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Friday, May 20, 2011

Obama Presses Israel to Compromise for Peace

Seeing to “capture a moment of epochal change in the Arab world,” Barak Obama delivered a foreign policy speech on May 19, 2011 in which, according to the New York Times, he sought “to break the stalemate in the Israeli-Palestinian conflict” by “setting out a new starting point for negotiations.” In particular, he suggested that the Israelis go back to the 1967 borders, adjusted somewhat to account for settlements on the West Bank. Meeting with Obama on the following day, Israeli Prime Minister Netanyahu said, “We can’t go back” to the 1967 borders, according to MSNBC.com.

                            Jim Young / Reuters

Before the president’s speech, according to the New York Times, Netanyahu “held an angry phone conversation with Secretary of State Hillary Rodham Clinton” to demand that the president’s references to 1967 borders be cut. White House officials said that nothing was changed from Israeli pressure. In spite of the billions in aid to Israel from the U.S., the Israeli government had ignored the president’s request that settlements be halted—only to reject the 1967 borders proposal.  Given the position of Israel in the Middle East and its financial support from the U.S., the Israeli government’s rejection of the American proposals is perplexing. In fact, the refusals, as well as the pressure, could be taken as presumptuous, given Israel’s intransience in negotiating with the Palestinians.

So why, one might ask, didn’t the American president freeze aid to Israel? Although Jews in the U.S. are only about 2% of the total population, as donors to political candidates and the Democratic Party, the Jewish influence is disproportionate. Congress would hardly support real pressure on Israel, so realistically the president’s hand was probably tied.

In fact, I would not be surprised if Netanyahu had threatened Obama that if he kept the 1967 border proposal in his speech, he would lose Florida in 2012. It would be unfortunate if Americans who happen to be Jewish would put another country before their own in voting for president. In fact, I submit that it is in the Jewish interest, whether in Florida or Israel, that additional pressure be applied to Israel so a comprehensive peace deal may be achieved. Indeed, the reaction to the speech in the E.U. was that finally the U.S. Government was standing up to Israel.  A spokesperson for E.U. foreign policy minister Catherine Ashton said she "warmly welcomes President Obama's confirmation that the borders of Israel and Palestine should be based on the 1967 lines with the mutually agreed swaps, with secured and recognized borders on both sides," according to Zawya.com. Perhaps the E.U. and U.S. could combine forces to pressure Israel to comrpromise.

However, was making a proposal not to Israel’s liking standing up to the Israelis? I contend that the most intractable problem in the Middle East requires more than words. Accordingly, President Obama should find the will to put money behind his words. Specifically, he should give the Israeli government a deadline for a peace deal, after which American aid would be frozen. If Congress’s approval is necessary, the president should make the recommendation, agreeing to take the heat. 

Coming off his victory over Osama Bin Laden, Obama has some political capital to burn, and he should not be afraid of retaliation from Americans who happen to be Jewish—whom I would think would be against occupation wherever it is going on, given the history of Jewish suffering under occupation. Surely Jewish Americans realize that two wrongs do not make a right, and, moreover, that Israel’s future will not be secured until it compromises with those whom it is occupying. Borne of occupied resistance, the United States itself ought to be for the occupied rather than the occupiers, and Jewish Americans are part of the United States, are they not?

In any case, the way to win a presidential election is to keep one’s eyes on the prize rather than deferring in order not to offend particular interest groups. Paradoxically, if winning re-election is the predominant factor in every major presidential decision, the likelihood of a win is diminished accordingly because there are inevitably costs borne more by some than others as a leader puts his money where his mouth is in order to achieve any truly worthwhile accomplishment. Relatedly, a benefit of a representative democracy rather than a direct democracy is that in the former representatives have a period of time insulating them from the immediate passions of the people so they can go out on a limb to bring home the bacon that might involve a bit of discomfort.

Sources:

Mark Lander and Steven Lee Myers, “Obama sees ’67 Borders as Starting Point for Peace Deal,” The New York Times, May 20, 2011.

On Term Limits & Representation: The Anti-Federalist View

In the New York convention for ratifying the U.S. Constitution, Melancton Smith favored having the state legislatures rotating their U.S. Senators rather than keeping the same men in the Senate for life. "It is a circumstance strongly in favor of rotation, that it will have a tendency to diffuse a more general spirit of emulation, and to bring forward into office the genius and abilities of the continent. If the office is to be perpetually confined to a few, other men of equal talents and virtue, but not possessed of so extensive an influence, may be discouraged from aspiring to it" (Storing, p. 348).  This argument could easily be applied to the people electing U.S. Senators.

The full essay is at "Is the E.U. a Federal System?"

E Pluribus Unum (One out of Many): Unity without Uniformity

On January 12, 2011, President Obama spoke at the memorial service for the fallen victims of the assassination attempt on Rep. Giffords. “What we can’t do is use this tragedy as one more occasion to turn on each other,” the President said. “That we cannot do. As we discuss these issues, let each of us do so with a good dose of humility.” Had we really been turning on each other? It is as though a bystander had pointed out to two people arguing that they were indeed shouting.  "Were we really shouting?" one might ask the observer in astonishment--to which the observer would nod and add, "You guys might try a bit of humility," rather than, as the President observed, "pointing fingers or assigning blame.” 

The night after the president's speech, I watched Karen Armstrong, the former nun and author of History of God, on the PBS program, Charlie Rose. Armstrong pointed out that discussion in which others' motives are presumed and impugned involve a certain arrogance.  Each of us is a mystery to ourselves, she added.  How can we be so sure of the other partisan's motives? 

Similarly, President Obama said in his speech, “Let us use this occasion to expand our moral imaginations, to listen to each other more carefully, to sharpen our instincts for empathy, and remind ourselves of all the ways that our hopes and dreams are bound together.” Empathy and humility are attributes antipodal to anger and pride. How often are the former two invoked in political discourse? How often are two partisans reminded that they have been turning on each other, in effect?  Are Americans really turning on each other?  Is the house so divided and thus acrimonious?  It could indeed be that we, the American people, have allowed ourselves to be unwittingly drawn into a fight in which the pundits on television and radio benefit financially from the escalation.

I do not believe that we are a warring people intrinsically, though we do seem to be vulnerable to artful and manipulating public figures.  Perhaps we are too readily inclined to engage in hero worship.  Indeed, there could have been some of that involved in the 2008 Presidential election. We do tend not always to rise to the occasion in managing or resolving real differences, whether in campaigns or in voting. Popular sovereignty, our Founders averred, relies on a virtuous and informed electorate. This involves the citizens feeling a sufficient civic duty to take a serious look at real differences and make a solid decision on election-day that reflects their own respective political and moral ideologies. To be sure, fundamental differences do exist.

Paul Krugman, for example, points to a "deep divide in American political morality," in which he believes there is "no middle ground." He takes the health reform law passed in 2010 as a case in point. "One side saw health reform, with its subsidized extension of coverage to the uninsured, as fulfilling a moral imperative: wealthy nations, it believed, have an obligation to provide all their citizens with essential care. The other side saw the same reform as a moral outrage, an assault on the right of Americans to spend their money as they choose." This difference can perhaps be characterized as pitting a moral imperative of a right to life in terms of survival (and the immorality of selfishness) against the moral imperative of property rights (and the immorality of theft via high taxes).  It is no wonder that tempers flared in the debate amid such emotionally-charged language.

Politics involves conflict over things that people hold dear—their values and beliefs. Representative democracy has the beneficial feature whereby relatively cool representatives debate and decide such policy. How quickly the Rights of Man became savage mobs in Paris in 1792. Does liberty translate into a mass of people, out of control and rushing into a prison to disembowel priests and slice limbs off aristocrats? Political discourse can be much worse than that to which President Obama had in mind when he characterized the American people as having been turning on each other. The extent of the "deep divide" in America can, with the aid of human nature, issue in violence, but this need not be, and I contend that we are a too peaceful a people to be led so astray by our passions abetted by media personalities and demagogues.  We may be making it more difficult on ourselves by willowing practically all public policy through the federal government.

We do have fifty republics we can draw on to have the sort of diversity of policy that could reduce the pressure on us to resolve the deep divide into one size as if one way could fit all. However, this solution would require tolerance. Burgess avers that there "is an important moral dimension to federalism, as it is all about toleration, mutual respect, and equality of partnership, amongst other principles" (Burgess, p. 70). For example, people in Idaho who not want government mandated health-care coverage must be willing to tolerate Massachusetts's mandate (and subsidies), and vice versa. With empathy and humility can come tolerance.

We are doing pretty well with religious tolerance, at least relative to historical instances of persecutions. In the seventeenth century, for example, four Quakers were burnt in New England—ostensibly for refusing to pay a church-tax that would go to a church they did not support. In the case of the contemporary uncivil public discourse, perhaps it would help to recognize that one size does not fit all in an empire-scale union--that ironically unum is strengthened precisely by tolerating more pluribus. I suspect this point has been lost on Americans since the founding.

We should not be surprised that there are substantial differences in a country that stretches across a continent and then some. In European terms, we are a union of nations--our states are equivalent in scale and political type (i.e., semi-sovereign political units of a union) to their countries. Accordingly, I contend that the U.S. Government ought to start dealing with those countries at the E.U. level.

In short, perhaps we have turned on each other because we have forgotten what we--the United States--are. Having lost sight of our polities, we have unwittingly suffered our differences to fit into the narrow funnel of uniformity, which we assume is requisite for unity. According to Burgess, “the formal organization of human relations [undergirding federal systems] must be founded upon ‘diversity’ as its cardinal principle. Consequently, we require unity but not uniformity” (Burgess, p. 68).  This is especially applicable where the federal system is on an empire-level.

In effect, we have forgotten the meaning of e pluribus unum; we have lost touch with what we are. Perhaps our angry public discourse is in part an eruption of our own subterranean angst, whose existential source is simply a hazy sense of being lost or adrift in some way. One cannot but be lost if one has forgotten what one is. We have forgotten that we, the U.S., are a union of republics that are commensurate to European countries. 

Sandra Day O'Conner once remarked at a small group setting, "Congress is acting like a state legislature." Evidently, Congress had forgotten what it is. If a person or group loses touch with what they intrinsically are, it likely won't be long before the wayward ship runs up against a reef. So it is only natural to feel a sense of angst while adrift without a sense of what one is. The tenor of our public discourse is merely a symptom. The question is whether we will treat it as such and dive deeper to get at the real problem, which lies in our own lack of understanding of what we are.

Click to add a question or comment (or view comments) on whether uniformity through the federal government is necessary for unity in the U.S.A.

Sources:

Paul Krugman, “A Tale of Two Moralities,” The New York Times, January 13, 2011.

Burgess, Michael, “Federalism and federation,” in European Union Politics, Michelle Cini, ed. (Oxford: Oxford University Press, 2003), pp. 65-79.

A Health-Insurance Mandate Consistent with Federalism

On June 7, 2011, according to the Huffington Post, “three judges on the 11th Circuit Court of Appeals panel questioned whether upholding the landmark law could open the door to Congress adopting other sweeping economic mandates.” Chief Judge Joel Dubina, who had been appointed by President George H.W. Bush, "struck early by asking the government's attorney 'if we uphold the individual mandate in this case, are there any limits on Congressional power?' Circuit Judges Frank Hull and Stanley Marcus, who were both appointed by President Bill Clinton, echoed his concerns later in the hearing.”

The full essay is at "Is the E.U. a Federal System?"

Thursday, May 19, 2011

On the Obama Administration's Inconsistency on Syria and Libya

In his foreign policy speech on May 19, 2011, U.S. President Barak Obama attempted to justify his administration’s policy of selective military action against violent rulers. “(W)e cannot prevent every injustice perpetrated by a regime against its people, and we have learned from our experience in Iraq just how costly and difficult it is to impose regime change by change by force – no matter how well-intended it may be.” The Obama administration was assuming that facilitating the removal of a ruler who is violently betraying his people must involve a multi-year American occupation, as in Iraq. However, the case of the U.N.-sanctioned international coalition enforcing a no-fly-zon and protecting civilians in Libya proffers a counter-example.

Obama stated, “(W)e saw the prospect of imminent massacre, had a mandate for action, and heard the Libyan people's call for help. Had we not acted along with our NATO allies and regional coalition partners, thousands would have been killed. The message would have been clear: keep power by killing as many people as it takes.” The problem is that by the time the U.S. President uttered these words, Assad had killed perhaps up to a thousand unarmed protesters in Syria. In June 2011, after Assad's troops had killed an estimated 1,100 civilians, U.S. Secretary of State Clinton could only muster a warning. "The legitimacy that is necessary for anyone to expect change to occur under this current government is, if not gone, nearly run out." How many civilians did Qadhafi's troops kill before his right to rule was expunged by the U.S. Government? The irony is that whereas in Libya the protesters had relatively quickly become armed rebels, the Syrian protests remained largely in the protest mode. Ethically, it is worse to kill unarmed protesters than armed rebels. 

Even though Obama admits that “the Syrian regime has chosen the path of murder and the mass arrests of its citizens,” he claims it is sufficient for the U.S. to have “condemned these actions, [while] working with the international community [to step] up our sanctions on the Syrian regime - including sanctions . . . on President Assad and those around him.” Sarcastically, I am tempted to ask whether sanctions is sufficient, given what Qaddafi had done to provoke a no-fly-zone and bombing to protect civilians amid an armed civil war.

In addition to the red herring that any U.S. involvement must somehow match the Iraq case, it is misleading to suggest that the U.S. “can’t” stop every ruler who turns on his people as if other empires or independent states could not also take the lead. To be sure, the American military has its areas of expertise, but this does not mean that the U.S. should or must take the predominant role globally. Working with other empire-scale countries as well as independent states, the U.S. Government could provide moral leadership as the world takes a firmer stand than mere sanctions when a ruler is killing hundreds of protesters. At the very least, the credibility of the U.S. Government would be much enhanced were it more consistent in regard to similar cases. Inconsistency can provoke possible explanations hinging on partiality and self-interest.

For example, some foreign policy experts say the White House has not called for the world to unite in a military action against Assad not because he has been any less violent than Qaddafi, but because Syria is “critical to Obama’s attempt to end Iran’s nuclear program and to promote Arab-Israeli peace,” according the USA Today. If this explanation is correct, then the U.S. Government has put manipulation above Obama’s own pledge to stand up for democracy over tyrants.

Still others argue that Assad has the support of other Middle East regimes and that the elite in Syria is not fractured—making the case different from that in Libya. However, this is not an argument that Assad’s betrayal has been any less than Qaddafi’s; rather, the argument is that more obstacles exist to stopping Assad than Qaddafi.  However, standing up for human rights is not for the timid. In other words, it is not necessarily quick and easy. It does not say much about a leader’s character if a little difficulty is enough to resort to sanctions. In the case of Syria, that the E.U. had already joined the U.S. in leveling sanctions against the Syrian officials suggests that an international coalition could be strong enough to give the Syrian protesters a viable chance to topple the regime, even given the size of Assad's military.

In Libya, Mustafa Abdul-Jalil suggested that it is in the interests of the U.S. and E.U. to support such causes. "The United States and the European Union should know that we are a righteous people," he said. "We are fighting for a better future and they will not regret helping us." Perhaps the question of consistency comes down to how important human rights are to the American and European officials who have competing goals.


Click to add a question or comment on the Obama Administration on Libya and Syria.

Sources:

Transcript: Obama’s Foreign Policy Speech, May 19, 2011.

Oren Dorell, “Syria, Libya Merit Different U.S. Policies,” USA Today, May 16, 2011, p. 5A.

Michelle Faul, "EU Opens Diplomatic Office in Libya's Rebel East," MSNBC.com, May 22, 2011.

Jay Solomon, "Syrian Violence Tests U.S.," The Wall Street Journal, June 3, 2011.

Leadership by Elected Representatives: Transcending the Politics of Slashing Vulnerable Federal Programs and Avoiding Tax Increases

On January 20, 2011, months before the Republicans would use leverage of a baleful debt-ceiling-default to extract additional cuts, the Republican Study Committee (RSC)—a group of fiscally conservative members of the U.S. House of Representatives—announced a plan by which $2.5 trillion could be cut from the U.S. Government's spending over ten years. According to The New York Times, the proposed cuts “would exclude the military, and would not touch the big entitlement programs, Medicare and Social Security. As a result, [their] effect on the entire array of government programs, among them education, domestic security, transportation, law enforcement and medical research, would be nothing short of drastic." The leaders of the RSC claimed that the cuts were “appropriate and necessary, given the government’s $14 trillion debt and annual deficits at their highest levels since the years just after World War II." The RSC "proposed generally reducing agency budgets to their levels in 2006 — the last time Congressional Republicans controlled the budget process — and then freezing them, with no annual inflation adjustments.” The RSC also recommended “slashing the federal workforce by 15 percent and canceling pay raises for five years, for a total of $2.29 trillion in savings.” Finally, the proposal included “an additional $330 billion in cuts to specific programs, including Amtrak, foreign aid and even the Washington subway system" (Source #1).

Analysis:

Back in July 2009, The New York Times reported that most Americans continued to want "the federal government to focus on reducing the budget deficit rather than spending money to stimulate the national economy" (Source #2). Nevertheless, Congress and the President went ahead in 2010 with extending the Bush tax cuts, which were expected to add an expected $850 billion to the deficits of 2011 and 2012. The President had proposed to extend the tax cuts for the lower and middle classes, which would be more apt to spend rather than save the difference and thus stimulate the economy then in a weak, jobless recovery. The congressional Republican leadership demanded that the tax cuts be continued for the wealthy as well, even though the latter could afford to pay more in tax and would be less apt to spend than save the money from the cuts. If the proposed spending cuts were “necessary” given the sizes of the deficits and debt, it would seem that the tax cuts—even those likely to be spent and thus stimulating—would have been a luxury the U.S. Government could ill-afford. That is to say, the deficits and debt could play second fiddle to stimulating the economy, only to be the reasons for “necessary and appropriate cuts.”

Besides dovetailing with the Republican goal of less government—particularly at the federal level—the combination of tax cuts and budget cuts sends mixed signals as to the importance of the U.S. Governments deficits and accumulated debt. Within the proposed spending cuts alone, cutting in some areas while leaving others—notably defense—completely untouched sends similarly schizophrenic signals regarding the seriousness of the deficits and debt. If the financial affairs are perilous, the U.S. Government could ill-afford protecting defense contractors and other sacred cows.

To be sure, Americans polled overwhelmingly said that they prefer cutting government spending to paying higher taxes, according to The New York Times (Source #3). The RSC's proposal was in line with this finding. Also, the proposal was in line with the poll's finding that nearly two-thirds of Americans do not want Medicare or Social Security benefits cut even to reduce deficits. At the same time, unlike the RSC’s proposal, the poll indicated that Americans by a wide margin preferred cutting the Pentagon's budget to cutting benefits in Medicare and Social Security; the RSC proposal treats all three areas the same (leaving them all off the chopping block).

However, those who are led by polls cannot lead, for leading involves moving the polled rather than being moved by them. Furthermore, the citizenry may not have fully aware of how serious deficits of over $1 trillion and a debt of over $14 trillion are to the viability of the United States. The seriousness of the deficits and debt require tax increases and spending cuts (including sacred cows) even if the general populous is not much bothered by the threat.

Representatives have to use judgment to know when to be agents reflecting the will of the people who sent them and when to lead constituents who sent them but would view the indebtedness as more precarious had they studied the matter more fully. In other words, elected representatives sometimes need to be critical of what their constituents think is in their true interest and that of the United States as a viable system. As faithful agents, representatives must look in such cases to the best interest of their district and to the United States as a viable concern. Going beyond polls, leaders are oriented to protecting the led even from themselves.

Click to add a question or comment (or view comments) on leadership applied to reducing the U.S. Government’s deficit by spending cuts and tax increases.

Sources:

1.      David M. Herszenhorn, “G.O.P. Bloc Presses Leaders to Slash Even More,” The New York Times, January 20, 2011.
2.      Dalia Sussman, “New Poll: Bring Down Debt, Don’t Spend More,” The New York Times, July 29, 2009.
3.      Jackie Calmes and Dallia Sussman, "Poll Finds a Willingness to Cut Spending, Just not Medicare or Social Security," The New York Times, January 21, 2011, p. A11.

Wednesday, May 18, 2011

On the State of the (American) Union: Getting Real

It is certainly more politic to declare the state of the union to be strong rather than weak. In his State of the Union speech in January 2011, President Obama ended by stating definitively, "The state of the union is strong." Even though particulars could doubtless be found to support his claim, I contend that he severely understated the weakness in the state of the union at the time.

The $45 billion deficit in the Social Security fund ought to have raised more than a few eyebrows, not to mention the U.S. Government deficit of over $1 trillion and the related debt of $14.3 trillion. To claim strength as if the U.S. were still a going concern as long as such a debt exists is more fitting for a magician than a U.S. President. Furthermore, one could point to the 3.4 million inhabitants expected to be foreclosed by the end of 2011 or the 9.7 million unemployed on unemployment compensation in January, 2011 (51,000 added the last week of January alone), as well as to the 40 million inhabitants within the U.S. still without health insurance (i.e., having to wait until 2014 because of a deal made with the insurance company lobby--a party with a vested financial interest).

The President's State of the Union speech evinces a state of denial going far beyond one man. One might ask, moreover, whether structural or systemic solutions are even possible in a representative democracy, or is the free world destined to be poll- and issue-driven? Furthermore, are we too fixated on the status quo wherein we prioritize our debate on the size and involvement of government (e.g., tax increases vs. spending or tax cuts, rather more revenue and less spending) over the immediately pressing exigency of fiscal balance and the human rights of the least well off (John Rawls' criterion for a just outcome)? Are we destined to have solutions foisted on us by the brute force of necessity? In short, can we bracket our incremental approach based on convenience and think instead about the long-term viability of the system itself? The State of the Union of 2011 notwithstanding, the state of our union is worth taking another look.

Click to add a question or comment on the state of the American union.

Source:

David M. Herszehhorn, “Deficit Forecast Nears $1.5 Trillion, Fueling Partisan Battle on Federal Spending,” The New York Times, January 26, 2011.

Unsustainable Structural Fiscal and Federal Imbalances in the U.S.: A Solution

The nonpartisan Congressional Budget Office (CBO) announced on January 26, 2011 that the U.S. Government’s budget deficit for the year would soar to nearly $1.5 trillion, which represents $414 billion more due to the extension of the Bush tax cuts. The deficit had been $1.4 trillion in 2009 and $1.3 trillion in 2010. According to the New York Times, based on the CBO, “the deficits of $1.4 trillion in 2009 and $1.3 trillion in 2010 are, when measured as a share of gross domestic product, the largest since 1945 — representing 10 percent and 8.9 percent of the nation’s output.” The budget officials also projected the deficit for 2012 would be $1.1 trillion. These figures dwarf the budget deficits even of the 1980s.

In his State of the Union speech on January 26th 2011, President Obama called for a partial five-year freeze in domestic spending by the federal government — what the New York Times calls “a more gradual imposition of fiscal discipline, while still increasing some spending in education, research and other areas.” It is hardly imaginable how a freeze alone could make a dent where the debt is over $14.3 trillion—a figure that is scarcely conceivable to a human mind, let alone sustainable. It is not clear that the U.S. Government will ever be able to pay off the mammoth debt, let alone arrest the annual increases in the debt (i.e., the deficits).

For their part, Republican congressional leaders used the need for a budget and an extention in the debt-ceiling in 2011 to pressure Democratic leaders to adobt substantial cuts, rather than merely a freeze. As a result, President Obama himself came to urge $4 trillion in cuts over several years. Yet even as the Republicans, whose penchant for less government (and perhaps restoring federalism) dovetailed with more cuts in federal spending, this position too did not take sufficiently seriously the U.S. Government's deficit and debt, for tax increases were to be off the table. 

In short, neither of the major parties were taking the structural fiscal imbalance in the U.S. Government sufficiently seriously.  It is as though they were urging the use of a bicyle rather than a car or train to get from Orlando to Miami in Florida (and let's add just for fun, "in August"). Beyond other objectives (such as less government) being allowed to intercede, the proposals were not sufficient. Were reducing the structural deficits and debt of the U.S. Government the overriding goal, both trillions in tax increases and spending cuts would be instituted over many yeears. I contend that it to be a moral imperative that the debt amassed since the surpluses in the late 1990s be paid off before the mean age in the generation of 18 to 38 year-olds in 2000 retire. The remaining debt could be paid off in incremental installments over many years. Simply passing on our debt for others to pay would be as immoral as it is convenient. 

Fortunately for us, restoring a balanced federalism can facilitate paying off the debt in our lifetimes. Rep. Paul Ryan's proposal for block grants to the state governments for medicaid claims to shift that program for the poor from the U.S. Government to the states. It is thus in the direction of restoring a balance in American federalism. However, the block grant element retains the federal purse-strings, and thus falls short in this regard. Both in terms of reducing the federal government's annual deficits and restoring a federalist balance, Rep. Ryan should have proposed that the states both run and pay for medicaid by raising state taxes. It would be up to the respective voters of the states to decide the level of coverage and the amount of tax increase--taking into account their respective state's' fiscal position so as to deal with any deficit there as well. Medicare too could be transferred to the states, though it would not be prudent to leave it up to the states to fund it until after states such as Florida, California and Illinois have solved their own structural deficits. Policy decisions involving health-care for the poor and the elderly could thus be tailored to the circumstances and ideologies that tend to differ in a union on an empire-scale. However, federal taxes would not decrease accordingly on account of the structural deficits and the objective of paying off the accumulated federal debt. Once the latter is eliminated, the federal taxes could come down.

One might squauk, "But that would mean raising my state taxes without corresponding tax cuts at the federal level!" Correcto! The lack of symmetry here is the mirror image of the asymmetry that has been involved in running deficits of over $1 trillion for years and having amassed a federal debt of over $14 trillion. We like asymmetry when it is convenient but abhor it when it goes against our pocket books. This combination of sentiments is what we must counter, bottom-line.  


Sources:

David M. Herszehhorn, “Deficit Forecast Nears $1.5 Trillion, Fueling Partisan Battle on Federal Spending,” The New York Times, January 26, 2011.

Stephen Gandel, “View from Davos: How Bad is a $1.5 Trillion Deficit?Time, January 27, 2011.

Tuesday, May 17, 2011

Federalism & Business: States in India Deregulating for Economic Growth

The gross domestic product in India for the year ended March 31, 2011 was estimated to have grown at a robust 8.6%. Gordon Chang at Forbes argues that besides Delhi’s own fiscal and monetary stimuli, competition between the states of India for business has been a formidable factor. Federalism, it turns out, can be good for business—yet at what cost? Chang omits this element, writing only that “As the states try to outdo each other, India’s investment climate improves.”

Chang cites Abheek Bhattacharya, who points to Tamil Nadu for its protection of property rights and Gujarat for its minimal regulations. Both states have been growing at double-digit rates. However, if the lack of regulations means that the economic growth has been at the expense of the environment and health of the citizenry, perhaps the weakness of the federal government is not such a boon to India. Federalism proffers the potential of a check and balance between the federal government and the state governments such that a “race to the bottom” element among the latter can be checked by a baseline of regulations issued by the federal government. To be sure, the latter is not without its own risks.

Whereas a race to the bottom risks the destruction of the country for short-term economic development, federal regulations risk a consolidation of power at the center. Federalism functions optimally if it is in balance. Chang undercuts such balance in suggesting that the “intense rivalry could even end up moving New Delhi in the right direction.” While such change would risk consolidation at the expense of federalism, Chang again cites Bhattacharya.

Although Bhattacharya had said on the John Batchelor Show that the states are essentially laboratories for nation-wide change, he had not meant that New Delhi would take over; rather, the more “laggard” states would simply realize that they need to “catch up” to the other states by loosening restrictions on growth. While evincing a “race to the bottom” in some respects, such convergence would not risk consolidation, as would New Delhi being moved “in the right direction.” Indeed, were the other states to join Tamil Nadu and Gujarat, any federal involvement should be antipodal to the deregulation at the state level to check any downsides. However, such a check and balance could risk eventual consolidation under the guise of protecting the environment and the Indian citizens.

In short, dangers exist in both runaway state and federal power. Just as economic growth and minimizing externalities needs to be balanced, so too must federalism for it to operate optimally as a system of public governance proffering governmental checks and balances. In a general sense, any system characterized by a maximizing variable that can break through the systemic constraints is doomed to implode. Accordingly, attention should be directed, at least in part, to the system itself so it may continue to be viable.

Click to add a question or comment on Indian federalism, regulation, and economic growth.

Sources:

Gordon Chang, “India’s Accidental Economic Formula,” Forbes, May 15, 2011.

Abheek Bhattacharya, “India Looks to the States,” The Wall Street Journal.

Investment Bank Dinners with Corporate Executives and Hedge Fund Managers: The General Public Not Admitted

The Case Study:

“One day in early March [2011], the phone lines of hedge-fund traders around London and New York suddenly lit up. A stock that many of them had placed hefty bets on—Pride International Inc., an energy company in the process of being sold to a rival—was falling. The traders had no idea why. They soon figured it out: J.P. Morgan Chase & Co. had hosted a meeting that day between a handful of hedge-fund traders and executives from a company that was considered a prime candidate to start a bidding war for Pride. One of those executives had indicated they weren't likely to make a bid.”

“The prospect of a bidding war had lifted Pride's shares above where they likely would have traded in the absence of a potential interloper. . . . At the March 8 lunch, though, as the traders munched on scallops and fish, Seadrill vice president and board member Tor Olav Trøim splashed cold water on the idea of a bid. He recalls telling traders that the company's Feb. 24 statement was ‘not normally what you would say if you were interested in bidding yourself. His intended message, according to one person familiar with the matter, is that Seadrill was "very unlikely’ to launch a competing offer for Pride. The information was market-moving, traders say. In the hours after the lunch, some traders wagered that the odds of a bidding war had declined. Seadrill's shares rose more than 1% as it was viewed as less likely to pursue a costly acquisition. Pride's shares fell by about 0.5% in the minutes before markets closed.”


“The moves may seem small, but they were significant for ‘merger arbitrage’ traders, who make short-term bets on deal stocks. In the case of the Ensco-Pride deal, the movements translated into a sudden 64% spike in the deal's ‘spread.’ That arcane measure reflects the difference between a target company's stock price and the per-share value of the acquirer's offer. The spread is closely watched by hedge funds that focus on merger arbitrage, which stand to gain or lose large sums based on the spread's movement. As the shares moved, anxious investors bombarded Seadrill's investor-relations office with phone calls, trying to figure out whether the company had issued new guidance about its appetite for bidding on Pride, according to a person familiar with the matter. Company officials responded that they hadn't released any new information. . . . Trøim says Seadrill executives regularly meet with large and small investors and that it is appropriate to help them understand the company's strategy. ‘We cannot see that we in any way have crossed any lines for giving privileged information,’ he says.”

The Issues:

“Hedge funds are a big business for banks. U.S. and European hedge funds last year shelled out a total of about $3.7 billion in brokerage commissions to banks for equity trades, according to research firm Greenwich Associates. . . . Investment banks vie for business from elite hedge funds by offering traders at those funds special access to senior deal makers and corporate executives at dinners and other gatherings. The traders sometimes pick up valuable nuggets of information that aren't available to other investors, according to people who have attended such gatherings.”

“Representatives of the banks say their investment bankers aren't permitted to discuss material nonpublic information, and that the meetings serve a legitimate business purpose. In addition to helping the banks win trading business, the get-togethers allow the bankers and corporate executives to cultivate relationships with the hedge funds, the banks say. The funds often are major shareholders in multiple companies and frequently help determine the outcome of key corporate events that are subject to shareholder approval, such as mergers and acquisitions.”

“Amid intensified scrutiny of insider trading, the U.S. Securities and Exchange Commission recently warned some banks that they need to be careful that such meetings don't result in the improper exchange of privileged information, according to people familiar with the matter.”

“Under insider-trading laws, it is generally illegal to buy or sell securities based on ‘material,’ or significant, information that isn't publicly available. Securities lawyers say the appropriateness of the meetings banks set up with hedge-fund traders depends on whether such information changes hands and is subsequently traded upon.”

“It is unclear how often useful trading information is disseminated in the meetings. The meetings appear to have made some banks nervous. . . . ‘It made me congenitally nervous,’ said a banker who until recently worked at a top Wall Street investment bank. ‘It certainly should be on [regulators'] radar.’ . . . Goldman Sachs Group Inc.'s compliance department [in 2010] barred its brokers from arranging dinner meetings between Goldman's bankers and outside hedge-fund traders, say people familiar with the matter. Bank of America's investment-banking arm, Bank of America Merrill Lynch, [in 2011] cut down on the gatherings after the SEC expressed concern, although it still allows them in some circumstances, according to people familiar with the matter. Many banks nevertheless continue to hold closed-door meetings with hedge funds on a regular basis, according to traders, bankers and other industry officials. Banks try to differentiate themselves from rivals by dangling access to key players—coveted by hedge funds, for which incremental bits of information can be extremely valuable. The banks also set up lunches and other ‘corporate access’ meetings that give the traders the chance to grill top corporate executives about pending deals and other matters. Such opportunities are rarely available to individuals and other small investors.”

Analysis:

To keep participants within the world of business from speaking with each other in closer terms than are available to the general public strikes me as utterly fanciful and doomed to failure—especially if a profit relationship is involved. Intimating a company’s strategy alone can proffer hints of information not available to the public and yet useful for trading. Are the courts to become embroiled in interpreting every nuance at every meeting in which investment bankers bring together corporations and hedge funds so they may behave as though in public? Policing such meetings is at best an uphill battle, and more realistically like trying to keep the rising tide back from one’s sand castles. It is the castles that are artificial, not the water presumably to be held back by them.

In terms of prohibiting insider-trading more generally, what is really being reputiated or denied is the concentric nature of the respective circles of family, friendships and finally the general public identified by Cicero in his theory of justice wherein caritas naturalis (natural love) is limited to the circle of amicitia (friendship). It is just by nature that friends share a love that does not hold in the wider public. This theory of justice is more restricted than the caritas universalis (universal love)—extending even to strangers—preached by Augustine. That loving strangers is difficult while loving one's friends is easy attests to the qualitiative differences between the concentric circles that inform Cicero's theory of justice, which insider-trading laws contravene.

In any social context, friends are not going to behave as though all they know of each other is what the general public knows. Just as it is natural that people closer will exchange more information than people in the wider public, it is also natural for the latter to envy those who are closer except when they themselves are in close relation with their own friends and colleagues. Enforcing publically-available information on business practitioners having mutual dealings is to conflate the widest circle with narrower circles. It is to pretend that caritas naturalis seu amicitia simply does not exist—that everything is universal rather than natural love being of friendship.

Fueling resentment of insider-trading may be our natural distaste for exclusion. As a student at Yale, I felt exclusion when my political party in the Yale Political Union invited me and the other new members to a Friday night party in a room in the clock tower. The chairman told me that we would all be initiated into the party’s secret society because the party owned it; we were members of the party, after all. In actuality, only a few members—those who had new leadership positions in the party—were tapped by the older leadership; the rest of us were invited so there would be an excluded element heightening the feeling of inclusion. My resentment was a function of my illusion (facilitated by the chairman) that an inner circle would treat a wider circle as equivalent.

As much as I detest the “insider/outsider” diremption, I must admit that it is a part of the human social condition. As social animals, we naturally find ourselves in relations wherein some people are closer to us than others. We fool ourselves if we presume that people who are closer will somehow open their relations up to a wider circle as if there were no narrower circle. Some of us, however, relish exacerbating the natural distances by excluding others solely for the pleasure of being cruel. For example, I grew up in a family that broke up into two camps, both of which relished excluding a family member. Even though the betrayal in such exclusion was unnatural, I must admit that narrower and wider circles naturally develop as human beings interact.

To pretend that there is only a general public is to deny the human condition in its social setting. Insider-trading law may be predicated by a denial of relationships that go beyond the general public.
Furthermore, the “harm” from insider trading is largely one of opportunity cost, as the benefits obtained by insiders are not shared by the general public. In contrast, the harm from fraud is felt by the victims, who are outsiders. In a wider sense, the systemic risk of the failure of a financial system is shared by the general public. Legislation and enforcement ought to take into account the difference between an opportunity cost and direct harm.

Therefore, for the SEC to put resources into insider-trading at the expense of going after banks and other companies that evince systemic risk is something more than misplaced priorities. In terms of punishment, to treat a business practitioner who benefits financially from information overheard from a CEO as though he or she committed fraud by lying to investors or murdered someone is to conflate categories of different degrees of harm.

Lastly, human behavior is such that it cannot be totally regulated. Nor can human nature itself manifested socially be remade as though there were just a general public without caritas naturalis seu amicitia. Business practitioners cannot be held back from exchanging information that is not available to the general public. Like jelly in a hand, the harder you squeeze it the less of it you will have within your grip. The illusion of micro-managing regulation to every facet of business ignores this principle, which is based in human nature rather than artifice.


Source:

David Enrich and Dana Cimilluca, “Banks Woo Funds with Private Peeks,” The Wall Street Journal, May 16, 2011.




Monday, May 16, 2011

The E.U.'s Membership in the U.N.'s General Assembly: An Oxymoron or Reality Catching Up?

On May 3, 2011, the United Nations’ General Assembly passed Resolution 65/276 by a vote of 120 to 0 (with two abstentions—countries subject to E.U. sanction). The resolution makes the European Union a non-voting member of the General Assembly. As such, the E.U. can “be inscribed on the list of speakers among representatives of major groups and be invited to participate in the Assembly’s general debate, in accordance with the order of precedence and the level of representation.” The E.U. is also “able to present oral proposals and amendments, which, however, would be put to a vote only at the request of [a voting member].” Hence, the E.U. membership is without the right to vote, co-sponsor resolutions or decisions, and put forward candidates. In other words, the E.U. has been granted a sort of “quasi” status commensurate with the world’s notion of the E.U. as a “regional organization”—whatever that means.  I contend that this misunderstanding of what the E.U. is has led to the resolution giving the union a quasi-status in the General Assembly even as another such union, the U.S., enjoys not only voting membership in the General Assembly, but also a veto on the Security Council. In short, the world is confused on the E.U. and the resolution bespeaks this condition.

The full essay is at "Is the E.U. a Federal System?"

The U.S. Senate as Protector of the Interests of the Rich

In the U.S. Constitutional Convention, Governeur Morris said on July 2, 1787, that the “Rich will strive to establish their dominion & enslave the rest. They always did. They always will. The proper security [against] them is to form them into a separate interest.” (Madison, p. 233) By this he meant the U.S. Senate. The democratic principle in the U.S. House and the aristocratic spirit in the U.S. Senate “will then controul each other.” (Madison, p. 233) Having the State Legislatures appoint their U.S. Senators—as was the case until 1913—would defeat the independence of the Senate, and hence its function as a check on the excesses of democracy in the U.S. House.  Such excesses had just been evinced in Shays’ Rebellion in Massachusetts, wherein the legislature there had sided with the former soldiers who had not been paid for their service but were still to make payments on their debts.

In other words, one of the purposes of the U.S. Senate as originally envisioned was to protect property (including creditor interests). The assumption was that the representative democracy of the U.S. House would favor the lower classes.  Although the amounts spent on Senatorial campaigns in after the turn of the twenty-first century practically guarantee that the seats would defend the interests of the rich, that the Senators are elected by citizens rather than appointed by State governments must compromise the U.S. Senate as a check on the democratic excesses in the U.S. House. Even as this check has been enervated, the protection of wealth function endures. 

Indeed, given Shaws’ Rebellion the check on excess democracy is really just the protection of property, which is practially guaranteed anyway by the amounts needed to run for the U.S. Senate.  Not surprisingly, in 2010 the medium wealth of a U.S. Senator was roughly $2.8 million. It is worth quoting from Governeur Morris again—this time from July 19 in Convention. “Wealth tends to corrupt the mind & to nourish its lvoe of power, and to stimulate it to oppression.” (Madison, p. 323)  As the number of electors per member of the U.S. House has increased, even that body could be said to evince a moneyed aristocracy.  The question may thus be raised: Is there a sufficient check against the rich in the national legislature?

Governeur Morris claimed in convention that the U.S. President “should be the guardian of the people, even of the lower classes” on account of the wealth-interest in the U.S. Senate. (Madison, p. 322). However, if the wealth interest has gained a foothold in the U.S. House and even in the presidency itself, that check may well be insufficient and nugatory. A return of domestic functions of government to those of the respective States could perhaps evince a greater weight for what Morris calls “the Mass of the people.” (Madison, p. 323)  At the very least, the lower houses of the State governments are not dominated by the rich. This was precisely what the delegates of the convention wanted to check, and the creation of a general government was their solution. It is no wonder that it has become top-heavy both at the expense of federalism and the poor.

Click to add a question or comment (or view them) on the U.S. Senate in protecting the interests of the rich.

Source:

James Madison, Notes in the Federal Convention of 1787 (New York: Norton, 1987).

The Electoral College Electing the U.S. President: A Check on Excess Democracy at the Empire Level

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

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

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

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

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

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

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

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

Click to add a question or comment (or view them) on the Electoral College.

1. James Madison, Notes in the Federal Convention of 1787. New York: Norton, 1987, p. 324.
2. Ibid.
3. Ibid., p. 327.
4. Ibid.
5. Ibid., pp. 328-29.

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

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

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

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

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

Analysis:

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

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

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

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

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

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

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

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


Sources:

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

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

Sunday, May 15, 2011

Strategic Thinking Beyond the Business Plan: Business Is Human After All

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

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

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

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

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

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

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

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

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

Click to add a question or comment on formal tools and insight in strategy and consulting.

Source:

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