent from the second quarter’s $118.1 billion, which was 3% of the economy at the time. The current account includes merchandise, services, and investment flows. The surpluses in services and investment were out-done by the deficit in merchandise to produce the overall trade deficit. According to the New York Times, the “improvement in the current account in the third quarter reflected a decline in the deficit on goods and a small increase in the surplus on services, led by a gain in foreign earnings made by financial services, insurance and professional services provided by companies in the United States. The surplus on investment earnings narrowed to $50.8 billion, down from $52.1 billion in the second quarter.” Most of the decline in the deficit on goods reflected a decline in the foreign oil bill, according to Paul Ashworth at Capital Economics.
Lest we get bogged down in the purportedly significant differences between 2.7% and 3.0%, $107.5 billion and $118.1 billion, and $50.8 billion and $52.1 billion, respectively, we might take note of the rather stark difference between goods on the one hand (i.e., sustained deficits) and services and investment (i.e., sustained surpluses). Although it was no doubt true that the economic slow-down in China and the debt/austerity-induced recession in the E.U. were reducing demand for American exports, a basic imbalance between exports of American-made and imports of foreign goods is clear from the numbers year after year. Indeed, in 2006 the current account deficit had reached a record $800.6 billion—suggesting that something fundamental was “out of whack.”
                                               This graph isolates the deficits in goods imported/exported.   source: thismatters.com 
The question may be whether Americans were importing too many foreign goods or were too uncompetitive in making goods. Regarding the former, being able to buy a relatively inexpensive television made in China is not in itself a bad thing, particularly to the consumer. The question is perhaps whether the price was artificially low, due for instance to a relative lack of environmental regulations, lower labor costs, or government/bank subsidies. However, even if due to these factors, a low price is undoubtedly welcome to any consumer.
Regarding American competitiveness, was it hampered by labor and environmental standards or simply by unmotivated workers and bad management? Whereas American consumers benefit from cheap imported products, no such benefit can be found in the U.S. to any sector from a relative inferiority in competitiveness.
There is, however, the argument that an “advanced” economy oriented to professional, business and financial services rather than manufacturing can enjoy a higher standard of living if the services are more premium than the goods would be. The pristine notion of the “knowledge economy” captures this point very well. That not all Americans are willing or even able to participate at this level suggests that the term could never completely cover an entire economy. Hence, it is necessary even in an “advanced,” or “high tech” and “professional,” economy to tackle the problem of competitiveness in manufacturing.  Does it come from high regulatory costs (which can be viewed as part of a demand by Americans for a certain “standard of living” writ large), a lack of product development, or an inefficient labor or management force?  Whereas wanting a decent wage-floor or environment as a condition of manufacturing has merit—the cost being that society may have to support people who would otherwise be working in manufacturing—a dearth of ingenuity, bad employee attitudes, and inept management have no such positive aspect.
I was born and raised in a medium-sized industrial city in the “rust belt.” Furniture was the first industry, following which machine tools were the dominant manufacture until competition from Europe took out most of the factories. Speaking a few years ago with a European who had been sent over to oversee a factory that had been taken over by a European company, I was not surprised when he admitted, “the workers here just are not good. They are not motivated and they don’t pick up on the training very good.” Years before that, I had watched a program on the American public broadcasting network about a man’s effort to prepare inner-city black people for job interviews. Midway through his talk, the man admitted to the folks attending, “from your attitude even here, I have to admit I can’t see how anyone would hire you, so I don’t see any reason to continue here.” The man ended the workshop at that point. Doubtless his decision prompted little if any self-criticism from the participants. A bad attitude is perhaps almost impossible to correct from the outside—even with the inducement of money!—given the nature of a bad attitude. Regarding people under thirty, perhaps a year or two at a military “boot-camp” might break down the attitude’s intransience and build up self-confidence and self-respect, not to mention basic civility. Absent such a strategy, perhaps the segment of the American population unwilling (or able) to become part of the “knowledge economy” is inevitably lost—not being able to compete even on a factory floor. The cost to the rest of society goes well beyond money.
While visiting Miami, I witnessed repeated incidents on the buses from the mainland to Miami Beach of black men shouting and even hitting each other, as well as bumping into (and even falling on!) tourists. The black drivers ignored the shouts (including a drunk black man loudly and repeatedly calling a pregnant white woman a “fucking bitch”) and even fist-fights. Even with tourists begging the drivers that the aggressive passenger be dismissed from the bus, the drivers just drove on. In two cases, the drivers asked the men being hit if they wanted to press charges. They replied that they did not, so rather than get the aggressor off the buses or call the police, the drivers simply started driving again. This happened twice in the last 24 hours of my visit!  Near the beginning of my visit, I myself was pushed against the open bus door of a bus at a rail station while I was attempting to board a bus because I had not allowed all of the black passengers to enter first. The black driver refused to call the police or even tell the aggressive black man who had squeezed me to leave the bus. The driver simply replied to me—as I was pinned to the open front-door—“no, I won’t call the police. You shouldn’t have gotten on then. That’s how it is here.” I should have called the police! I was so stunned at the violence and systemic cover-up that I simply wanted to get to my destination. Just after I took my seat, a nice older black woman asked me where I was from. I told her that I had grown up in Illinois. “It must be worse in Chicago,” she remarked. “No,” I countered, “it is worse here. The blacks there are better.” In spite of being the only white person on the bus, I went on. “Even with the blacks killing each other in south Chicago, the people are better there.” She asked if north Chicago was white and the south part black. “No, the north part of the city itself is integrated, while I think the south is black. I was referring to the north—the blacks there are much better than the ones here. Here—I can’t leave soon enough.” Silence . . . complete silence. It then occurred to me that the entire bus—which still had not left the tri-county rail station—had been listening to this white guy talk about blacks very directly.
As it happened, a month or so later I was in Chicago taking a bus when a black man tried to enter the bus by pushing three old white women in line in front of him. The driver, who was also black, saw the attempt and quickly said, “Hey, what do you think you are doing? Get back out of the bus and let those women on first. Who do you think you are?” Then the driver turned to us in the bus and remarked, “It’s all about him, isn’t it?” The offender must have been startled, for he merely replied, “But it is cold out.” The driver pointed out that it was cold for the women too. The three women ended up sitting near me, and I told them (and the front half of the bus) about what I had witnessed in Miami on the buses there—and that it really was better in Chicago and even warmer despite the cold—even in terms of people moving past each other in the isle. “In Miami, the driver would not have intervened and you all would have been pushed out of the way of the guy who was behind you in line. Even complaining to the driver would have had no effect, and the man would have gotten away with it—whereas here that attitude is an exception. It was therefore countered, or pushed back, and therefore not allowed to become the default.” I don’t know whether the driver heard my compliment.
While it is easy to point to the bad attitude of many of the black passengers in Miami, I contend that the incompetence and attitude of the bus drivers there were just as problematic, and my anecdote from a bus in Chicago demonstrates that the attitude need not be enabled rather than challenged. The fact that the drivers in Miami all reacted the virtually the same way suggests that the decadence is systemic there. Put another way, the rudeness and aggression had become the norm and thus could not be checked. Perhaps this is why the drivers simply ignored even the violence—though this is hardly a viable excuse.
In terms of passive aggression, I witnessed drivers of buses going between downtown and Miami Beach regularly and knowingly cram too many passengers (even tourists!) on the buses and then demand that the extra passengers (who had already paid) shout back into the bus for others to step back so the extras could “get behind the yellow line.” To allow passengers known to be beyond capacity on board and then put them in an impossible situation while refusing to take control of the bus by making an announcement for people standing to move back evinces not only incompetence, but also an almost-sadistic mindset. On several occasions, I saw order itself fall apart on buses there as frustrated passengers—even tourists!—openly challenged the unjust and incompetent drivers on this very point.
Leaving Miami, my overall conclusion was that that county should not be part of the United States of America because of the rudeness, aggression and even the break-down in order—all tacitly sanctioned by county managers and employees. The rudeness, by the way, was nearly everywhere, rather than just on buses. I could not imagine any of the aggressive passengers or enabling drivers lasting more than a few days working in a factory, and the bus company managers (who knew of the incidents, according to local passengers) were doubtless virtually unemployable in the private sector too.
In short, the serial merchandise trade-deficits may point to an America that even many Americans do not know exists. That is, the structural imbalance may reflect a decline in American society—both in terms of labor and management—that manifests in a significant number of Americans compromising manufacturing or even being virtually unemployable. Put another way, I suspect that the condition in the American factory was at least as of 2012 part of a much more serious problem wherein even the social contract itself was under threat, or at the very least the American empire was in decline.


The Associated Press, “US Shirks Trade Deficit As Oil Falls,” The New York Times, December 19, 2012.

ICE Bought NYSE: Profiting from the Rules?

Tell me what the rules are, and I’ll make money with them.” This statement, made by Jeffrey Sprecher of Intercontinental Exchange, captures well the attitude that business practitioners should have toward government regulation in a republic. That is to say, businesses should be regulation-takers rather than makers. For the regulatees to make regulation to which they themselves would be subject is an oxymoron, or contradiction in terms. At the very least, it involves a conflict of interest. At the macro level, business as “regulation-maker” effectively turns a democracy into a plutocracy. Accordingly, the strategic use of regulation should pertain to the use side, rather than the regulating side. Crafting regulations—essentially dictating them to legislators or regulators—in order to make money from them takes the strategic use of regulation too far.
 Jeffrey Sprecher of ICE.  Making money playing by the rules.  (nypost)
Sprecher began by working at electric companies. He picked up on the need of those companies to hedge energy contracts so he bought a small exchange and built it up around derivative trading. Eventually, he did away with the exchange’s trading floor—preferring 24 hour computer trading. In 2010, the passage of the Dodd-Frank Act of financial reform requires that derivative trading be done through a clearinghouse. Sprecher’s company stood in a position to take advantage of the new rule. In fact, the intent of the new regulation being that regulators could have a better idea of the volume of derivatives “out there,” Sprecher created a derivatives database in his company. In other words, he anticipated in a way that meant more profits, and he did so without trying to manipulate legislators or regulators with a huge lobbying effort. Rather, he anticipated weaknesses in the market and devised company-based solutions that would be profitable. It is no surprise that the Dodd-Frank Act essentially adopted his business model regarding derivatives—effectively forcing it on the industry as a whole.
In fact, observing the heightened scrutiny of swap contracts under Dodd-Frank, Sprecher decided to convert them to futures contracts. Here again, profit was also in the mix. “The reality is that there are incentives to convert swaps into futures, where there’s less competition,” according to Richard McVey of MarketAxess. “There’s no requirement for [Sprecher’s company] to open [its] futures clearinghouse to other exchanges.” This restriction of competition to increase profit is ironic for ICE because in late 2012 came the announcement that the company would purchase the New York Stock Exchange, which had capitalized on monopolizing the trades of its members. Ironically, Sprecher’s actions had undercut this monopolization and here he was exacting his own version in turning “insurance” swaps into garden-variety futures contracts. Business skill can be regarded as the art of knowing when to ride a wave—and which wave to ride.
It should be noted that both the computer-trading and derivative-trading trends furthered by Sprecher’s very company enabled it to buy the vaunted New York Stock Exchange for $8.2 billion rather than something much higher. According to the New York Times in late 2012, the “transformation of the New York Stock Exchange from its position at the apex of the world financial system to an asset to be bought and sold like any other—and one that is not deemed to be worth as much as it would be if it traded more modern derivative securities rather than old-fashioned stocks—has been going on for decades, but has accelerated in recent years.” Essentially, Sprecher took advantage of this trend by making the purchase, and he would capitalize on owning the “temple of commerce” through intra-company synergies even while committing to keep the NYSE floor up and running.
In short, business acumen has no need of being sidetracked into manipulating lawmakers and regulators into formulating rules favorable to one’s particular company. The strategic use of regulation is most profitably accomplished over the long run on the use side. Take the rules as given and make money with them. This is entirely consistent with business in a viable republic. An implication of this thesis is that it’s the bad—both in terms of business intuition and moral disapprobation concerning manipulating public policy for private gain—manager who represents the plutocric threat to a republic.  The business practitioners knocking on Congressional doors are not the brightest guys in the room as regards innate business skill, and they are not the most forthright concerning getting what they want, whether by money or even information. Unfortunately, turning opportunities into profit is instinctive only for some practitioners, while it is forced or contrived in many others, who therefore feel compelled to circumnavigate business by pressuring public officials. It is significant—and telling—that ICE did not have a substantial lobbying presence in Washington, as Sprecher and his subordinates undoubtedly “kept to the knitting,” being good at it, and thus they did well in profiting from gaps in the market and the related regulatory changes.


Ben Protess and Nathaniel Popper, “Exchange Sale Reflects New Realities of Trading,” The New York Times, December 21, 2012.

Floyd Norris, “A Temple of Commerce that Failedto Keep Up with Change,” The New York Times, December 21, 2012.

Michael J.de la Merced, “At the Big Board, Seeking Rejuvenation in Consolidation,” The New York Times, December 21, 2012.