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Saturday, August 20, 2011

Pushing the Envelope: Faster, Higher, Bigger

The death of a Georgian luge athlete on the opening day of the 2010 Winter Olympics occurred amid concerns about the speed of the record-setting track at the Whistler Sliding Center. “There were some questions asked by other athletes even before this tragic accident,” said Nikolas Rurua, Georgia’s deputy minister for culture and sports. He added that there had been several crashes in the same area of the track where the death occurred.

The luge is often called the “fastest sport on ice.” Sliders use their legs and shoulders to steer small fiberglass sleds down an icy track, at times approaching or surpassing speeds of 90 mph, according to the Vancouver 2010 Winter Olympics Web site. On headline read, “This Winter Games could be the first time the sport sees a competitor hit 100 mph.” Sports Illustrated’s David Epstein, who covered the Olympics for the magazine, claimed that the Whistler course was at the time the fastest in the world, “and not by a little.” He explained that while most luge courses “flatten out” around the 11th turn, the Whistler track “just keeps on dropping, so there’s really kind of no break from gathering speed toward the end.” Epstein reported that some athletes had been complaining about the speed of the course and speculating that that Winter Games could be the first time a competitor hit 100 mph. “That’s 15 to 20 mph faster than any course in the rest of the world.” Is being faster the overriding point?

Whether we are talking about luge tracks, sky-scrapers, or passenger jets, there seems to be in the human psyche an innate proclivity to extend a threshold further—regardless even of how far the extension is from our natural limits.


Airlander 10, the largest aircraft in the world, crashed on its second test-flight on August 24, 2016. 

In 1912, the Titanic ocean-liner was the largest thing built by human beings. In spite of the risk in being the largest, the ship was presumed to be unsinkable. Speaking about the ships a century later, Helen Kearns, a spokesperson for Siim Kallas, who was the E.U. Transportation Commissioner at the time, said, “There are legitimate questions as these vessels have substantially evolved in recent years.” I wonder if “evolved” is the right word. “The boats have gotten a lot bigger, as it’s economically advantageous to have more passengers,” Kearns added, but “the way these vessels have grown in size does mean finding the right balance to make sure regulations are stringent enough to ensure there are procedures like safe evacuations.” She was presuming here that cost-efficiency is a given, and, furthermore, that regulations can make up for any increased risk that comes with size.

Kearns was responding to reports that a cruise ship had hit a rock off Tuscany and partially sank several yards from an island off the coast. In the case of the partial-sinking of the Costa Concordia about twenty feet from an island just off the Tuscany coastline on Friday the 13th in January 2012, there was still confusion regarding how many of the 4,200 souls on board were still missing. That total figure of people who had been on board is about double that of the ill-fated Titanic, which went down in the North Atlantic on August 15, 1912—a century earlier. To put the two accidents in perspective, being twenty feet from an island would undoubtedly have looked like a godsend to those who perished in the icy waters. Had humanity become too spoiled in a century of technological development and mounting regulations further distancing us from nature? In other words, has the human race been moving in one direction even as it has been making itself increasingly vulnerable in the other by making bigger and bigger toys?

We forget the retort of Titanic’s designer to the White Star Line executive, who claims that the Titanic—the biggest ship in the world in 1912—cannot sink. In James Cameron’s film, Titanic, the engineer tells the businessman who cannot be wrong, “I assure you, good sir, it is made of iron. The Titanic will sink. It is a mathematical certainty.” A century later, it was taken for granted that Costa could not fall over in the water, yet it did—making it difficult if not impossible to deploy the emergency boats.

I can only conclude that a human tendency exists to presume that we cannot be wrong, even in cases in which we are most likely to error. This is what makes our quest for faster, higher, bigger so dangerous. Blinded by our vision of something faster, higher, or bigger than we have today, we discount the added risk as soon as we put our sights on it.

Click to add a question or comment on the modern conception of progress.

Sources:

"Olympic Luger Dies on Track Where Speed Caused Concern," CNN, Febuary 13, 2011.
http://www.cnn.com/2010/SPORT/02/12/olympic.luge.crash/index.html

Steven Erlanger, “Oversight of Cruise Lines at Issue After Disaster,” The New York Times, January 17, 2012. http://www.nytimes.com/2012/01/17/world/europe/oversight-of-cruise-lines-at-issue-after-disaster.html?pagewanted=all

Friday, August 19, 2011

Eurobonds: The Solution to the E.U.’s Debt Crisis?

One possible solution to the E.U.’s debt crisis may be debt issued by an E.U. government agency and vouched for by all 17 state governments that use the euro currency. According to the Wall Street Journal, “Such euro bonds would dispel concerns Italy or Spain might not be able to get the financing they need, as it would be provided centrally.” Of course there is the downside of moral hazard: states facing crushing debt-loads could rely on the wealthier states to guarantee additional debt. Because the “fiscally imprudent” state governments “could borrow freely at low cost, there would be little incentive to stop.” The wealthier states in turn would be in the position of guaranteeing debt that they do not control.

“It will not be possible to solve the current crisis with euro bonds,” Angela Merkel of the state of Germany said on August 21, 2011 according to the International Herald Tribune. Pointing to the economic pressures being at odds with the interests of her electorate’s interests, she remarked, “The markets want to force us to do certain things. That we won’t do. Politicians have to make sure that we’re unassailable, that we can make policy for the people.” However, what people? If on the state level, the European general interest could be ignored as each state politician acts in the interest of his or her own state to essentially externalize any costs. In other words, Merkel’s statement, while making a good point that markets ought not necessarily be allowed to dictate policy, reflects an excessive reliance on state leaders to solve E.U. problems. Beyond greater fiscal integration to match the monetary union of seventeen states in the E.U., Europeans might consider shifting more decision-making power to the European Parliament and the Commission from the state capitals.

Sarkozy’s reply concerning a Eurobond facility reflects the same over-reliance on state governments in the E.U. He maintained that the facility would “need to come with strictures: each government saying to its peers what it can and can’t borrow, and thus what it can and can’t spend.” Sarkozy insists that E.U. institutions “’don’t have the democratic legitimacy’ to forbid individual states from spending.” I disagree.

Firstly, the Eurobond facility’s strictures would not involve each state government telling the others what they can spend; rather, authority would be at the E.U. level, even if the state governments have a role. In other words, the authority, or voice, would be centralized rather than bilateral between the various state governments.

Second, the so-called democracy deficit of the E.U. is qualified by the existence of the European Parliament, whose members are directly elected by the E.U. citizens rather than by (or representing) states. Like the U.S., the members of the E.U. are both states and citizens. This is how modern federalism differs from confederalism. Sarkozy was mistaken in referring to the E.U. as a confederation—as it the union had only a council wherein the state governments are represented. If he is really concerned about democratic legitimacy for a facility to issue Eurobonds at the E.U. level, Sarkozy should propose that the European Parliament take up the issue, debate it and vote on it (before passing any resulting legislation to the “upper chamber”—the European Council of Ministers).

If pressing bank finances mean that Europe needs “bolder fixes,” then it is evident that the E.U. has sufficient governmental institutions at the federal level to proffer sufficient legitimacy. The question is perhaps whether using them is in the political self-interest of state officials whose power is maximized by stressing the intergovernmental councils in the E.U. It would be like the state governments in the U.S. insisting that the U.S. Senate, which represents the states, be given additional power and then complaining that the “two degrees of freedom” in terms of citizens’ representation compromises the legitimacy of any use of the power. There is another legislative body in the U.S. Congress, however, and that chamber could answer the concern. The case is the same with the E.U. The legitimacy of the governmental institutions is there; it is perhaps merely a question of will and political self-interest (as well as recognition of what the E.U. really is).

Click to add a question or comment on Eurobonds and the European Debt Crisis.

 Sources:

Charles Forelle, “A Shaken Europe Looks for Bolder Fixes,” The Wall Street Journal, August 19, 2011. http://online.wsj.com/article/SB10001424053111903596904576516663024370704.html

Jack Ewing, “Germany Stands Firm Against Euro Zone Bonds,” International Herald Tribune, August 22, 2011

Two Tiers Fiscally in the E.U.: Too Simplistic

Stephen Castle of the New York Times puts the main question regarding E.U. reforms oriented to preventing state governments from being overburdened with debt as follows: “Is the euro more in need of Germanic fiscal stability or the growth and stimulus policies that France traditionally champions?” I contend that there are bigger fish to fry that unfortunately go largely unnoticed in Castle’s article.

First, Castle notes that “France put together a coalition, ultimately supported by Germany, that prevented the imposition of sanctions” on states that allowed their public deficits to exceed 3% of their respective total economic output (total public debt at 60% or more of GDP also triggers fines). Although Castle observes that Germany and France were themselves in violation of the 3% deficit-cap, he does not stress the glaring conflict of interest involved. Nor does he pick up on the same conflict of interest in the proposed structure that would be occupied by state officials from the states having the euro and subject to political pressures to call off sanctions (which would include cutting off the E.U.’s structural and cohesion funds). The point is presumably to exact “tough punishment for violators.” However, continuing to have state rather than federal officials in charge of the structure itself suggests that the actual sanctions might not be so drastic. Furthermore, the roles that Merkel and Sarkozy have set out for themselves in their proposed “economic government” of the E.U. involve a conflict of interest because they are proposing it. In other words, they stand to gain in what they are proposing, while another arrangement might do a better job structurally at meting out punishment to wayward state governments. For instance, E.U. commissioners could run the fiscal program.

Second, Castle makes a category mistake by likening a shift of governmental sovereignty to the federal level in the E.U. to creating another International Monetary Fund. The IMF is global, and it is a non-profit organization. The E.U. is neither. Furthermore, the additional governmental sovereignty that Merkel and Sarkozy propose to shift to the E.U. from the 17 states having the euro would exist within a federal system in a union of states. The denial on this point is palpable, and perhaps even self-defeating.

Third, Castle refers to the Merkel-Sarkozy proposal on fiscal integration as possibly solidifying an “economic inner core within a two-tier European Union.” Castle may be reducing the E.U. to its economic competencies—ignoring, for instance, the current opt-outs on social policy, for example. Britain, for instance, is not subject to that competency of the E.U., while other states must adhere to that domain. Rather than a “two-tiered” E.U., there are various “tiers.” The U.S. has a dwarfed version of the opt-outs in the form of waivers on particular federal laws. For example, as of mid-2011 at least, states could get a waiver to opt out of portions of the U.S. health-insurance law of 2010. In the E.U., “opt-outs” tend to be broader in scope, and they are more salient than in the U.S. In fact, they give the U.S. the look of a “one size fits all” approach. In the E.U., orienting a proposed competency to some but not all of the states has been par for the course for decades. Moreover, such flexibility is part of the ability of federalism to accommodate diversity within.

Accordingly, Americans might want to study up on what their counterparts in Europe are up to with respect to the E.U.’s “euro-tier.” Ironically, the U.S. could reach “ever closer union” by developing different “tiers” such that the people of a particular state (such as Texas) don’t feel that they either have to leave the Union or conform to one size fitting all. Rather than being nullification, the opt-outs would be decided at the U.S. level (just as it is decided at the E.U. level in Europe). Don’t Texans say all things are bigger in Texas?  Well, that’s kind of like relying on state officials to police themselves simply because they are acting at the E.U. level; even so, ever closer union can ironically be better secured by accommodating differences. Even within the “Eurozone” itself, there could even be two tiers (depending on the states’ respective debt-to-GDP ratios, if there are two clusters).  A state could “graduate” to laxer requirements by improving its fiscal house (essentially accession to another tier—being determined by E.U. rther than state officials).  

Click to add a question or comment on the proposed competency for the E.U. on fiscal matters.


Sources:

 Stephen Castle, “In Debt Crisis, Reminders of Disputes in Euro’s Founding,” New York Times, August 18, 2011. http://www.nytimes.com/2011/08/18/business/global/debt-crisis-brings-focus-back-to-early-euro-pact.html


Nathalie Boschat and Gabriele Parussini, “France, Germany Push for Sanctions,” Wall Street Journal, August 18, 2011. http://online.wsj.com/article/SB10001424053111904070604576514351609783680.html


Thursday, August 18, 2011

Fraud at S&P: A Conflict of Interest

By the summer of 2011, the U.S. Government had brought relatively few cases against large financial institutions for their roles in the financial crisis of 2008. For instance, the government investigated Washington Mutual and Countrywide without taking any further action in spite of reports of “liars’ loans.” In the case of the three major ratings agencies, the business model “is riddled with conflicts of interest, since rating agencies might make their grades more positive to please their customers. Before the financial crisis,” according to the New York Times, “banks shopped around to make sure rating agencies would award favorable ratings before agreeing to work with [one of the agencies].” In spite of accounts of the agencies’ mixing of business and ratings, the Dodd-Frank law of 2010 retained the issuer-pays business model while putting the agencies on the same legal liability level as accounting firms. As of mid-2011, the S.E.C. and the U.S. Justice department were investigating the comment made by David Tesher at S&P, “Don’t kill the golden goose,” which he may have made to raters. If so, then the “Chinese firewall” between profitability and ratings could be shown in civil court to be an insufficient bulwark against the pressure in the conflict of interest (i.e., standing to gain over an obligation on which other parties are relying). This in turn could spur Congress to force a change in the agencies’ “issue-pays” business model to something like “investors pay.”

During the boom housing years, the rating agencies made record profits by bestowing the AAA rating on the top tiers of collateralized debt obligations (CDOs) based on sub-prime mortgages (which were the first to burst in the housing downturn). Even without a civil verdict, it can be seen that the force of such profits would easily breach any internal firewall. Beyond the competence issue, the agencies’ secretive processes make it difficult to ferret fraud. Indeed, simply getting current employees to testify would involve them in a conflict of interest that would likely mean them siding with their financial interest (i.e., agency over public interest). In other words, Congressional action need not depend on a legal process that is itself riddled with conflicts of interest. The conflict of interest in the “issuer-pays” business model should be sufficient to sufficiently discredit it as an alternative is mandated.

Click to add a question or comment on the Justice Dept. inquiry on Standard & Poor’s fraud.

Source:

 Louise Story, “Justice Inquiry Is Said to Focus on S&P Ratings,” New York Times, August 18, 2011. http://www.nytimes.com/2011/08/18/business/us-inquiry-said-to-focus-on-s-p-ratings.html

Monday, August 15, 2011

A Conflict of Interest in Issa's Earmarks

Congressman Darrell Issa (R-Calif.) runs his local district office down the hall from where he runs his businesses worth hundreds of millions of dollars. According to the New York Times, his “dual careers” evince a “meshing of public and private interests rarely seen in government.” While advocating for business in Congress, he split his holding company into separate multibillion-dollar businesses, started an insurance company, and retained a financial interest in his automobile-alarm business. According the Times, at least some of his actions in government have made him richer.

Most notably, he secured Congressional earmarks for road widening and other public works projects that benefit the many commercial properties that he owns in his district. For example, earmarks that he arranged made possible the widening of a busy road in front of a medical plaza that he bought for $10.3 million. To be sure, his constituents applaud the easing of traffic, but what if the money would otherwise have been spent to relieve more severe congestion elsewhere? Even if no worse instances existed, that the congressman’s constituents benefitted from the street-widening does not mean that his action was ethical.

A Vista city councilman sees no conflict of interest in Issa’s intersecting roles in business and government. “As a politician, that his job to bring a slice of the pie back home, and as a businessman, he’s going to invest in the areas that he champions.” Aside from the odd new verb, champions, the city representative seems not to grasp even the basic problem in a conflict of interest. I contend that direct or indirect foreseeable personal or commercial financial benefit—even if it does not motivate the public policy and the public also benefits—renders a public official’s public function unethical. Such a decision or action violates the ethical principle of fairness because others, including constituents, do not get that benefit, which is not included in the benefits from the office. Even if constituents benefit in other ways, it is unfair for their representative to enjoy a benefit that they cannot or do not receive.

Of course, that there is an unethical component does not mean that a body politic will extirpate it; the public may judge that the public’s benefit justifies the action anyway. My point is simply that an unethical element pertains when a public official stands to benefit financially from a matter of public policy on which he or she has been instrumental. Simply put, the problem is the use of public office for private benefit. Even if the public also benefits, it is at the very least unseemly for an elected official to stand to gain in such a pellucid way. We recognize this intuitively when we read of such cases. David Hume characterized the moral judgment of unethical conduct in terms of reacting innately with a sentiment of disapprobation.

Disclosure is not sufficient to obviate the blight; the dollars still flow. Rep. Issa could have recused himself rather than even speaking out on regulatory matters in the auto industry even as he maintained ties to that industry through the auto electronics company (DEI) he founded. Even though he had sold off his controlling interest soon after he was elected to Congress, he remained on the board and his family’s foundation continued to earn millions from holding stock in the company. He had recused himself on at least one other matter after being advised of a potential conflict of interest, so why did he miss the obvious one here? Perhaps he used the recusals where only minor amounts of money were potentially affected—the sacrifice giving him cover to go ahead in areas in which more money is on the line.

The Congressman insisted, however, that at least with regard to the Toyota recall, being an automobile supplier enabled him to give the car company a harder time. Moreover, he asserted that having a member of Congress with knowledge of how to run a business involved in regulation policy makes Congress more effective in writing regulatory law. He does have a point, for the classic argument of regulatory capture is that lawmakers and regulators depend on the expertise of the regulates (and thus get their biased “information” and “judgments”).

Even so, at the time of the road earmarks, Darrell Issa was the very powerful chairman of the House Oversight and Government Reform Committee, and he was viewed as a good friend to business—hardly an insider willing to use his knowledge of business to constrain it. According to the Times, his “pro-business policies usually align closely with those of the firms he has worked with in his wide-ranging business career.” To be sure, a pro-business ideology is perfectly legitimate in the American political lexicon (and especially in the GOP). The problem is where the platform is allowed to be a subterfuge for personal gain.

According to the Times, “House members are generally restricted from using their positions ‘for personal gain’ or on matters in which they have a direct financial interest.” So it is not clear why he was allowed to earmark $815,000 to widen West Vista Way, a busy corridor along which Issa’s medical complex is located. He bought the complex in 2008, soon after securing the first of two earmarks for the two-mile project. After the announcement of the widening, the assessor’s office valued the complex at a sixty percent appreciation. Not bad for government work. Issa also owns a number of commercial properties near the planned $171 million expansion of State Route 76; that project was helped by $245,000 in his earmarks. Furthermore, Issa pushed the Sirius and XM satellite radio company merger despite others’ objections on competitive grounds. At the time, Issa’s electronics firm was in a partnership with Sirius to distribute its audio products.

So perhaps the question is why such obvious conflicts of interest exist even under the public eye in Congress. Where, for instance, were the Democrats? Was it simply a case of “you scratch my back, I’ll see that daisies are planted in your back yard too”? Or is the body politic not willing to take even the appearance of conflicts of interest seriously enough to extricate them from our public lawn? Perhaps a societal value on money and business effectively enervates any objections to conflicts of interest having to do with them. Perhaps the public does not sufficiently understand the concept of a conflict of interest. In any case, Darrell Issa has certainly played us for fools, and we, as if serious court jesters, have obliged him.



Source:

Eric Lichtblau, “Helping His District, and Himself,” New York Times, August 15, 2011. http://www.nytimes.com/2011/08/15/us/politics/15issa.html