On the Presumptuousness of Power: Does Wall Street Own Congress?

At the end of April, 2009, U.S. Senator Richard Durbin blamed the powerful banking lobby for the defeat of legislation that would have allowed bankruptcy judges to modify some troubled mortgages.  Even as mortgage servers were claiming to be overwhelmed with requests from distressed borrowers for readjustments to the adjustable-rate mortgages (ARM), the banks and mortgage companies felt the need to stop the US Senate from enabling judges to relieve the backlog. Durban later said in an interview, “And the banks — hard to believe in a time when we’re facing a banking crisis that many of the banks created — are still the most powerful lobby on Capitol Hill. And they frankly own the place,” he said on WJJG 1530 AM radio's  “Mornings with Ray Hanania.” On October 30, 2009,  James K. Galbraith spoke on the Bill Moyers Journal on the bank lobby changing the financial system regulation reforms now being discussed in Congress.  That that lobby feels itself to be in a position to advise the Congress on a matter in which the banks were part of the problem is something that blows Galbraith away.   They should realize among themselves, or at the very least BE TOLD that their involvement is not helpful or appropriate.   Galbraith pointed out that we have a pretty good idea of what needs to be done governmentally to stave off another financial crisis—such as separating the commerical banking and investment trading (on the bank’s equity even!) functions and reducing the scale of the banks too big to fail.  However, there are a hundred reasons why the governing class will not follow through. 

For one, we can look back to Durbin’s comment that the banking lobby owns Congress.   The conflict of interest in the owner of Congress keeping Congress from legislating on the industry is a suffiicent basis for worry; that the lobby presumes itself to be in a position to advise or pressure on banking regulatory reform and that the lobby still has the muscle to see that it is still invited to the table strikes me as emetic.  It shows the arrogance of the corporate world and the corruption of the governing class.   The housing bubble and sub-prime mortgages were in the interest of both, and yet reform strangely is not.   I would add that any voter who goes on, business as usual, in voting for an incombant is contributing to the perpetuation of the  squalid system that we are now enjoying.

Imagine, just for a moment, that a friend or neighbor insults you.  You invite some other friends over to figure out how to deal with that friend or neighbor.  You are shocked when he or she walks in your front doorway (no need to hide) and sits down in your living room with the others.  Not only that, he or she presumes to advise the group, adding pressure or outright threats that the group had better come up with something that is good for him or her. Here’s what I’m getting at: focus for a moment on the attitude of the friend or neighbor.  In our normal interpersonal relations, we would rationally conclude that the person is delusional and excessively self-absorbed.  We tend to let positions or organizations keep us from viewing their people as other (flawed) human beings.   Arrogance built on presumption concerning a matter on which the person has screwed up and others are hurt  is or ought to be a huge red flag for the rest of us (and our representatives!).   I find this attitude to be far more difficult to understand and accept than the fact that industry lobbies have an inordinate amount of power in Washington. 

I find myself thinking about the nature of presumption that can manifest as an illness where it is beyond the pale. That the person involved probably doesn’t even see this suggests to me that a rather dysfunctional lot has congregated in the upper rafters of American banking.   What kind of a person pushes for his or her advantage in the efforts by others to clean up one’s mess?   That they are allowed in the room is alone a sad testament; that our representatives are actually succumbing to them is sordid indeed.   Of course, it is in the interest of big business that the political power be concentrated among the governing class in Washington.   We are mere bystanders as the dance unfolds. 

See related: Essays on the Financial Crisis

Sources:

http://www.politico.com/news/stories/0409/21962.html
http://www.huffingtonpost.com/2009/04/29/dick-durbin-banks-frankly_n_193010.html
http://www.huffingtonpost.com/2009/04/29/dick-durbin-banks-frankly_n_193010.html  (“own the place” quote)
http://www.pbs.org/moyers/journal/10302009/profile.html

Debating Federalism

It could be maintained that federalism gets in the way of solving problems that are simply too important to go unsolved.  In short, the argument is that federalism impedes progress on important issues. State to state differences should not be tolerated, he argues, where important needs are involved. “Resources and die-hard beliefs in the role of local government vary too much from state to state” for us to trust State government to deal satisfactorily with grave problems.   I suspect this view is widely held today.

In response, I would argue that the choice of a governance system should only partly be determined by the ease by which particular problems are solved.  In designing the U.S. Government to include a separation of power between the three branches, the delegates in the constitutional convention of 1787 were looking to thwart the solution of problems by the Union’s general government.  In addition to fearing tyranny from a consolidation of power into a few hands, they believed that the functions of that government should be limited because the state legislators are closer to the people, and thus better as republics.  Rather than being problematic,  differences between the States (generically), or republics (more specifically), are natural.  Given the scale involved in many of the States alone, how could a Union of many such republics be anything but inherently diverse?  To ignore the differences and impose one solution on all is artificial and likely to build up pressure for eventual dissolution.  Such pressure can unwittedly be built out of ignorance.   So “ease in solving problems” may actually be antithetical to the criteria we want for designing our system of governance spanning a continent. I would argue, moreover, that it is short-sighted to re-orient a system of governnance to the whims of what is best for handling particular problems of the day.  To subject long-term viability to the vissitudes of the day is to subject one’s posterity to ruin.

One could also point out that federalism is a historical means to forming the Union and is therefore antiquated (as the Union is now formed).  Some of the delegates to the constitutional convention would argue that they had to put up with the continued existence of the States simply due to the politics (i.e., the intractability of the delegates defending their respective States).   Certainly Hamilton would have preferred to do away with the States—replacing them with administrative districts of the federal government.  I believe that a significant number of Americans today share Hamilton’s view.  If this sentiment is dominant among the citizens, we should give serious thought to a constitutional convention for the purpose of replacing federalism with consolidation, officially through an amendment.  Even though I believe that this option is not compatible with having a republic at the Union level, if a super-majority wants to change our system of governance, it should be changed (assuming a “constitutional moment” of reflection and debate on the proposal).

I do not believe that federalism was merely used as a political means of achieving agreement on the creation of a general government.  As I have written in another post, the diversity spanning an empire-scale polity can be accommodated by federalism.  Some large States are sufficiently large in themselves that they have diversity that could justify a federal system.  Consider, for example, California and Illinois.  Each of these republics is sufficiently diverse in its provinces that federalism could accommodate the different cultures and bring legislation that is more fitting and less compromised for all concerned.   That new States have been added to the Union since its founding—some of the last of which being quite different culturally from the others (e.g., HI and AK)—means that there could be even more diversity within the Union today than when it was founded (assuming that transportation and communications technology has not totally overridden the diversity inherent in the territorial scale of empire).  Paradoxically, the need for federalism could be more pressing today.  I have already argued that republic principles may be stretched too thin at the empire scale.  This, plus the matter of accommodating diversity within the empire, strongly points to the utility of restoring federalism. 

Finally, someone could say something like,  ”I believe in the power of each State, but I have NO confidence in the people” running the State governments.”  This point may resonate with the extant condition of state government today in the United States. That is, the eclipse of the State governments has almost certainly had an impact on the quality of the representatives the State level.  Do the best and brightest really want to work in a legislature that has been reduced to considering by and large local government issues?  What sort of person would agree to campaign for a rather impotent position?   The situation now is markedly different than in the revolutionary period, when the preference of the best and brightest of the politicians was to serve their respective countries.   Even as late as 1860, General Lee felt obliged to fight for his native Virginia—turning down Lincoln’s request that he fight for the U.S. Government.   So presumably were a balance of power restored such that State governments would have real power over the issues that really concern us, we might find the quality of our State reps improve.  We might have better candidates to choose from, and we might take more interest in their campaigns.  So I would argue that the enervated conditon of State government today should not be taken as indicative of how such government would look were it restored to a balance of power with the U.S. Government. For example, were the National Governor's Association given a formal role in determining American foreign policy, we might see better candidates running for governor.

In closing, I want to note that being in a large Union that is inherently diverse does require a certain amount of tolerance for regional differences.  “Not trusting” a State’s people who have a different understanding of government or who feel a different way on a problem is not consistent with having a Union.  That is to say, we won’t last as a Union if a dominant faction in one region imposes its ideology on States in other regions spanning the continent.  A certain humility is necessary.  Of course,  a Union has certain bed-rock common principles (in our case, representative democracy, for example) that delimit certain behavior and laws (e.g., holding other races in slavery).   The problem is the slippery slope wherein one uses “common principles” to impose one’s own ideology and the natural diversity spanning a continental Union is not accommodated.   The people of a republic will naturally want out if their way of life is imposed upon without justification.   In short, being in a Union requires having a sufficient tolerance that can admit that not every State is going to solve your important problems in the way you want.   I suspect that this Union has lost too much of this tolerance (contributing to divisive partisanship at the federal level).   One size fits all over a polity spanning across a continent (and beyond!) is likely to involve bitter partisanship because people view the approach as all or none.   To be sure, there may not be sufficient tolerance anymore among Americans to allow for a viable system of federalism.  Moreover, federalism itself is not perfect, so debate on it could lead to a decision by the popular sovereign to make the United States officially consolidated.  In my view, however, such a debate is urgently needed, for otherwise the American people will continue to live a consolidated lie under the rubric of federalism on parchment.

For more on this topic, see: Two Federal Empires and American and European Federalism

Consolidation in Russia: Federalism and Democracy at Risk

United Russia, the party led by Prime Minister Putin, decided in August, 2010 not to submit the name of the governor of Kaliningrad, Georgy V. Boos, for reappointment. The decision appeared to put pressure on governors to do more to ensure the satisfaction of those they govern, or to at least keep a lid on dissent. Governors had been popularly elected in Russia until a 2004 decree by Mr. Putin, then Russia’s president, that gave the president responsibility for appointing them. In that decree, the president is to select governors from a list of candidates drawn up by the governing party. Critics have said that the practice has made governors beholden to the Kremlin and insensitive to the popular sentiments. This can be problematic on two grounds.

In an empire-scale polity the size of Russia, which is inherently diverse,  insensitivity to popular sentiments can create pressure that could cause the federation to eventually explode. Being geographically separted from the rest of Russia and comparable to a small country, Kaliningrad is undoubtedly in a position to have expectations arise from its people concerning some extend of self-governance. As Russia treats its constituent republics like a republic’s provinces, the people in the republics are likely to take offense and demand more in terms of self-governance more in line with that of the EU’s states.

Secondly, the appointment power evinces a democracy deficit. The inability to elect governors was one of the central grievances when 10,000 people protested in Kaliningrad in January, 2010 to call for Mr. Boos’s ouster. Konstantin Doroshok, the head of the Kaliningrad branch of the opposition group, Spravedlivost, said of United Russia’s decision to deny the governor a second terms, “On the other hand, it is important to understand that the people have not been given the most important thing: the real opportunity to independently elect governors.” To the extent that the protest was over the constitutional change rather than Georgy Boos in particular, United Russia may have taken the wind out the Baltic sails without having to directly address the raison d’etre of the complaint. Even so, the pressure for more self-governance is likely to intensify in Russia’s republics. In excessively consolidating, Russia may go the way of the USSR.

Source: Michael Schwirtz, "Moscow Acts on Governor's Lack of Support," The New York Times, August 16, 2010.

Federalism 101: Does Power Naturally Consolidate?

Consolidated power seems, at least in theory, to be contrary to American political culture.   The financial consolidation even after the financial bailouts of 2008, can be deemed dangerous economically and even politically, given the unlimited campaign contributions made possible by the Citizens United case in 2010. Such consolidation complements the political consolidation at the federal level in the U.S.  Is the consolidation, which has occurred since 1865, and especially from FDR's New Deal onward, natural or contrived? That is to say, will the E.U., when it is over 200 years old, suffer the same plight? If so, federalism itself, which I submit must include a balance of power, given the checks and balances feature, between the federal level and that of the states, may be a temporary system inherently. 

For Europeans to reflect on these questions, it is first necessary to avoid the typical category mistake, which compares a state in the E.U. with the entire U.S., obviating the rather obvious point that states should be compared with states, and empire-level unions with other such unions. 

Will the E.U. consolidate political power as has occurred in the U.S.? Lest it be assumed that the popularity of state-identification issuing out in "states' rights" checks on federal power will suffice as an enduring fortress, the same identifications were common in the early U.S. So the question is whether the consolidation of power can be expected (i.e., whether it is natural), and, if so, whether safeguards in the E.U.'s basic, or constitutional, law are sufficient. Unfortunately, parchment tends to pale against pressing political pressures of the day. 

Not even democracy can be relied on, for majoritarian preferences may be for more federal-level power without any thought of the implications for the federal system. Even a constitutional court, such as the European Court of Justice and the U.S. Supreme Court, cannot be relied on, for turning back an onslaught of power that has already been transferred to the federal level can be deemed impractical. Imagine, for example, the U.S. Supreme Court ruling in 2018 that Social Security, which was enacted in the 1930s, must be turned over to the state governments without any federal-level funding or legislation. That court had not even ruled that the federal requirement to have health insurance was should be a matter for the states.

One problem of consolidating power for federalism is that the states cannot serve as a check on tyranny (or over-reaches) at the federal level if that level holds much more power. Another problem is that federal legislation in an empire-scale union tends to follow a "one size fits all" approach that ignores the ways the states differ. A healthy federal system allows for both overarching legislation for the good of the whole union and legislation that takes into account the distinctiveness of each state. 

The lack of balance in the American federal system begs the question of whether governmental power naturally consolidates over time. I suspect it does, for historical examples of decentralized power enduring as such are sparse. The question is then whether the Europeans can create countervailing safeguards without counting on "nationalistic" sentiment of the day. 

For more on this topic, see: Two Federal Empires and American and European Federalism

Political Black Holes: On the Power Behind the Throne

Our galaxy, the Milky Way, has a black hole. If this is news to you, there is no need to go hide under a rock. It turns out our black hole is not the biggest by far, and it doesn't spew out a lot of excess energy that falls into it. Even so, it is ours, and we can be glad that we have one of our very own even if it isn't the biggest one on the block. In case you are interested in seeing it’s baleful look in a picture, I’ve got bad news for you; it is invisible. No light can bounce off it.  You are probably wondering how the scientists found it.  Well, they knew that black holes are in the center of galaxies, so the crafty lab coats used light to find our center because there is too much gas there for much there to be visible to us.  The scientists noticed that the speed of stars speeds up around a certain point and posited the existence of a highly-dense black hole.

Using the phenomenon of black holes as an analogy, political "scientists" might investigate whether power, whethere in business, government or society, tends by its very nature to consolidate. In the Micheal Moore documentary on capitalism, two members of congress point to the immense power of an anti-democratic corporate banking elite that was able to turn around the House vote on the bank bailout (TARP) using the democratic leadership as runners. If so, such power was invisible to the public. Likewise a black hole is of course invisible. In the case of the banking elite, we couldn't point our fingers at who exactly gave the marching orders that turned around the no-questions-asked government loans to the banks too big to fail.  Nor do we, or will we, know who told the U.S. Senators: hands off meddling in foreclosures.  Indeed, we shall have no idea whether a power behind the throne told Congress not to even debate the alternative of giving the TARP money directly to home borrowers in trouble.  That this was not seriously debated for foreclosures involving mortgages that banks and mortgage companies should not have given in the first place hints of the existence of a massive albeit hidden political black hole. Finally, such a black hole may have been behind the administration's decision not to push for banks too big to fail to be carved up while extant rather than simply "orderly liquidated" once they have fallen under their own weight.

Neither the American people nor the American media companies go far enough in investigating even the existence of invisible black holes in the American political universe, let alone what damage they do from the standpoint of the public or common good.  Micheal Moore suggests that Citibank and Goldman don’t fear popular election much because they expect the 1 person, 1 vote thing won’t turn on them because most people think they could be in the elite too. The financial elite is 1% of the vote; 1% of the population holds 90% of the wealth, so if the other 99% happen to wake up and notice, they might take back the reins. The big business would be worried, but, alas, Wall Street is not shaking in its golden boots. As to why, I would add to Moore’s explanation by pointing to the extent to which Americans are manipulated without even knowing it.  Lest it be missed, the giant media companies are corporate too.

Is it an accident, for example, that so many stories on Afganistan pop up when it is in the interest of the defence contractors? Are they simply using the people to urge Congress to support a surge?  I would call this “direct manipulation” because we are being summoned to debate what has been put on the table for us.   The other kind is “indirect,” which involves a political black hole keeping an issue or policy-option off our radar screens.  President Obama’s suggestion, for example, that the banks too big to fail be reduced in size (and money) so they would not be so dangerous in failing, quietly went away. In looking for indirect manipulation, the important thing to notice is the absence of  any visible event or change that could explain the removal of a proposal by some new issue being covered by the media. We ought to be examining what political black holes do not want us to talk about because of private interests. For instance, we now know that health insurance companies gave their surrogates "death panel scare stories" to fan out discussion of a public alternative in health insurance.  Scaring a proposal off the radar screen is among the silent weapons used by political black holes.  Again, the source of such weapons is invisible.

So like sheep, the American people is led to debate or focus on something or to forget something else, In the process, we are unwittingly giving up, or failing to grasp, our democratic power, which can be used for the public good. To be sure, there are excesses and drawbacks in democracy and these too should be discussed, but there are hidden dangers to political black holes, and we miss these if we do not even know that such things exist.  That is to say, the democracy we do have may be rather wan in comparison to the gravity of the political black hole at the center of our political society.

Perhaps the question on your mind is:  So how do we get it back?   It might involve nothing short of waking up out of the Matrix.  So many of us don’t realize how much we are being manipulated.  Realizing it, and not tailoring our thoughts and discussions along its lines will wake others.   Once people start waking, we can start to look for candidates who do not, like Obama, take a $1 million from Goldman after promising real change.  We need candidates willing to forego being bought out by the elites who sense that democracy might possibly get the upper hand in an election.  Pay particular attention to the matter of teeth in such candidates’ proposals with respect to big business…and ask at their speeches whether they are taking money from the establish that has a vested interest in the status quo.  Don’t buy the “I’m not influenced by money.”  …which should be treated as a laugh line.   If you find genuine candidates willing to effect systemic change even where it is at the expense of the big corporate players, know that the elite will offer such candidates so much if the elite view the candidates as viable and  not under their control.  Control, by the way, can be more subtle than using a leash.  This is perhaps my major point here…political black holes are invisible and yet their anti-democratic gravity is HUGE…even as it is in a tiny space, or office.

In the Roman Empire, the games in the arena (which means “sand” in Latin) were a devise to distract as well as mollify and entertain the masses.  Today, we have American Idol and the Super Bowl, as well as the World Series.  Besides their entertainment value made possible by the talent involved, these idols are effective in gravitating popular attention…and this can be useful to the extent that the US is a plutocracy (i.e. ruled in the interest of the top 1% of the wealth) and vested powers fear the 1 person, 1 vote power of democracy.  But as Micheal Moore points out, Citibank and Goldman Sachs can rest easier knowing that many of us don’t use the power of the vote to take from the banks because many of us believe we might be among the plutacracy one day. 

I would add that we tend to be easily manipulated into following the media’s current (which, kein Zufall, tends to move around the interests of the major houses so as not to disturb the islands of capital).   We stop wondering about the distant promises to do something about the banks too big to fail because the media has conveniently stopped reminding us.  We forget that an option is to break up the banks too big to fail (which, by the way, have gotten bigger since September, 2008 and are still active at the casino).  We unthinkingly join the media in debating Obama’s banking consumer protection proposal, as though that were primary.  In other words, Goldman Sachs, which was Obama’s largest campaign contributor according to Micheal Moore (over $1 million), is content to have us debate a potentially pain so we will be appeased by Obama’s pledge of “real change” and not ask, demand, or VOTE to apply anti-trust law to financial houses.   In short, we allow ourselves to be dupped and we don’t even know it.  We don’t even realize we are taking our eyes off the eight ball.  Goldman lets Obama have four more years and 1 person, 1 vote is once again not a threat to either Goldman or the change agent that the bank bought.  Don’t expect Obama to rock the boat in bringing any real change that is not in the interests of the most powerful of the corporations.  Obama’s challenge is to show us just enough that looks like real change while not acting outside the interests of his corporate backers.  However, aren’t real change and status quo vested intersts mutually exclusive?  If so, how does Barak Obama get around this?  He gives us just enough to appear…   Meanwhile, the systemic change that is needed on the players at fault in September, 2008, goes by the wayside and we remain vulnerable even though We the People are convinced that a new consumer protection agency will do the trick.  The trick, ladies and gentlemen, is on us–and we don’t even know it.  We don’t know what we don’t know…while we presume we know it.

In 2009, Moammar Gadhafi of Libya gave a speech  at the annual opening of the General Assembly at the UN in New York City.  Substantively, he pointed to the drawbacks in having the UN remain in New York.  He also advocated a permanent seat for the African Union in the Security Council.   Fifty-three states are represented in that Union.  In an interesting twist, he remarked that the US contains fifty countries, so Africa too deserved a permanent seat.  I was utterly surprised that the man who was disorganized and sporatic in his delivery (and whose government would kill hundreds of unarmed protesters in 2011) could grasp the nature of the US in terms commensurate to the AU. He added that the EU should have a seat.   This makes a lot of sense because it is not fair for three of the EU’s states to have seats while all of the 50 United States have one. It occurred to me in listening to his speech that he understood the nature of the US as an empire-scale polity better, actually, than most contemporary Americans do. This is a bad commentary on the condition of civics classes in American high schools.  So I was surprised to find the mainstream media report the speech simply as “disorganized" without reporting any of the substance, as though there had been no serious content whatsoever.   Someone must have wanted to discredit Qaddafi for political or economic reasons.   The summary verdict was so immedate and total that none of Qaddafi’s content was covered.   The media’s treatment had all the footprints of a hidden strategy--that is, of a black hole's pull.  If I am correct, I’m left surprised that the subterfuge itself could be so blatant.  For a journalistic standpoint, the reporting was really bad.   Alternatively, the journalists could have reported what the man had said (as well as on his style and approach) and have left it to the readers to decide whether the content should be dismissed due to the style.   Something else was going on.  I’m just not sure what. I contend that something else typically goes on in terms of what is debated in the public discourse via the media. The invisible source steering and pruning what travels across our public radar screen is none other than a political black hole: a very dense concentration of private power functioning akin to an invisible elephant in a small living room. One person senses a trunk--another a leg--but we as a people miss the very existence of the elephant.  We are too distracted, and this is no accident, as it manifests by the very black hole that we do not suspect exists.

In short, both the content and frequency of topics reported by the media bear traces of the black whole that they are orbiting. As long as the source of the gravity is invisible, the black hole will continue to be quite useful.  Put another way, as long as Americans take the press reports as simply journalism, we will miss what is going on behind the scenes and therefore continue to be subject to being manipulated.  Micheal Moore asks: when will democracy ascend over the power of big business?  It is possible, but not probable.   This, by the way, is the expression that Kant uses in discussing his Kingdom of Ends (treating rational beings as ends and not just as means). Beyond the latent or actual subterranean power of corporate America over our public airwaves and legislative chambers, we ought to reflect on the threat to a republic in there simply being political black holes.

  

See: Nova on Black Holes
 (http://www.pbs.org/wgbh/nova/blackhole/)

The American News Media: A Case of Egoistic Over-Reaching

During the summer of 2010, as commentators at Fox, CNN, and MSNBC were arguing, they referred to their own arguments as “trench warfare” and “hand-to-hand fighting.”  Real soldiers would doubtless dismiss such descriptors as attempts by children to count as adults—as something more.  The soldiers would be correct, of course. Insulting or criticizing another person does not constitute fighting in the sense of warfare. Someone at MSNBC calling someone at Fox a racist does not come close to shooting someone with a rifle or even slugging someone with one’s fist.  The protesters in Libya who were being shot at by their own government in February, 2011, would shake their heads in disbelief in hearing of the "war" among media personalities.

Lest it be objected that this matter is insignificant, the propensity of the media “personalities” to over-reach has, I submit, dominated their depiction of news for years.  For example, they use “crisis” far too often.  To be sure, a crisis really did exist in September, 2008 on the Thursday evening in which Ben Bernanke and Henry Paulson told congressional leaders that unless they showed some intent to act, there would not be a financial system by the following Monday. This is what it means to be in a crisis mode. To call the BP oil in the gulf a crisis more than two months after the explosion (and weeks after the well had been capped) a "crisis" pales in comparision; hence, it is thus a case of the media over-reaching. 

By its very nature, a crisis is short-term.  The protest in Egypt, for example, during the Arab Spring quickly reached a do or die point. Such is crisis mode.  So too, when the planes shot at the protesters in Libya; the resulting turmoil, which can only be sustained as such for a brief period before a decision has to be made one way or the other, instantiated a crisis mode.  For republicans or democrats in Congress to refer to budget talks as though they were at a crisis utterly pales by comparison, even if non-essentials in government might be temporarily shut down. Yet journalists have nonetheless perpetuated the verbal inflation in order to get increased attention, which has its own life besides the obvious bump in ratings that benefit their respective networks. It is the journalist's own ego that is being served just as much as profits. Is there any room for news, especially international beyond Iran, Iraq, Russia, and Israel?

Every presidential address is self-righteously vaunted as critical. The President needs to say X or the sky will fall. No mention is subsequently made of the sky still up there even though the President omitted X.  Silently omitted is the accountability on journalists and pundits when they over-reach. 

The Downfall of MF Global: Implications for Banks Too Big To Fail

Here is an alphabet-soup of regulatory agencies that let MF Global, a financial services company that specialized in futures-trading, engage in much, too much, risk: SEC, CME, CFTC and FINRA. On one level, regulators will never be able to stop practitioners from making risky or simply bad decisions; a business system populated only by firms above average is by definition impossible. As long as their managers have any freedom of movement at all, some firms, including some in the financial sector, will inevitably fail. The question I want to pose is whether this means that firms too big to fail (TBTF) should be allowed to exist at all. In short, although MF Global itself was not TBTF, the risk Corzine (who had been chairman of Goldman Sachs) permitted suggests that human nature might be insufficiently disposed to support mammoth concentrations of private capital whose fall could mean the collapse of the financial system itself. Ultimately, I suppose, human nature can only go so far, organizationally speaking.

MF Global admitted to $630 million in missing customer funds. Although accounting errors and bank-cushions could account for the discrepancy, MF Global used customer funds to loan itself money. To be able to do so, the former U.S. Senator and Governor of New Jersey, Jon Corzine, met personally as head of MF Global with federal regulators to get them to relax their proposed rule that would have forbid such a loan. According to the New York Times, financing by borrowing customer funds is not unheard of on Wall Street, but is “carries substantial risk.”

Corzine’s influence with the regulatory agencies may have been similar to the role that Madoff’s status played in his dealings with the SEC. It would seem that regulators are readily “captured” by high status alone—never mind relying on the regulated firms for information and possibly even being influenced by political contributions via elected officials acting on the behalf of big donors. Given the riskiness in borrowing customer funds without the traditional banking oversight of lending, the regulatory “status lapse” syndrome is dangerous—particularly if a firm TBTF is involved. In other words, might we be rolling the dice in Dodd Frank by relying so much on regulators? The possible mix of duplicity and risky multi-billion dollar bets at MF Global should drive home this point.

People at an exchange that cleared trades for MF Global have indicated that Corzine’s firm might have moved money out of customer accounts “in a manner . . . designed to avoid detection” as the firm headed toward collapse. CME Group, the parent company of the Chicago and New York Mercantile Exchanges, indicated that it appears that MF Global dipped into customer accounts after CME finished an onsite review of the securities firm during the last week of October, 2011. The CME statement read in part, “It now appears that the firm made subsequent transfers of customer segregated funds in a manner that may have been designed to avoid detection insofar as MF Global did not disclose or report such transfers to the [Commodity Futures Trading Commission] or CME until early morning on Monday, October 31, 2011.” CME served as a clearing house for trades that were made through MF Global, according to the Wall Street Journal.

Meanwhile, questions regarding MF Global’s $6.3 billion bet on E.U. state debt and the scrutiny by regulators were mounting, according to the Journal. That any bet would be for such a sum ought to raise a red flag for the firm making the bet. Although MF Global was not TBTF, the managers’ willingness to take on such risk suggests that the mentality to take on extraordinary risk carries on in the financial industry. This finding may render the very existence of financial firms deemed too big to fail as something we might want to revisit through legislation. In other words, if bets worth billions of dollars on European government debt were going on through the E.U. debt crisis, the risk alone (to say nothing of the utter stupidity) may suggest that financial-sector firms that are too big to fail are also too big to exist—especially if regulatory scrutiny is insufficient. The risk and the numbers may have reached a dangerous level, given how human nature treats risk (and the limits of human cognition).

Paul Volcker admitted on Charlie Rose in late October 2011 that he never thought he would talk in terms of trillions of dollars, but there it is, that day had arrived and with it, the horrendous risk of banks being too big to fail. Whereas Citigroup had $1.63 trillion in total assets at the end of June 2006, the bank had $1.94 trillion at the end of the third quarter 2011. Comparable figures for Bank of America are $1.45 trillion and $2.22 trillion. JP Morgan Chase: $1.33 trillion and $2.29 trillion. Wells Fargo: $500 billion and $1.3 trillion. Where is the lesson on TBTF from September 2008? It is as if the credit crisis and fall of Lehman Brothers had not happened. Thomas Hoenig, former Kansas City Fed chairman, said in a speech in February 2011, “We must break up the largest banks.” He said the government could do so by restricting the activities of government-backed banks “and significantly narrowing the scope of institutions that are now more powerful and more of a threat to our capitalist system than prior to the crisis.” According to the Wall Street Journal, regulators “can ultimately force a firm to sell off parts of itself if they don’t believe a firm could be wound down without threatening others.” Although Hoenig said he is not against BIG, just too big to fail, so it is possible that the biggest banks could show that “they are manageable, that their risk will not impact the taxpayer in the future,” I contend that the mere existence of concentrations of $1.94, $2.22, $2.29 and $1.3 trillion is inherently dangerous to the financial system and the greater economy. If even one of those should go under all at once, assuming losses are involved, investors, business managers, bankers and even consumers would surely hear a subtle fiscal “thud” and react aversely, even if in a self-fulfilling prophesy. If Wall Street bankers did not learn a lesson from September 2008, however, that “thud” could be far more than psychological. The example of MF Global may suggest that the bankers on Wall Street did indeed continue on in being all too willing to make risky multi-billion-dollar bets, having “slept through” the shrieking “wake-up call” of the financial crisis of 2008. The resumption of the extravagant bonus culture strongly suggests that the bankers still had an incentive to bet big with little regard for risk.

Treating the mega bank as too big to exist as a mega bank does not depend on regulatory scrutiny, which can be subject to the “status syndrome”; rather, once a firm hits the pre-established threshold, the regulators would simply come in and orderly “smash the atom” such that smaller firms result (with different owners, managers and employees—unlike the case of the companies coming out of Standard Oil, which had the same ownership and whose executives were even allowed to continue working in the same building!).

I think perhaps we presume too much regarding human nature, given the edifices we build ever higher and higher, as if in testament to the self-idolatry of our presumption that we cannot be wrong. Lest we come too close to the sun and turn our cities into deserts, we might want to fly our chariots a bit closer to the ground.

                                                

Sources:

Jean Eaglesham, Aaron Luchetti, and Jacob Bunge, “Regulators Enter the MF Fray,” The Wall Street Journal, November 3, 2011. 

Azam Ahmed and Ben Protess, “As Regulators Pressed Changes, Corzine Pushed Back, and Won,” The New York Times, November 4, 2011. 

Victoria McGrane, “Banks’ Critic Poised to Be Head of FDIC,” The Wall Street Journal, November 18, 2011. 

Having It Both Ways: American Culture or Merely Congress?

Under the terms of the debt-ceiling budget agreement enacted during the summer in 2011, members of a joint Congressional committee, evenly divided between the parties as well as between the two chambers, had until Nov. 23 of that year to recommend ways to reduce budget deficits by at least $1.2 trillion over 10 years. Both houses had to vote on the package by Dec. 23, 2011. If no legislation is enacted, the government would automatically cut almost $500 billion from military spending, with an equal amount from nonmilitary programs, between 2013 and 2021.

As negotiations in the “super committee” were becoming mired in November, some Democrats were becoming “increasingly concerned” that some Republicans on the committee, in declaring that they would not be able to accept new revenues toward deficit reduction, were calculating that they would be able to reverse the triggered cuts. Not just any cuts—only those from military spending were loathed by the Republicans. Even as the joint committee was still meeting, Republicans on the House and Senate Armed Services Committees were “readying legislation that would undo the automatic across-the-board cuts totaling nearly $500 billion for military programs, or exchange them for cuts in other areas.”

“Republicans should not count on taking the easy way out if they continue to resist a balanced deficit deal that includes revenue increases,” warned Senator Charles E. Schumer, Democrat of New York. Representative Chris Van Hollen, Democrat of Maryland and a member of the joint committee, said the attempt to undo the triggers “reflects a total lack of seriousness.” Adding that such efforts would not be successful, he said they were “the result of people trying to escape the fundamental choices before us, and one of those choices is whether or not we are willing to end special interest tax breaks to pay for defense.” Interestingly because he is a Republican, the House speaker, John A. Boehner of Ohio, said he wanted the joint committee to succeed, but that he would not tamper with the mechanism for automatic cuts. “I would feel bound by it,” he said. “It was part of the agreement. The sequester is ugly. Why? Because we don’t want anybody to go there.” That’s just the point; the default of automatic cuts was put into the agreement as an incentive for the joint committee to reach an agreement. Consisting of both parties equally, both sides would have to give. I contend that the Republicans were much less used to giving, so they were less tolerant to the hard choice that the default they had voted for foisted on them.

The porous path of least resistance is often easy to spot. Republicans being forced to choose between agreeing to tax increases and defense cuts found themselves between a rock and a hard place—that is, between anti-tax lobbyists such as Grover Norquist and defense contractors such as Lockheed Martin. “There is more fear this time,” Representative Mo Brooks, Republican of Alabama, said about the anxiety being expressed by military contractors in his district. Simply put, the Republicans were used to being able to satisfy both Norquist and Lockheed, so the lawmakers went after what they perceived as a false choice. The Speaker was being a statesman in refusing to support such efforts.

When all of a sudden getting things all one’s way is no longer possible, perception itself can be affected—such as in viewing the defense cuts as unfair or disproportionate even though they were equal to the non-defense cuts that the Democrats would have to swallow in the absence of an agreement in the joint committee. In other words, that the Democrats were not trying to change the mix of sequestration cuts even though half of those cuts were politically noxious. This suggests that the Republicans may have felt more entitled to getting things all their way than did the Democrats. Tolerance for being in a tight spot is easier if one is not used getting one’s way and thus does not necessary expect it. In other words, respect for even one’s own rules tends not to hold up to a mentality that privileges getting 100% of one’s position.

That more Americans are conservative than liberal may have been providing the Republicans in Congress with a “playing field” leaning in their favor. Hence, they could typically avoid being the side to blink. For example, during the summer of 2011, they successfully kept raising taxes off the table. When suddenly faced with pressure to give even a bit on this point, the ongoing mentality seeks to deconstruct the default giving rise to the pressure rather than to respect the hard choice and the structure undergirding it.

Beyond partisan politics, it is legitimate to ask whether the American cultures (and there are several, as in Europe) unduly support or even value the mentality wherein a person demand his own way. “My way or the highway” is a common expression in the U.S. I contend that it is particularly salient in American business. Perhaps Republicans coming from or representing that sector of society are so used the self-serving rigidity of “corporate policy” that they won’t even sit down to discuss a deal unless it fits with their “ground rules.”  I suspect that the instinct to deconstruct anything that pressures a choice that involves not getting everything one’s own way is engrained in American managerialism and corporate culture.

I suspect that people reading this essay who have visited the U.S. and are from other regions may be nodding in agreement, Yes, that’s how the rest of us see you guys, but you don’t see it. Americans are perhaps so used to the entitlement of my way or the highway and so used to evading rather than respecting even self-imposed hard choices the mentality within is hardly even recognized, much less expunged in any meaningful way. I see my fellow Americans so used to the rigidity and selfishness of employees (and managers) in retail sectors of American business that it can scarcely be imagined that customer (or, falsely, “guest”) relations in the states might be severely dysfunctional in terms of social psychology.

If I am correct here, then the way the chronic deficits are dealt with may be as problematic as the fiscal imbalances themselves, for both evince a jejune mentality that refuses to grow up and face adult decisions.

Source:

Jennifer Steinhauer and Robert Pear, “Lawmakers Aim to Stop Defense Cuts if Debt Panel Fails,” The New York Times, November 5, 2011. 

Contagion Beyond the Headlines in the E.U.

The E.U. states of Greece and Italy were grabbing headlines during the first two weeks of November 2011, given the dramatic resignations of Papandreou and Berlusconi. The only other state to get some attention was France. The Wall Street Journal noted on November 12^th that concerns had been quietly building about France. According to the paper,“French bond yields rose to four-month highs, one day after Standard & Poor's Ratings Services erroneously issued a message saying it had cut France's triple-A credit rating. The yield on France's benchmark 10-year bond climbed 0.02 percentage point to 3.46%. That was 1.66 percentage points over yields on comparable German government bonds. France now has the highest government bond yields among its triple-A-rated peers in the region.” However, it seems overly dramatic to say that a .02 percent increase evinces a climb. Moreover, 3.46% is well under 7 percent, which is the level that was presumed at the time to signify the need for a bailout. Relative to the changes in the Italian yield, those of the French bonds could be viewed as relatively moderate, The French yield was still closer to that of Germany. Although not a red herring, the concern over France masked some real sleepers that were poised to take a hit in 2012. 

Eclipsed by the headlines, Portugal’s expected GDP for 2012 was revised downward by the E.U.’s executive branch in November from the May estimates of around -1.8% to -3% with an expected unemployment rate of nearly 14 percent. The 2011 numbers were also revised downward, from about -1.9% to around -2.1 percent. Meanwhile, Portugal’s semi-sovereign 10-year bond yield was at just over 12 percent, well over Italy’s “point of no return” rate of 7.5 percent, which was hit for a day during the second week of November. With an expected contraction of 3% in 2012 and a 12% yield in November of 2011, Portugal could be expected to face stronger head-winds in being able to make its interest payments in 2012. I suspect that the press had become so captivated with the circus of personalities in Greece and Italy that the iceberg lying in front of Portugal was simply not seen.

Besides Portugal, some of the states in Eastern Europe faced icebergs of their own—though not necessarily of their own making. These too were receiving too little press coverage in November of 2011. Specifically, the state leaders of the “euro zone” had decided in October to give the “zone’s” major banks until the following summer to raise their capital reserves. With that amount of time, the banks could avoid issuing new stock (which would dilute the holdings of their existing stockholders) and get the added reserves together by cutting back on lending to Eastern E.U. state governments instead. Morgan Stanley figures that Poland, Romania, and Hungary are most vulnerable to a loss of “euro zone” bank lending. Roughly 1 trillion euros of “euro zone” bank assets were in Eastern Europe at the time of the change in governments in Greece and Italy. Hungary’s exposure was the largest, with loans held by the banks amounting to about 37% of GDP. According to the Wall Street Journal, any hit to the E.U.’s eastern states, whose economic growth had been powered the global recovery, would only worsen the E.U.’s economic outlook and its ability to service its debts. That is to say, enabling the “euro zone” banks to raise additional reserve capital by reducing lending rather than raising equity may have been in the banks’ interest, but choking the eastern states could already in November be expected to make it more difficult for Greece, Italy, and Portugal to service their respective debts from reduced economic output in 2012. 

It would have been wiser on the journalists’ part to put France in perspective and take a look at Portugal and Eastern Europe than to have fixated so much on the plights of Papandreou and Berlusconi as they struggled to maintain power only to ultimately lose it.

For more on this topic, see Essays on the E.U. Political Economy

Sources:

Matthew Dalton, “Europe Slashes Its Growth Forecast,” The Wall Street Journal, November 11, 2011. 

Kelly Evans, “Eastern Europe Vulnerable in Debt Crisis,” The Wall Street Journal, November 11, 2011. 

Neelabh Chaturvedi, Stelios Bouras, and Liam Moloney, “Europe Pulls Back From Brink,” The Wall Street Journal, November 12-13, 2011. 

On the Allure of Popular Suffrage

In the European singing contest/show in which Susan Boyle competed, she lost the top spot to a teenage rap group. The method of selection made all the difference. Rather than having a three-judge panel of experts on singing determine the winner, the general public could “text” via cell phone or other device to vote. That one of the judges explicitly advocated for Boyle after her final performance (just before the voting) was no never mind to the general public that submitted a majority of the votes. To be sure, there were certainly non-music reasons to vote against her. Most notably, the suggestive comments she made on stage just before her first performance, including, “I’m 48, and that’s not my other half” (as she was swinging her hips as if she were sexy), were downright emetic, if not utterly bizarre. So it is possible that the voters put her personality defect above her excellent singing. It is also possible that the “texters” responsible for a majority of the votes simply preferred rap music. I do not like rap “songs” that include shouting and swearing; I do not even regard such “songs” as music. Otherwise, I could sing a song simply by yelling at you. From what I saw, the rap group in the competition was not swearing, but the “singing” did sound at times like shouting to me. Moreover, the group members seemed more oriented to dancing than singing. It is possible that the votes for that group went for any of the fads being represented rather than to singing per se.

A tension, or even an outright contradiction, can exist between meritocracy and direct democracy, or popular sovereignty. Plato and Aristotle both claim that there is a dark side to each system. Meritocracy can slide into aristocracy and democracy into mob rule: government by a selfish and uninformed mob swayed by the passions of the moment over even the people’s own best interests. What struck me about the results of the singing contest was that the rap singing wasn’t good singing whereas Susan Boyle sang very well, yet even so, the group won. It can be safely assumed that most of the voters probably were not experts on good singing. They were not trained to separate their own tastes from a critical perspective focusing on the singers’ voices. The judges presumably could have done this, but they were relegated to proffering their views before the voting—views that the voters could ignore without any imprecation. Indeed, the selection method itself—popular sovereignty—tacitly "disvalues" expertise. In one person, one vote, no one is assumed to be any better qualified to render a decision than anyone else. Differences in effort and talent among the electors are irrelevant unless particular voters care to take them into account.

Lest it be assumed that people in Western democracies necessarily privilege popular sovereignty or the will of the people refracted through elected representatives, it should be noted that power-elites are tacitly permitted to run our political, commercial and non-profit sectors. When Greece’s prime minister, George Papandreou, proposed a referendum in which the Greek people would decide whether to accept the latest debt-deal negotiated at a meeting of the European Council (consisting of heads of the E.U.’s state governments), leaders of France and Germany as well as E.U. appointed officials bore down on the prime minister, perhaps even undercutting his influence with members of his own party in the Greek legislature. Although defending the euro currency from a collapse assumed likely without the implementation of the latest debt deal, the E.U. leaders (including Merkel and Sarkozy) sent the message that direct democracy, ironically in Greece, could not be tolerated given the severity of the economic challenges involved. Experts at the E.U. level, such as the head of the European Central Bank, were included as the E.U. leaders met with Papandreou to pressure him to drop his proposal or change the question to being on the euro zone (rather than on whether to accept the latest E.U. debt deal). Disrespect for direct democracy, or popular sovereignty, was very much implied in the stance being taken at the impromptu E.U. meeting before the G-20 meeting. Yet strangely, the “gang” got away with it. Europeans did not stand up for the voice of the Greek people to be heard directly. Not even the Greek parliament resisted the E.U. “gang” by sufficiently backing the prime minister’s proposal. Instead, leaders of some of the E.U.’s big states and maybe even some E.U. appointed officials may even have pressured members of Papandreou’s own party to bring him down lest he not relent and do what was being deemed necessary to save the euro and the E.U. itself.  Indeed, even Papandreou, when he was caving on the referendum, betrayed his earlier appeal to popular sovereignty by stating that the referendum had value only as long as the opposition was opposing the debt-deal.

I contend that in the E.U., as well as in the U.S., all too often lip-service is given to popular sovereignty and representative democracy, when in fact people still look up to expertise. The Oscars, whose awards are decided by members of the film academy who have expertise in the various fields of filmmaking, is more esteemed than are the People’s Choice Awards. The Oscars are more likely to recognize Maryl Streep’s acting ability than is the People’s Choice.  I would argue that the results of the Oscars are more credible because expertise is not chucked for a flavor of the month. For instance, in the 2010 Oscars, Hurt Locker beat Avatar for Best Director and Best Picture. Hurt Locker was largely an Indie (i.e., on the fringes) film, whereas Avatar broke box office records and was no doubt much more popular with the general public. The Academy members were able to weight improved 3D effects, story and direction without allowing the technical dazzle to overshadow. Indeed, Avatar did receive the Oscar for its development and use of new 3-D technology, even as the members of the academy recognized that the most technologically-advanced film is not necessarily the best.

Of course, Oscar voting is not perfect. The 5000 plus membership may be sufficiently small that cronyism or, its opposite, grudges, may play a role. Avatar’s David Cameron, for example, was apparently not the best-liked man in Hollywood at the time, and his ex-wife just happened to be the director of Hurt Locker. I saw a television clip a few months before the 2010 Oscars showing Cameron being very rude to a fan who simply wanted an autograph at LAX, so I was rooting for his ex-wife and her movie even though Avatar was one of my favorite movies at the time. The lesson is perhaps that no selection process, or person for that matter, is perfect.

My point is that the case of Susan Boyle and the Oscars both point to there being drawbacks to popular suffrage. The E.U. suggests that efforts to bracket direct and even representative democracy are tolerated by the general populous even in democracies. Maybe we are not as much the democrats as we think we are. Maybe there is good reason to leave some things to experts. Even so, at least with respect to political judgment, there may be good reason not to cut off the will of the people. Hence, the U.S. has its Electoral College and the European Council appoints its president, while the U.S. House of Representatives and the E.U. Parliament have elected representatives of the people. In binding the Electoral College to popular vote, the U.S. has moved to the democratic pole, even while tolerating the influence of “big money” in politics. In looking the other way while E.U. leaders undercut state government vetoes and referendums, the E.U. have moved subtly away from the rule of law as well as democracy, even while the salience of state-level elected officials at the EU level (via the European Council) emphasizes “first order” representative democracy (over “second order” selected by the first order). Ideally, neither expertise nor the will of the people are eclipsed, with the rule of law protecting both. The E.U. and U.S. could both take a lesson.

Sources:

 Richard Corliss, “Oscar Wrap-Up: Why Avatar Lost,” Time, March 8, 2010. 

Marcus Walker and Alkman Granitsas, “Greece Blinks on Euro Threat,” The Wall Street Journal, November 4, 2011.