On the Influence of Wall Street in Congress: The Proposal to Distinguish Financial and Commercial Derivatives

In the process whereby financial reform legislation made its way through Congress after the financial crisis of 2008, the U.S. House and Senate had different approaches concerning who would be required to go through a clearing house to buy or sell deriviative securities. According to Michael Masters, "The clearing house would stand in the middle of the transaction and guarantee both sides of the trade. If one counterparty to the transaction fails, then the central counterparty absorbs those losses, protecting the system as a whole from collapse."  Masters claims that "Wall Street firms hate this idea because their prodigious profits will dwindle when derivatives are traded in the light of day, letting their counterparties see the true costs. So Wall Street is pushing hard to exempt as many transactions as possible."  Given the culpability of Wall Street in the financial crisis, they were in no position to "push hard." That they did nonetheless is a telling sign of the underlying character, or lack thereof, "on the street."  Furthermore, that the representatives and senators were listening to them ought to cause the voters some concern.  Yet because of the reality of the banks' muscle on the hill, the power of the banks to exploit any loopholes in the final legislation should have been salient as the legislation made its way through Congress. This can be seen in whether to favor the House or Senate version.

According to Masters, "The Senate version of the clearing house requirement, which is currently the base text for the bill, includes a narrow, well-defined exemption that allows commercial end-users a complete exemption from clearing, while denying this exemption to financial players. The House language, however, would exempt anyone hedging "balance sheet risk." Since every financial player has a balance sheet, it is estimated that more than 50% of the outstanding derivatives would go uncleared under the House plan, compared to just 10% under the Senate version."  One might say: Ah, 50% is a pretty wide door--better go with the Senate version (assuming it could resist threats and favors from the banking lobby).

Masters explains the rationale for the Senate's version. There "is a critical policy distinction that must be made between commercial end-users like airlines, and financial entities like hedge funds. For a commercial end-user, risk arises naturally out of the ordinary conduct of business. For a financial entity, pricing and managing risk is their core business. As an example, an airline cannot fly without incurring the risk of wildly gyrating jet fuel prices. Allowing them to hedge their jet fuel exposure without a clearing requirement would provide stability for the airline, confidence for airline investors and ensure that the broad U.S. economy benefits from reliable airline service. A hedge fund, however, starts with no inherent risk. Its mission is to evaluate investment options, balancing risk and reward. If a hedge fund enters into a jet fuel derivatives contract on a bet that prices will increase, then it's nonsense to say that they are "hedging" when they subsequently enter into an offsetting deal to reduce the risk they voluntarily took on in the first place. These semantic charades can easily be carried to such extremes that every transaction a hedge fund enters is "hedging" something. An exemption for hedge funds serves no social purpose and, in fact, it puts our entire financial system at risk."  In other words, there are good business reasons for non-financial companies to be able to use derivatives to hedge for risk related to price volitility even if the companies cannot meet the clearing requirements. Of course, it could be asked what proportion of commercial use should but would not occur were such use subject to the clearing house requirements.  I don't know the answer to this question. I contend, however, that even if it is significant, the danger that the loophole would be exploited such that the financial system would once again be at risk outweighs any such inconvenience.  In other words, in reaching too far for perfect efficiency, we could unwittingly be inviting the irrational exuberance of the market to destroy the market mechanism itself.  We ought not fly too close to the sun or we might get burnt and fall to the ground. Masters concludes that the Senate language is "superior to the House's simply because it forces far more derivatives into the open." This may be so, but what would prevent a financial player from using a commercial user as a front to bypass the clearing requirements? Furthermore, there might be legislative language in the exemption that allows financial firms to obviate the clearing houses without even needing such a front.

In short, I contend that having any loopholes, or exeptions, is an unwise practice when we know (as Sen. Dick Durbin said) that the banking lobby owns Congress. We also know that managers and their lawyers are oriented to exploiting loopholes.  To expect otherwise is to tell a shark that it should not be a feeding machine.  That is, we must accept the nature of business for what it is, and not do what can reasonably be assumed to be taken advantage of.  It is like saying to sharks: those of you who do not eat any swimmers can go through the hole in the net and into the shore area.  It is just too dangerous to have a hole in the first place, even if there are some benefits to having it.

Source: http://money.cnn.com/2010/06/23/news/economy/congress_derivatives/index.htm

Westboro Church's Anti-Gay and John Galliano's Anti-Semitic Opinions: The U.S. and E.U. Contrasted

The First Amendment protects free speech in the U.S. even if it is as hurtful as signs at a Marine funeral proclaiming "Thank God for Dead Soldiers," the U.S. Supreme Court ruled on March 2, 2011. The Westboro Baptist Church celebrated the death of Lance Cpl. Matthew Snyder in Iraq with signs such as "God Hates You," along with anti-gay messages at his funeral in Maryland in 2006. The late Marine's father sought damages for emotional distress. An appellate court had reversed the $5 million award granted by a district court, and the U.S. Supreme Court concurred with the appellate court's decision.  The Wall Street Journal notes that "Chief Justice Roberts nodded to the wrenching set of facts in the case, writing that 'the applicable legal term— 'emotional distress'—fails to capture fully the anguish Westboro's choice added to Mr. Snyder's already incalculable grief.'"  Crucially, however, the justices of the majority opinion would not fall to the temptation of acting on the emotion that naturally follows hearing of such harm.

Interestingly, on the same day as the American high court's decision, the designer John Galliano was being fired by Dior's CEO and investigated by the French police (for inciting racial hatred with anti-semitic statementsm, which is illegal in at least the French and German states of the EU) for having made anti-semitic insults to a couple with whom he was arguing late at night in a trendy bar (cafe) in Paris. There, the emotions got the best of both the designer and those who reacted to the video posted of his comments (albeit showing only a part of the argument). Perhaps a grieving father at his son's funeral reading signs that thank God for dead American soldiers can be likened to a Jewish couple at a bar hearing that they are lucky their grandparents or parents were not exterminated by the Nazis. It is difficult for the rest of us to know how either feels, or how to compare the pain.

In any case, that any human being would want to hurt another so much is truly a sad commentary on our species that otherwise vaunts itself as being in the image of God. Perhaps the question is what kind of God is being envisioned here. A vengeance is mine, sayth the Lord sort, which Nietzsche condemns in his writings as already discredited on account of having such a sordid divine attribute as vengeance?  The deed is done, according to Nietzsche.  So too, the pain has already been inflicted on the grieving parents and the Jewish couple.  The rest is merely mopping up. 

I contend that the impulsive reaction in Europe to the fashion designer's drunken anti-semetic slurs is inferior to the majority opinion of the American court in the Westboro case because the tolerance of reason is more in keeping with a free society than is vengeance or retribution against a disliked opinion. Chief Justice Roberts emphasized that speech on public issues (of which gays in the military is one) "cannot be restricted simply because it is upsetting or arouses contempt," USA Today reports. Roberts pointed out that the jury at the district court level of the case had been told that Westboro could be held liable for the intentional infliction of emotional distress if the picketing was "outrageous." The chief justice argues that that test is "highly malleable," which is to say, it can change according to what a given person happens to think is outrageous. An old man might think noice in an apartment hallway at midnight is outrageous while a few college students down the hall might simply assume that the party has begun. In such a case, outrageous may have a physiological determinant and thus be innately different depending on the person. Quoting the 1988 case of Hustler Magazine v. Fallwell, Roberts said that liability cannot be imposed on "the basis of jurors' tastes or views, or perhaps on the basis of their dislike of a particular expression." Rather, reason must trump passion in such matters. Regarding the Synder case, Roberts said that the small Topeka-based church's messages "may fall short of refined social or political commentary," but discussed "matters of public import," such as the nation's morality and gays in the military and thus are protected by the first amendment to the U.S. Constitution, which guarantees free speech.  A free society is only really free to the extent that we protect even the opinions of those we loath. Otherwise, society reduces to a primitive matter of excluding those we don't like. Such banal convenience is too decadent for a vibrant republic and society. Reason tells us this. The question is whether we have sufficient impulse-control to proffer the degree of tolerance that is requisite. So actually, the matter pivots on us--Americans and European generally--rather than on Westboro and Galliano. They can make us stronger in spite of themselves if we permit ourselves to rise to the occasion rather than satisfy our immediate gratification.  In the end, it is up to us, not them, what kind of societies we have.

In terms of federalism, the chief justice noted that states can regulate the time and place of the protests, and the church was already contesting some as too restrictive. As of the date of the court's decision, forty six states had enacted laws to minimize picketing near a cemetery during funerals. In terms of federalism, it might be that the states' respective Supreme Courts might have been the proper venue in interpreting the U.S. Constitution in such cases. Generally speaking, if there can be fifty different sets of regulations on protests, there can be fifty different decisions interpreting free speech. It would not be like fifty different foreign policies. As it is, even with fifty different regulations, the final decider is centralized in the U.S. Supreme Court.

Sources:

http://online.wsj.com/article/SB10001424052748703559604576176323629295598.html?KEYWORDS=first+amendment+protects

http://www.guardian.co.uk/lifeandstyle/2011/mar/04/john-galliano-dior-brand

Joan Biskupic and Kevin Johnson, "Westboro free-speech ruling has its limits," USA Today, March 3, 2011, p. 2A.

The Banking Lobby Amid Goldman Sachs' Culpability: A Danger to the Republic?

To simplify how Goldman Sachs got into trouble with the SEC: According to Annie Lowrey, the hedge fund Paulson & Co. handpicked mortgage-backed securities that were doomed to stop performing, being backed with subprime mortgages, and Goldman packaged them into a kind of bond. Paulson & Co. bet against the bond by buying short-sales, with Goldman acting as the broker. At the same time, Goldman sold the bond to other clients without disclosing that Paulson had engineered the bond to fail. The SEC filing notes that those other clients lost $1 billion. Goldman had no direct stake in the success or failure of the CDO. It made money either way. “This litigation exposes the cynical, savage culture of Wall Street that allows a dealer to commit fraud on one customer to benefit another,” Chris Whalen, a bank analyst at Institutional Risk Analytics, said in a note to clients on April 16, 2010. Someone at Goldman said on the same day that “the SEC’s charges are completely unfounded in law and fact.” If the SEC charges hold up (and it is doubtful that the agency would bring such charges without supporting documentation; it is more apt to miss something than go overboard), I am astonished that the people at Goldman simply dismissed the matter out of hand. It might make sense as their legal defense, but if the bankers are convicted, those lying ought to be fired even if they were not a party to the scheme. It also appears that the bankers lied about whether they made money in betting against the housing market. “The 2009 Goldman Sachs annual report stated that the firm ‘did not generate enormous net revenues by betting against residential related products,’ ” Senator Levin, chairman of the US Senate’s committee on investigations, said in a statement in April, 2010. “These e-mails show that, in fact, Goldman made a lot of money by betting against the mortgage market.” When a spokesperson for the bank says something in the future, a rational person will be wont not to trust him or her. Lying has (or ought to have) consequences rather than being dismissed as harmless PR or a legal defense. The bank’s credibility is at issue here. The SEC has accused Goldman of outright lying to customers in order to make money both ways on a deal. Even though this ought to reflect negatively on Goldman’s future business, bigger issues involved that ought to consume more of our attention than how Goldman fares.

Given the strength of the financial sector’s lobby in Washington, this case involving Goldman suggests that we, the American electorate, were unwittingly putting our financial system and our republics in danger by enabling the lobby to have such effect in watering down the regulatory reform in the wake of the financial crisis of 2008.

In the election cycle in which the US Senate’s agricultural committee took up legislation that would regulate all derivatives (2010), people and organizations affiliated with financial, insurance and real estate companies gave members of the committee $22.8 million. Wall Street firms raised $60,000 at two fund-raisers for the committee’s chair’s re-election campaign in the cycle before the committee took up the legislation. Many of the chairs constituents want a crackdown on the speculation. This put Blanche Lincoln in a difficult situation, ethically speaking. At the very least, accepting money from the firms that would be subject to the legislation involves the appearance of a conflict of interest. I contend that given human nature, even such an appearance ought to be avoided or even outlawed. At the very least, it is unseemly in a republic, and I would argue dangerous to its viability.

Furthermore, as if the banks’ culpibility in the crisis was not sufficient to cancel their reservations at the regulatory table, the Goldman case strongly suggests that the banks ought not to be trusted as contributors to regulatory reform. And yet they push ahead to reduce the regulatation, in spite of it all. A child who drops his milkshake doesn’t turn around and tell his mother that she better not clean it up and that she had better not get involved if it happens again. Rather, such a child stands back. As if there is not enough of a natural feeling of shame at having made a mess, there is, or ought naturally to be, an even greater sense of shame in presuming to be in a position to direct the clean-up according to one’s self-interest over objections that the person who caused the problem is not the one best suited to fix it. Even if corporations can enjoy the legal fiction of personhood, there are actual human beings running them, and it is telling when those people dismiss their innate shame in their presumption–even pretending that it is not presumption! We are to blame in not calling them on it, and relegating them. We must relegate them if they won’t do it for themselves, as would be natural for them to do. In other words, we ought to call the artiface for what it is and relegate it as a parent would naturally tell a spoiled and misbehaving yet dogmatic child to go to his room. We, the American people, are enablers; bad parents. We ought to look toward solving the bigger problem, which the case of the Goldman children intimates.

The theory of regulatory capture points to the government’s need for information that the industry being regulated can provide. This theory ignores the broader power-base that an industry is apt to have in lobbying the government (and supporting candidates). In other words, information is just small change from the standpoint of an industry’s ability to influence a government. A better theory would have its primary focus on the macro level, asking the question, in effect, whether (and how) a republic is compromised by its moneyed corporations and banks. Besides looking at campaign finance law and uncovering actual lobbying practices, we ought to look at how much the society in question values money, commerical gain, wealth and economic freedom. We ought not be limited to the managerial or technocrat perspective in ascertaining whether our financial system and indeed our very republics are in danger from being used by unscrupulous firms or industies according to that which fits their peoples’ desires. Once we have uncovered the real problem, we really won’t have any excuse for not fixing it, and we would be bad parents indeed if we let the children fix it.

Sources:
http://washingtonindependent.com/82571/sec-charges-goldman-sachs-over-subprime-tied-product  http://opinionator.blogs.nytimes.com/2010/04/16/goldmans-stacked-bet/?ref=opinion
http://money.cnn.com/2010/04/16/news/companies/sec.goldman.fortune/index.htm?postversion=2010041616 ; http://money.cnn.com/2010/04/16/news/companies/goldman_sachs_questions.fortune/index.htm?postversion=2010041615 ; http://www.nytimes.com/2010/04/20/business/20derivatives.html?hp
http://www.nytimes.com/2010/04/25/business/25goldman.html?ref=us

The Volcker Rule: Taking in Water on Proprietary Trading

Under the Dodd-Frank financial reform law of 2010, Goldman Sachs had to break up its principal strategies group, the trading unit that had been very profitable. Goldman was considering several options, including moving the traders to another division or shutting the unit altogether. Morgan Stanley was considering ceding control of its $7 billion hedge fund firm, FrontPoint Partners. At Citigroup, executives had sold hedge fund and private equity businesses and were discussing reducing proprietary trading, which relies on a bank’s own capital to make bets in the financial markets. JPMorgan Chase had already begun dismantling its stand-alone proprietary trading desk and was modifying the structure of some investments of One Equity Partners, its internal private equity business. “This is the real stuff,” said Brad Hintz, an analyst at Sanford C. Bernstein & Company. “It shows that if you squeeze Wall Street, like a balloon it will come out somewhere else, and we really are squeezing Wall Street. Their business models are changing.”

However, loopholes in the legislation may enable the banks to continue to trade on their own books, even apart from serving as a counterparty for client transactions. Citigroup and others, for instance, are considering moving proprietary traders to desks that handle trades for clients, although the traders would still be able to make their own bets in the markets. The Volcker Rule’s definition of proprietary trading is open to interpretation. At first blush, it looks watertight: the rule forbids banks from buying and selling financial products for their “trading account.” That, in turn, is defined as an account meant to profit in the “near term” from “short term” movements in prices. Besides not covering such long term bets as shorting in anticipation of a fall in the housing market, the rule states that banks can still trade government and agency securities for their own account. Some of the problems at the hedge fund Long-Term Capital Management stemmed from trying to arbitrage prices between Treasuries of different terms. And the Carlyle Capital Corporation, a heavily leveraged debt fund, crashed in 2008 when prices of Fannie Mae and Freddie Mac mortgage bonds dropped. So in allowing for continued proprietary trading apart from serving as a short-term counter-party for a client’s transaction, the Dodd-Frank Financial Reform law may not change Wall Street’s landskip all that much. This is hardly surprising, as members of Congress allowed the banking lobby to participate in the writing of the legislation in spite of the industry’s culpability in the financial crisis of 2008.

Sources:
http://www.nytimes.com/2010/08/06/business/06wall.html?_r=1&scp=2&sq=wall%20st%20faces%20specter%20of%20lost&st=cse
http://www.nytimes.com/2010/08/06/business/06views.html?scp=1&sq=anthony%20currie%20christopher%20swann&st=Search

The U.S. Supreme Court as Decider: A Conflict of Interest in Federalism Cases?

As to whether the supreme courts of particular American states, or republics, should be able to declare the general (U.S.) government’s health-insurance mandate unconstitutional in the sense of being an encroachment of the government of the union beyond its enumerated powers, it is typically presumed that the U.S. Supreme Court is the rightful and proper umpire--the court of last resort on disputes on federalism applied to particular legislation. Forgotten is the argument made by Thomas Jefferson against that court’s suitability owing to its institutional conflict of interest in contests between the U.S. Government, of which the U.S. Supreme Court is a branch, and a goverment of one of the several states.  Typically, we do not consider how the conflict of interest can be solved. We do not “think outside the box.” Rather, we feel resigned to have branch of one of the parties of the dispute act as the final decider short of a constitutional amendment.

We do not consider, for example, that perhaps a council of the States’ Supreme Court Chief Justices (or their attorney generals) might be a less problematic alternative. We need not throw up our hands and leave it to any state to nullify any federal law it doesn’t like. We can design an umpire of federalism in such a way that the the encroaching tendency of the center is counterbalanced by the interests of the states in deciding the question. That is to say, we ought to design the umpire mechanism in such a way that tilts in the direction of the states, given the tilt of power in the other direction historically and today. It is well worth reviewing Jefferson’s argument so this doesn’t sound so radical. Given our aversion to real change, the need for a constitutional amendment must be backed up by a mainstream figure.

Essentially, Jefferson maintained that there is a conflict of interest in one branch of the US Government–the US Supreme Court–being the ultimate umpire in federalism disputes between a State and the US Government. It is like having a member of one of the two baseball teams playing being the umpire. In college, I was a referee for intermural football. I was stunned when the coordinator of the refs, himself a student, assigned himself to referee the game involving his own fraternity. When I suggested that there is a conflict of interest in his self-assignment, he dismissed my concern out of hand. Sadly, this sort of attitude characterizes Americans in general with respect to institutional conflicts of interest in our government (and between business and government). I contend that we are blind to such ethical problems, and the viability of our federal system of public governance, which includes semi-sovereign States, is paying the price in the form of a massive imbalance.

One might counter that the separation of powers in the US Government make the US Supreme Court independent of the Congress and President. According to Thomas Woods, the separation of powers in the federal government cannot be relied on to distinguish the US Supreme Court’s interest from its basis as a branch of the US Government because the “three federal branches can simply unite against the independence of the states and the reserved rights of the people.”[i] In 1825, Thomas Jefferson wrote, “It is but too evident, that the three ruling branches of [the Federal government] are in combination to strip their colleagues, the State authorities, of the powers reserved by them, and to exercise themselves all functions foreign and domestic.”[ii] Jefferson believed that in a dispute between the states and the federal government, the resolution should not come from a branch of the federal government. With the US Supreme Court as the umpire on federalism questions, the states “would inexorably be eclipsed by the federal government.”[iii] Woods observes, “(S)ince the federal courts are themselves a branch of the federal government, how can the people be expected to consider them impartial arbiters? The [US] Supreme Court itself, after all, although usually pointed to as the monopolistic and infallible judge of the constitutionality of the federal government’s actions, is itself a branch of the federal government.”[iv] For one thing, US Supreme Court justices are selected by the US President and confirmed by US Senators. In this process, even an unconscious “similarity of perspective” is likely to be sought or welcomed even with respect to one’s vantage-point (i.e., perspective). Spencer Roane, a Virginia judge whom Jefferson would have nominated to the US Supreme Court, wrote, “the States never could have committed an act of such egregious folly as to agree that their empire should be altogether appointed and paid by the other party. The [US] Supreme Court may be a perfectly impartial tribunal to decide between two States, but cannot be considered in that point of view when the contest lies between the United States and one of its members… . The [US] Supreme Court is but a department of the general government. A department is not competent to do that to which the whole government is inadequate… . They cannot do it unless we tread underfoot the principle which forbids a party to decide his own cause.”[v] As a branch of the Federal government, the US Supreme Court justices have at the very least a perspective from the “whole”–meaning the US as a whole–which is the vantage-point of the US Government. This is a background basis of similarity; the nominating President and the confirming Senators are likely to ask questions of a nominee that would show the nominee’s attitude or opinion concerning the power of the US Government (i.e., the power of the President and Senators!). The conflict of interest is clear, yet no one points to it. This is very odd indeed–tantamount to a societal blindspot.

Not unexpectedly, the US Supreme Court has consistently and overwhelmingly decided federalism cases in favor of the US Government. Even the Morrison and Lopez cases on the reach of the interstate commerce clause in the 1990s allow for indirect economic effects from such commerce to justify the jurisdiction of the US Government over those of the States. An indirect effect is just the sort of loophole that the US Government has been using to expand its power. So even the Rhenquist court was pro-US Government vis a vis the States. Joseph Desha, governor of Kentucky in 1825, wrote, “most of the encroachments made by the general government flow through the [US] Supreme Court itself, the very tribunal which claims to be the final arbiter of all such disputes. What chance for justice have the States when the usurpers of their rights are made their judges? Just as much as individuals when judged by their oppressors.”[vi] What amazes me is not so much the historical trend; rather, I’m bewildered by how such an obvious conflict of interest could be allowed to fly for so long under the radar screen of American public consciousness. This really should tell us something about ourselves, and we ought not to be flattered by what we see.

————————————————————————————————————————
[i] Woods, Jr., Thomas E. Nullification: How to Resist Federal Tyranny in the 21st Century (Washington, DC: Regnery, 2010), 4.

[ii]Thomas Jefferson to William B. Giles, December 26, 1825, in The Writings of Thomas Jefferson, vol. 10, ed. Paul L. Ford (New York: G. P. Putnam’s Sons, 1899), 355.

[iii] Woods, Jr., Thomas E. Nullification: How to Resist Federal Tyranny in the 21st Century (Washington, DC: Regnery, 2010), 5.

[iv] Woods, Jr., Thomas E. Nullification: How to Resist Federal Tyranny in the 21st Century (Washington, DC: Regnery, 2010), 5.

[v] James J. Kilpatrick, The Sovereign States: Notes of a Citizen of Virginia (Chicago: Henry Regnery, 1957), 156.

[vi] State Documents on Federal Relations: The States and the United States, ed. Herman V. Ames (New York: Longman’s, Green, 1911), 113.

Balancing Company Rights and Worker Security through Public Policy

It would be a cruel joke were an airline to keep the extendable corridor back as the plane’s front door is opened and passengers are pushed out. Not even having a safety net below would neither be sufficient nor fair. When a government gives companies the flexibility to fire workers without yet having in place vocational safety nets, said government acts negligently and perhaps even with partiality to one side of the labor-management duality. At the very least, the flexibility to fire should be held off until the matter of economic security is finalized.

With the largest automaker in the E.U. state of France announcing the firing of 1,300, the largest supermarket-chain in the state set to cut 2,500, and 200 at a major clothing retailer in January, 2018, companies were already “taking advantage of new rules that make it easier to hire and fire. But the other changes, those designed to help cushion the blow like retraining programs,” were not yet in place, “leaving workers vulnerable to a coming wave of downsizing” in a state whose unemployment rate had been “persistently stuck at more than 9 percent for more than a decade.”[1] The Times goes on to point out that “the initial imbalance between employer rights and workers’ protections means the economic picture could get worse before it gets better.”[2] This way of expressing the matter highlights the possibility that the government officials were biased in favor of the business lobby (and cash).

I submit that protections for citizens—providing a safety net even if only for workers in transition—is more important than employer rights (i.e., property rights) because even just risking sustenance is a greater harm than holding on for a while to old rigid rules on firings. The case of an impending bankruptcy may be different, as firing some employees could save the jobs of the majority.

In this analysis, I am drawing on Bentham’s utilitarian ethical theory, wherein the greatest good in terms of pleasure (less pain) is the criterion. Generally, a public policy that restricts the choices of a company’s management creates less pain than the corresponding pleasure (without pain of losing sustenance) for the workforce. Opening up the choices creates pleasure (and reduces pain) for managements and stockholders, but the pain of being unemployed is more. Even given Bentham’s claim that such pleasure and pain could be put in quantitative terms, the pain from losing the means of livelihood and possibly having to do without even on the basics (food, shelter, and medical care) is high indeed—so high that even comparing it to the pleasure obtained by the companies seems an injustice. This is not a justification for regulation or socialism (i.e., the state owns the means of production); rather, I submit that balance, such as in the timing of the public policies on firings and worker-security, is a ripe additive to Bentham’s theory.

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[1] Liz Alderman, “Newfound Freedom . . . to Fire,” The New York Times, January 24, 2018.

[2]Ibid.

The Strength of the Euro Bespeaks Normalcy for the E.U.

As 2018 was beginning its climb in the northern hemisphere toward eventually warmer days, the prospect for the E.U. through and after the secession of one of its largest states was perhaps brighter than commonly thought at the time. When the days are short, it is perhaps all too easy to be pessimistic. Signs of strength in the euro implicitly sent the message in January  of 2018 that the E.U. would be just fine without its foremost euro-skeptic state.

The first month of 2018 witnessed negative interest rates both for the euro and the yen, and stronger economic growth for the E.U. and Japan. Interestingly, however, the two currencies were heading in opposite directions as markets protected that interest rates would rise quicker in the E.U. than in Japan. In 2017, the euro had rallied by 14% against the dollar, while the yen had been up by only 2 percent. Against a bloc of trade-weighted international currencies, the yen had actually declined.[1]

The normalization of the E.U.’s context, and the E.U. itself, even as a large state was in the midst of seceding from the Union, can be inferred from the euro’s relative strength. “What we clearly have is that the expectation for normalization is giving the euro a boost, and that’s part of what’s moving the currency,” said Andreas Koenig of Amundi. Normalization is not a word that most Europeans would have probably been using at the time. Britain was still holding that it could avoid a hard border in Ireland and yet leave the single market and the customs union, as well as have diverging regulations. At the federal level was the expectation that the state’s intent on ending the free movement of E.U. citizens in and out of an independent Britain as no longer being subject to the ECJ, the E.U.’s Supreme Court would “point to a free-trade agreement little more comprehensive than those with South Korea or Canada.”[2] With the E.U. and one of its states holding such divergent expectations still in the dawn of 2018, normalcy is a word that people then likely were not applying for the E.U. for the year and indeed the next several to come.

Yet the secession of a state whose government had not only resisted transferring more governmental sovereignty to the federal level, but also wanted some back and even viewed the E.U. itself eschew as a network or mere trading “bloc,” could even then be reckoned as a good thing for the Union because a stronger, more internally aligned one would come out without even such a large state at the UK. For a house divided cannot long stand, and at the very least the vast majority of any political society, even a federal one, should agree on the basics of what the society is.

---

[1] Mike Bird, “Euro and Yen Tell Different Tales on Negative Rates,” The Wall Street Journal, January 22, 2018.

[2] “Now for the Difficult Bit,” The Economist, January 13, 2018.

Rule of Law in the E.U.: Implications for the Federal System

For a federal system to be viable over the long term, a core of basic values must be shared even though one of the main functions of federalism as a system of government is the ability to accommodate diversity from state to state. In the case of the E.U. and the U.S., the rule of law, democracy, and separation of powers as concerns the independence of judiciaries at the state and federal levels are non-negotiable; hence as these are compromised or thwarted outright, the viability of E Pluribus Unum can be expected to unravel. As 2017 came to an end, the E.U. found itself largely impotent as some of the eastern states violated the basic principles of rule of law and an independent judiciary with impunity. If the impunity was indeed real, the federal system itself was in desperate need of repair.

The expansion of the U.S. westward during the nineteenth century brought the rule of law to the “wild west.” Similarly, the expansion of the E.U. eastward in the early decades of the twenty-first century was meant in part to instill  the rule of law after decades of corruption under communism.  Yet in the state of Poland late in 2017, the state government fired more than a third of the judges on the state’s highest court. That government even ignored the ruling of the state’s constitutional tribunal, “prompting the European Commission to trigger a sanctions procedure that could strip Poland of its voting rights in the union.”[1] Making the weakness of the E.U.’s lopsided (i.e., state dominated) federal system transparent, the governor of the state of Hungary declared he would veto any such stripping. The conflict of interest is obvious, given Viktor Orban’s “increasing authoritarianism” in Hungary.[2] In particular, his Fidesz party had forced judges into early retirement and exerted control over the media, central bank, and data protection in the state after winning a supermajority in the state legislature in 2010. That the federal procedure for punishing the state government of Poland could be subject to a veto from another wayward state government points to weakness at the federal level. Specifically, not enough governmental sovereignty had been shifted from the states to the Union.

The compromised independence of state judiciaries cut into the core values of separation of power and of law, which are essential in any viable republic (i.e., representative democracy); for a democratic majority can oppress minorities and individuals and thus deprive them of essential liberties that in turn underpin a democracy. Although the state of Bulgaria, which began its six-month E.U. “presidency” in January, 2018, had made some progress against corruption, that state and Romania were said by the Commission to have not made enough progress to end a decade of special monitoring. To be sure, Malta too had issues with the rule of law. The same could be said of the Sicily region of the state of Italy, where the mafia was still vibrant, so the western states were not immune. Even so, an E.U. official said that people in the west felt betrayed by their fellow citizens in the east.

A house divided cannot long stand, it is said, yet institutions have an incredible amount of undeserved inertia. Even so, the gravity of the problem facing the E.U., which I contend is enough to warrant an additional shift of governmental sovereignty to the federal level with respect especially to the ability of the “feds” to come down on wayward states, is evident from E.U. Vice President Frans Timmermans’ statement that undermining the rule of law “is putting at jeopardy the very core of what holds us together.”[3] Perhaps the E.U. should have held off the accessions of the formerly Communist states or taken a greater role in ongoing monitoring in them, but the fundamental values of a political culture are slow and even resistant to change. The federal level of the E.U. needed more power with which to stave off inertia or back-sliding in the problematic eastern states. A federal FBI and adequate federal laws to go after individual wrongdoers in the state governments could have made a dent in the problem, in that E.U. citizens living in the east could have seen that participating in corruption does not pay even if it still does locally. The ECJ could have been empowered to take on a larger role with respect to the state governments and even their respective individual officeholders. Criminal law is not among my areas of expertise, however, whereas I can state decisively that the inability of a federal level to enforce basic principles against opposition in a few states points to a serious weakness in the federal system itself with respect to the relation of the federal and state levels in terms of authority. A viable federal system enables both the federal and state levels to act as checks against the other, and this requires something approaching a balance of power between the two levels. In the case of the E.U., as in the early U.S., the problem has been the insufficiency of power at the federal level.  

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[1] Valentina Pop and Daniel Michaels, “EU Confronts Deep Divisions Over Legal Standards,”The Wall Street Journal, January 19, 2018.

[2] Ibid.

[3] Ibid.

BP and MMS: A Case of Regulatory Capture

In the U.S. Constitutional Convention, James Madison in particular stressed the nepharious quality of faction in relation to the public good. He argued that if a republic is extended in scope sufficently that there are more factions, none of them would be able to dominate and the public good would emerge. In a republic in which there are only a few major parties, the people's perspectives can become delimited by the parties' paradigms in an either-or dual macro-framework. That is to say, societal blind-spots can exist. To the extent that both BP and the relevant U.S. Government regulatory agency, MMS, were both culpable in the Deep Water Horizon rig explosion in 2010, both the Republican defense of business and the Democratic defense of government fall short. Even so, these respective defenses went on undaunted in the wake of the disaster and in the next year. To be sure, old paradigms die hard.

Albeit an oversimplification, it can be said that the Democratic party in the United States stresses the power of business as the problem, whereas the Republican party there views the problem as being government.  In campaigning for President in 1980, Ronald Reagan bluntly said that government was indeed the problem.  Deregulation ensued and industry self-regulation was like a fad. The idea was that the checks and balances in goverment that protect the liberties of the citizens could be applied at the industry level such firms would provide a check on eachother automatically. Lost in the buzz was the extent to which an industry would be willing to sacrifice its own long-term viability in order to protect even the bad among its own.

In 2010, the Republican paradigm whereas business is good and government is bad resulted in some Republican office holders defending a piriah (BP) and continuing to urge deregulation in order to excoreate against the US Government and frustrate the Obama Administration.  The ranking Republican on the US House Energy and Commerce committee apologized to BP’s CEO for the “shakedown” by Obama in extracting a $20 billion fund for the claims in the Gulf region. Meanwhile, Democrats were hard-pressed to admit that a goverment regulatory agency, namely MMS, could be so inept and corrupt.  It was not so much a matter of more regulations being needed; rather, the problem was government regulation itself.

Democrats could point to the encroaching nature of big business over the regulators, but absent a shakedown in the size of the biggest companies, the wherewithal of the regulators not to “partner up” with the regulatees may be an intractable problem in government regulation.  The traditional argument in capture theory that regulators depend on their respective industries for information doesn’t even break a sweat in what is needed to explain the extent of the power of big business over government regulatory agencies.  The imbalance of power is systemic: government officials being too feckless and corrupt. and big business being too powerful for the good of the republic.  In their letters, Jefferson and Adams agree on the need for a natural aristocracy of virtue and talent, rather than the artifical sort of wealth and birth.  Absent a natural aristocracy, systems whether business or government, cannot but be ineffective and corrupt.

In 2010, BP’s sordid safety record and its explosion in the Gulf of Mexico challenged the paradigms of both parties.  In actuality, business and goverment, as well as business and government, contain problems that exceed and transcend a particular paradigm. In treating the two party paradigms as a dichotomy, we miss the interaction effect that exists among the respective sectors’ problems.  It might be that the founders were correct in their suspicion of factionalism, as it does indeed detract from the common good.  Where a paradigm keeps one from acknowledging problems that are in the radar of an “opposing” paradigm, a person is not apt to serve the public interest.  In other words, both paradigms are limited.  The BP-MMS interaction and the subsequent explosion and responses exposed the delimited nature of the partisan paradigms.

For more on MMS, see Cases of Unethical Business, which is available in print and as an ebook at Amazon.

On U.S.Senators Being Elected

According to David Firestone of The New York Times, a “surprising number” of the Tea Party members were calling for the repeal of the 17th Amendment of the US Constitution during the election campaign season of 2010. That amendment, which was ratified in 1913, provides for direct election by the people of each state of US senators. According to Firestone, “allowing Americans to choose their own senators seems so obvious that it is hard to remember that the nation’s founders didn’t really trust voters with the job. The people were given the right to elect House members. But senators were supposed to be a check on popular rowdiness and factionalism. They were appointed by state legislatures.” That it may seem so obvious to us does not mean that we have it right. Yet Firestone presumes so in writing, “a  modern appreciation of democracy — not to mention a clear-eyed appraisal of today’s dysfunctional state legislatures — should make the idea unthinkable.” Should it really?  Firestone seems biased in his dogmatism.

For one thing, the delegates to the Constitutional Convention in 1786 didn’t want to restrict direct representative democracy in the US Government to the US House only out of fear of mob rule as Firestone suggests.  They thought the direct power of the state governments in the US Government would be necessary to keep the new empire from consolidating at the imperial level (i.e., in the US Government). Firestone himself admits that to most authors of the Constitution, “allowing states to appoint the Senate was the linchpin of the entire federalist system and the real reason there are two houses of Congress.” Whereas the British House of Lords represents wealth, the US Senate was to represent not only that, but semi-sovereign republics as well.  The latter likens the US Senate to the European Council rather than to the upper chamber of one of the EU’s states.  Firestone makes a category mistake where he avers that it “may be true that appointed senators, accountable only to state legislators, would never approve of many useful federal mandates designed to put the national interest above local parochialism — including everything from the minimum wage to the new health care reform law.” States commensurate with European kingdoms/countries are not local polities.  Furthermore, reducing the US Government to a “national” interest ignores the semi-sovereign nature of the states (and thus the international principles in the design of the US Senate as opposed to the US House, which is national in nature).

Firestone seems to misunderstand what the US Senate is.  In referring to returning to having the state legislatures appoint their delegates to the US Senate as an “elitist notion,” Firestone forgets that state legislators are elected by the people and in fact have smaller electorates than do US House or Senate members.  Empowering state legislators would ironically be to bring power back closer to the people.  ”Senate candidates have to raise so much money to run that they become beholden to special interests,” Tea Party members say according to Firestone.  The members ”argue that state legislators would not be as compromised and would choose senators who truly put their state’s needs first.” That in turn would restore checks and balance to federalism, wherein both the state and federal governments would be checked (by the other). This is not just a matter of state rights; rather, it is a matter of a viable federalism instead of consolidation. As Tim Bridgewater, who ousted Sen. Robert Bennett of Utah as the Republican candidate writes, “We traded senators who represent rights of states for senators who represent the rights of special interest groups.” By rights of the states, one can infer an empowerment of the representatives elected by the people of the states.  Such a change would hardly be anti-democratic or elitist; rather, it would reduce the power of the elitism in Washington DC.  A writer ought to be careful in dogmatically writing that something is ridiculous or unthinkable, for the lack of thought could come back to haunt him or her.  It is clear that Firestone is not very open to the possibility that he could be wrong.  The arrogance of centralized power at an empire-level is truly remarkable, even in its press.

Source: http://www.nytimes.com/2010/06/01/opinion/01tue4.html?hp

See American and European Federalism  and Essays on Two Federal Empires, both available at Amazon.