Showing posts with label financial sector. Show all posts
Showing posts with label financial sector. Show all posts

Sunday, March 24, 2019

Monetary and Fiscal Policy and Structural Reform: Each Had a Role to Play after the Financial Crisis

With fiscal policy hamstrung by public debt in both the E.U. and U.S., monetary policy was a major beneficiary of the financial crisis of 2008 and the ensuing state-debt crisis that stammered on at least until 2013 in Europe. Lest it be concluded that central bank policy had reached an unassailable peak of salvation, the expanded role actually made its limitations transparent, at least in financial circles.
Speaking to Charlie Rose on March 11, 2013, Jeremy Grantham of a Wall Street firm argued that the U.S. Federal Reserve Bank's extremely low interest-rate policy would be unlikely to spark an increase in employment even in the severe recession following the financial crisis. In fact, a low interest rate is a transfer of wealth from the poor to the rich. Fiscal policy, such as the Conservation Civilians Corps of U.S. President Franklin Roosevelt's New Deal in the 1930s, is a much better tool to achieve full employment. Yet even the New Deal did not have enough fire-power to bring the U.S. economy out of the Great Depression; it took the breaking out of a second world war to get America's military-industrial complex to create enough jobs. One implication is that a competitive market alone is not sufficient to reach full employment. Even though such a market can sport great efficiency if kept competitive by the enforcement of anti-trust law, natural consumption levels have been unable to spark enough jobs for full employment to be achieved. Not even low interest rates can do that, as per the decade of the 2010's. We ought to accept that a lot of fiscal stimulus is needed to achieve full employment, even if it is not optimally efficient. 
Meanwhile, Jens Weidmann, the president of the Bundesbank, argued that monetary policy in the E.U. “can only buy time at best..” He went on to say he was “a bit concerned about some of the expectations around the power and potential of monetary policy.”[1] In other words, the ECB should have gotten back to monetary policy in a stricter sense, rather than trying to spark economic growth and employment through low interest rates and buying state-government bonds.
Behind the view of interest-rate, or monetary, policy as being capable of giving us economic salvation was the paralysis of fiscal policy determination in both federal unions.  Divided government at the federal level stymied fiscal policy in the U.S. after President Obama’s insufficient “stimulus” package in 2010. In the E.U., the vetoes retained by the fiscally- and debt-conservative state governments such as Germany at the federal level through the European Council put pressure on state governments strapped fiscally to take on even more debt even just to avoid defaulting on existing debt, not to mention keeping their fiscal policy-levels sufficient that their residents would not be imperiled. Increasing debt-loads for fiscal reasons did not serve states like Greece and Spain well. Fiscal redistribution at the federal level is one of the benefits of federalism, and yet the E.U. was stymied because each state government had too much power at the federal level (quite unlike the states in the U.S. at its federal level). 
In short, much of the allure of monetary policy actually came from fiscal frustration at the federal levels of both unions. Alternatively, both fiscal and monetary policy could have been used, and pointed in the same direction: toward full employment. Using low interest rates and the issuance of debt, respectively, to pull up an economy out of severe recession and even as political coverage (in the U.S.) or leverage (in the E.U.) for needed structural reforms of a financial system and indebted states, respectively, may not have been sufficient or even smart. Taking on a corruption-induced financial system in the U.S. required a lot of political guts, which not even the Obama administration had, for the Dodd-Frank Act of 2010 did not go far enough in deconstructing the conflicts of interest in the system. Also, feeding Wall Street with infusions of government money appropriated by Congress and much more created by the Federal Reserve Bank, with no strings attached, did not make the bankers at the big banks any more willing to accept structural reforms even though they would have protected the banks by fixing the system. Not even fiscal stimulus plus low interest rates could keep the U.S. out of a severe recession, though arguably the U.S. could have entered a severe depression otherwise. Both fiscal and monetary policy and going politically after dysfunctional systems, whether that of Wall Street or those of heavily-indebted E.U. states, all must be used so none of the tools is over-relied upon and thus overused.  

See Institutional Conflicts of Interest, Essays on the Financial Crisis, and Essays on the E.U. Political Economy. All are available at Amazon.

1. Katy Barnato, “Central Banks Alone Can’t Fix Europe: Weidmann,” CNBC, March 12, 2013.  

Tuesday, August 1, 2017

Cases of Unethical Business: A Malignant Mentality of Mendacity

The book, Cases of Unethical Business: A Malignant Mentality of Mendacity, presents a number of cases of unethical conduct at American companies in several industries, along with some cases from other regions of the world for comparative perspective. A variety of industries are represented so to evince a common denominator lurking beneath specific instances of unethical conduct in business. The emphasis here is not on ethical decision-making, for it does not go deep enough. Rather, the underlying mentality out of which the decisions come is to be unearthed to be examined in the light of day. The mentality can be characterized as a mendacious narcissism having little or no regard for other people or institutions; yet even this characterization is incomplete, for a certain presumptuousness or even arrogance is can also be discerned in the cases. The mentality can be deemed to be inherently unethical in itself, regardless of whether any ensuing sordid conduct ensues.

The book, Cases of Unethical Business, can be obtained in print or as an ebook at Amazon.com.

Friday, July 14, 2017

Essays on the Financial Crisis

The financial crisis that peaked in the United States during the fall of 2008 is an excellent case study of what can go wrong with leadership and corporate governance in business, financial ethics, government regulation directed both to the firm level and that of the financial system itself, and legal accountability for the culprits. The collection of essays begins with a series of essays on Lehman Brothers, with particular attention on its last CEO, Richard Fuld. Given the fraud surrounding subprime-mortgage bonds at numerous banks, the second part of the book looks at why legal accountability was so elusive in the United States. Weaknesses in the financial regulation, with particular attention to whether agencies had been captured by their respective regulated firms, comprises the third part. The fourth part examines the culpability of the Federal Reserve Bank, which had perhaps been too close to its regulated banks to anticipate the crisis. The book concludes with essays on why business ethics had been so very weak. The careful reader will take from the book a sense that the financial system remained vulnerable even after government attempts to reduce the systemic risks of a big bank going under. 


Thursday, June 1, 2017

ECB Poised to Approve Italian Bailout of Monte dei Paschi Bank: An Instance of Federal-State Collusion?

Under the E.U.’s banking law enacted after the 2008 financial crisis, the state governments “are not supposed to inject fresh taxpayer money into a bank if it is deemed insolvent. When a bank gets into financial trouble, shareholders and bondholders, assumed to be sophisticated investors aware of the risks, are supposed to take the hit and bear the losses.” Much of the banking reforms were intended, moreover, “to prevent banks from becoming so big and so risky that they could hold the global economy hostage. Politicians and policy makers didn’t want taxpayers to be on the hook for the banks’ mistakes.” What about a mid-sized bank whose financial plight puts a state’s economy and reigning political elite in jeopardy? Should the E.U.’s central bankers look the other way and allow the state’s government to finance a bail-out so stockholders and bondholders need not feel the brunt?

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

Wednesday, May 31, 2017

Goldman Sachs’ Venezuelan Bonds: Power Behind the Throne

Goldman Sachs paid about $865 million for $2.8 billion worth of bonds in May, 2017. This represents 31 cents on the dollar and translates into an annual yield of more than 40 percent.[1] The high yield is due to the high risk that is involved, for the bonds had been held by Venezuela’s central bank in what “the government’s opposition decried as a lifeline” to the regime then in power.[2] Indeed, the central bank’s foreign-currency reserves increased by $442 million to $10.8 billion the day the bond deal was completed, and the government needed to raise money it owed to key allies like Russia and China.[3] In indirectly aiding that government, Goldman Sachs risked the ire of the opposition. Writing to Goldman Sachs, Julio Borges, head of Venezuela’s opposition-controlled legislature, indicated that he would “recommend to any future democratic government of Venezuela not to recognize or pay on these bonds.”[4] Hence, the high risk, high return. Though I submit that the risk might have been considerably less than meets the eye on account of the influence of the bank on the U.S. Government.

Goldman Sachs had been “steadily increasing its Venezuelan holdings in recent months, betting that a change in government could more than double the value of the debt if the country, which sits atop the world’s largest oil reserves, reforms its economy.”[5] The American bank could arguably dismiss Borges’ ominous threat because of the bank’s formidable influence, or power, in the U.S. Government. Besides the lavish political-campaign contributions that the bank no doubt extended to members of Congress, prospective candidates, and to the sitting president at the time, the bank had an insurance policy of sorts in that one of its alums, Steve Mnuchin (formerly a partner at Goldman) was serving as U.S. Treasury Secretary and another, Gary Cohen (who had resigned from being the President at Goldman), was the U.S. President’s Chief Economic Advisor (i.e., head of the National Economic Council). Additionally, Steven Bannon, the chief strategist in the Trump administration, had worked in the bank. Ex-Goldman bankers thus held very senior positions in the U.S. Government as the bank was betting that future regimes in Venezuela would recognize the validity of the debt owed to the bank.

The expression, “power behind the throne,” expresses the underbelly of power that has existed without doubt since the dawn of human organization. The advent of the large corporation, whose astonishing accumulation of wealth stems from principles of the Industrial Revolution, meant that private power could trump publicly held power to an unprecedented extent. The governmental discretion of lawmakers and even heads of governments may actually be diminished because of the sheer power behind the strings. In spite of the dubious democratic legitimacy and the horrendous human-rights record of the regime in power in Venezuela when Goldman Sachs bought the bond that had been issued by the state oil company Petroleos de Venezuela, the policy of the U.S. Government could easily be to “look the other way” and even prop up that regime or support any prospective regime that agrees to “toe the line” on repaying the debt owed to Goldman. The power behind the American throne, in other words, might reduce to the bottom-line financial transactions of the large American banks, which, by the way, are too big to fail yet sufficiently powerful to vanquish even public debate on whether the banks should be broken up for the overall interest of the U.S. economies and financial system. In short, follow the money, not the ideals or even enlightened self-interest. The world, moreover, may be in a driverless ship—one whose route is simply a matter of large financial transactions. Those transactions themselves may be the true power, for not even the CEO at a major bank can realistically deviate from seeing them through; the shareholders would have his head.

The discretion, whether in the large corporations or in the halls of government, may really only reside at the point at which the decisions are taken to proceed with a given large transaction. Only an investment banker would know how much discretion is truly present in the decision of whether to commit funds to an investment. In the case of Goldman’s purchase of the Venezuelan state-related bonds, the anticipation of the artificial risk-reduction by means of financial-to-political power could mean the allure of a 40% return on investment is too much to resist (i.e., greed). Yet such a prospect being deemed realistic could mean that Goldman’s managers faced a de facto fiduciary duty to the stockholders to make the non-bet “bet.” The availability of alternative profitable uses of the funds available for a bank like Goldman Sachs could give the bank’s managers some leeway in line with not propping up a regime that suffers democratically and in terms of human rights. It is only on the margins, I suspect, that ideals can get a glimpse of sunlight in a political economy in which large financial transactions hold sway in terms of both financial and political power. Yet the greed leaning strongly toward the 40% return, which crucially is made so realizable only by the bank’s power over political power in the U.S. Government, is hard for human nature to resist, especially that which is well ensconced in the culture on Wall Street. Accordingly, large financial transactions may take on a deterministic hew.

In any case, once a transaction is committed to, power goes to the transaction itself, with its private and public defenders feeling they have little practical choice but to act in the transaction’s own interest. Indeed, bank managers can be fired and government officials can be turned out if they don’t “play along.” The logic of the existing financial transactions may be determinative for the ship of state as well as an economic system. It is no wonder, therefore, that the general public should fear the prospect of a distant iceberg coming unawares over the bow, and that ideals for a better world should fall off along the way like ice melting off the rails. 




1. Kejal Vyas, Anatoly Kurmanaev, and Julie Wernau, “Goldman Sachs Under Fire For Venezuela Bond Deal,” The Wall Street Journal, May 30, 2017.
2. Ibid.
3. Ibid.
4. Ibid.
5. Ibid.

Monday, May 15, 2017

Is Undoing Financial Reform In Line With Free-Market Ideology?

Legislating on the basis of an aversion to government intervention in financial markets can paradoxically result in more massive intervention. The latter can come to pass even amid an anti-interventionist ideology on account of the emergency conditions that call for the extraordinary incursion of government into a market. Undoing the Orderly Liquidation Authority of the Dodd-Frank Act in the U.S. is a case in point.

The full essay is at "Financial Deregulation."

Sunday, August 23, 2015

American Consumers Using Gas-Savings to Reduce Debt: Frugality or Responsibility?

The steep drop in the price of oil in July 2015 was a concern for traders. Drillers and other energy companies comprise a significant portion of the S&P 500 index. “The upside to falling oil is that all the money that drivers are saving at the gas pump should mean more spending by them at stores — and a faster-growing U.S. economy. But Americans are choosing to pay off debt instead of going shopping.”[1] Is this a bad thing? In reckoning it as such, Wall Street analysts are missing the big picture, even financially.

Gasoline at a station in January 2015. (ABC News)

To go on a shopping spree when in significant consumer debt is, I submit, foolish and perhaps even reckless. The mentality erroneously treats debt as permanent rather than something to be paid back. In this respect, the U.S. Government has been a terrible role model, as Bill Clinton dedicated only half of the surpluses in the late 1990s to paying down the debt. After his presidency, the wars and occupations in Iraq and Afghanistan added more than $4 trillion to the government’s debt.

To urge consumers in debt to spend what they save on gas implies the same mentality. Tim Courtney at Exencial Wealth Advisors, for example, says "Household finances are growing more healthy ... but you want to see a pick-up in spending, too."[2] I submit that such additional spending at the expense of reducing debt is detrimental to a person’s financial position. Not only is the debt not reduced, but also the habit of spending while ignoring the debt is reinforced. Consumers regaining their pre-debt position is good for Wall Street, moreover, because the financially solid position puts the consumers in a better position to spend beyond the short term.

Even so, using discretionary income to reduce household debt is said to be frugality. The following passage from The Associated Press is a case in point, and even makes explicit the interests behind the perspective. “The new frugality helps explain why the biggest long-term driver of stock prices — corporate earnings — have been so disappointing lately. In the second quarter [of 2015], companies in the S&P 500 grew earnings per share just 0.07 percent from a year ago, according to research firm S&P Capital IQ.”[3] That which is behind disappointment can be expected to be treated harshly rhetorically. Hence, responsible efforts to reduce debt is “frugality,” which has the negative connotation of cheapness.

I submit that debtless consumers are worth more societally than are continuously increasing corporate earnings (and consumer debt). The Associated Press could have reported that consumers were being responsible while over-reaching corporate expectations were taking a hit. How the media decide to report a story does indeed have an impact not only on consumers and company managers, but also the society as a whole—even in how it votes. In the case of the U.S., especially relative to the E.U., business interests can be said to have a disproportionate influence societally.




[1] Bernard Condon and Ken Sweet, “Why Stocks Are Tumbling 6 Years into the Bull Market,” The Associated Press, August 23, 2015.
[2] Ibid.
[3] Ibid.

Friday, November 21, 2014

Wall Street Banks in Commodities Businesses: An Inherently Unethical Conflict of Interest

Writing to the bank’s board of directors, an executive at Goldman Sachs wrote that the bank’s commodities division would achieve higher value “if the business was able to grow physical activities, unconstrained by regulation and integrated with the financial activities.”[1] According to Sen. Carl Levin, Goldman’s goal here is “to profit in its financial activities using the information it gains in the physical commodities business.”[2] The integration could be achieved in part by using the bank’s access to nonpublic information from the banking or trading operations to manipulate the price of a commodity by artificially restricting or adding to supplies through ownership at the production or storage stages. This structure contains a conflict of interest. Because resisting the temptation to exploit the conflict would put the Goldman bankers at odds with the bank’s financial interest, I contend that reliance by the public on intra-bank firewalls (i.e., policies) separating the commodity businesses from the bank’s trading operations is too weak to protect the public, including buyers of the commodity.

The full essay is at "Wall Street Banks in Commodities"




1. Sen. Carl Levin, “Opening Statement,” Wall Street Bank Involvement in Physical Commodities Hearing, Permanent Subcommittee on Investigations, U.S. Senate, November 20, 2014 (accessed November 21, 2014)
2. Ibid.
3. Ibid.