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Saturday, October 15, 2011

Asia and Latin America: Economy & State

In the fall of 2011, the economic troubles in the developed countries were starting to hit fast-growing developing economies like China, Brazil and Indonesia. The governments of the developing countries were “girding themselves,” according to the Wall Street Journal, “to offset any economic and financial damage.” China’s government, for example, increased the investment of its sovereign wealth fund in Chinese banks. In September, China’s exports to the E.U. grew at 10 percent, compared with 22% in August. China’s increase in imports was also weaker, which did not bode well for emerging markets in Latin America and elsewhere that supply commodities for China’s construction industry.  Yet IMF projections depicted an interesting distinction between the projected increase of real GNP in Latin America and the developing Asian economies. The projections for 2011 were 4.7% and 7.9 percent, respectively. For 2012, the projections were 4.0% and 7.7 percent, again respectively. What can explain this pattern wherein Asian newly industrialized economies (NICs) were expected to fare better?

Economists might point to the regions having different mixes of industries as behind the difference in projected growth—some industries more affected by the global downturn than others. Economists might also point out that domestic markets are more mature, and thus resistant to external shock, in the Asian NICs. Political economists would likely bring up the strong/weak state variable, hence bringing in the element of government to explain the difference in the projected economic growth rates.

In their democratic incarnations, Latin American governments have been less resistant to popular pressure for increased government spending on consumption. This has come at the expense of government investment such as infrastructure projects attractive to foreign direct investment. In other words, the governments of the Asian NICs have had a stronger state in the sense that the governments have been better able to resist the demand by people for increased entitlement spending at the expense of investment oriented to industrializing. Such investment can include education/training and transportation networks. Managers at a corporation looking for a country in which to locate a factory, for instance, are apt to size up the local and regional transportation infrastructure with an eye to being able to bring in supplies in a timely manner and send off products—both to the domestic market and other markets. Also, the government of a poor country hoping to develop economically via attracting foreign direct investment invests in training facilities and attempts to reduce corruption, as foreign companies appreciate locally-trained labor and not having to pay bribes to government officials in return for being able to conduct business. Officials of strong states are less capricious, and thus less corrupt.

Asian NICs were able to industrialize in the last two decades of the twentieth century more so than Latin American countries in part because of a strong state—meaning more resistant to spending tax revenue away on immediate consumption at the expense of infrastructure investment. This “state” variable was salient in the scholarship of international political economy when the Asian tigers were pulling away from the Latin American economies in the 1980s.

Lest it be presumed that a strong state is necessarily better simply because it can be useful in industrializing a “LDC” (low developed country) into a NIC through foreign direct investment, it is also possible that a government that is more resistant to popular pressure can also be more resistant to democracy. If republics are susceptible to profligacy in spending on consumption while dictatorships can resist such pressure and attract foreign direct investment, then a sad tradeoff could exist between liberty and wealth. Of course, as many dictatorships have shown, the wealth garnered from licensing commodity extraction (e.g., oil drilling) can be quite concentrated domestically. The tradeoff may not reach the people.

Perhaps ideally, the state is weak, or pliant, at election time, when governmental sovereignty bows to popular sovereignty. As the government turns to governing, the state hardens up in resisting the passions of the masses for immediate gratification. The resistance entailed in governing can be oriented to a people’s best interests rather than to oppressing the masses. The IMF projections may indicate that the Asian NICs came out of the twentieth century better constituted than the Latin American countries in this regard.

Click to add a question or comment on the impact of a global economic downturn on Latin American and Asian developing countries.


Alex Frangos and Patrick McGroarty, “Troubles of West Take Toll on Emerging Economies,” The Wall Street Journal, October 14, 2011. http://online.wsj.com/article/SB10001424052970204774604576628631676483052.html

Friday, October 14, 2011

Occupying Wall Street: A Self-Regulated Protest?

The right to protest as a manifestation of freedom of speech is held societally as sacred the United States, but the question of how far protest goes before it becomes simply living in a park is one of those gray areas that tend to be decided by the judiciary far from the tarps and sleeping bags. The protesters’ premise that living in a public space eventuates in the achievement of their goals is tenuous where the goals are broad. Undergoing a hunger strike to get a certain anti-corruption bill voted on by India’s parliament is far different than camping out in Zuccotti Park in New York City until corporate capitalism is ended in the U.S. In short, the tactics used should be oriented to the sort of objective being sought. Moreover, the tactics and indeed the objectives themselves require a protest group to self-police such that it does not wander too far off course or spread itself too thin. Protest movements may be too prone to die a slow death from self-inflicted wounds without even the slightest recognition of the cause of death. The Occupy Wall Street protest movement had the capacity to self-regulate, but fell well short of that which was necessary for the group to achieve its anti-corporate goals.

                                                                                    Robert Stolarik/NYT

To be sure, the movement evinced some capacity to regulate itself. Faced with the prospect of an imminent clean-up of Zuccotti Park—perhaps a salubrious subterfuge actually geared to permanently dislodging the park’s new residents—some of the protesters scurried around “with brooms and trash bags, moving mountains of sleeping bags, backpacks and jackets out of the way,” according to The New York Times. Meanwhile, others gardened. These tasks doubtlessly tapped into the young protesters’ ideal of working toward something larger than themselves, which they tend to label as “community.”  The impetus on the upkeep was geared to forestalling the park’s owner, Brookfield Properties, from clearing the park a third at a time for a “once-over” by a clean-up crew, after which new rules proscribing camping, tents, tarps and sleeping bags would be enforced. But was it even in the group’s interest to allow camping to become a major issue? Secondly, could the energy of self-regulation have been put to better uses than clean up, given the group’s anti-corporate goals?

Taking the first question first, it should be obvious that occupying a park is not occupying Wall Street. If the protesters were serious on their occupation, they would have sat own in streets in New York’s financial district and blockaded the bank entrances with sit-downs—perhaps even occupying bank lobbies akin to the anti-war protest at Columbia University in 1968. This “actual occupation” strategy would have been more likely to involve the police, but the occupation would have been real—at least for a time. This strategy is distinct from protest marches, which as a strategy could have been an alternative or addition to that of actual occupation of the streets and banks. Allowing the issue to be whether camping takes place in a park can thus be seen as a diversion that is not in the protester’s own interest. Indeed, getting sick by living in a crowded park night after night would also enervate the protest (besides justify the public authorities in clearing the park for public health reasons).

Regarding the second question, the self-regulation evinced by the protesters cleaning up on their own volition can be read as supporting the argument that the protest movement could have policed itself regarding delimiting its topic and presenting a positive image for public relations purposes. Protesters could have volunteered, for example, to make the rounds to eliminate any off-topic signs, such as those for the environment and against the war in Afghanistan. Allowing the protest to be a virtual grab-bag of leftist causes deprived the movement of broader support and gave the opposition ammunition with which to relegate the movement. Even in shifting from an anti-big-corporation message to redistribution undercuts the group’s original anti-corporate (but not necessarily redistributive) goals.

Butting up against the movement’s own efforts to regulate itself was the ideology or illusion that the movement had no leaders. “Every action you see here is autonomous,” one protester said as he was filling plastic bags with trash. “Autonomous enough for people not to be doing it,” another protester added, as reported by The New York Times. That protester went on to describe his “autonomous plan” as if that label itself, and his belief in it, rather than a single-minded aim of ridding American society of large corporations were the main point of him being there.

In other words, the protesters themselves suffered from a lack of priorities and this hurt the attainment of their original anti-corporate goals. Even though the voluntary clean-up effort demonstrates that the movement was capable of self-regulation to delimit and protect the priority of its original, anti-corporate goals, the refusal to delimit the topics (based on the illusion that there were no leaders) and keep the distracting ideologies at bay undercut the group’s self-regulatory potential and ultimately the group’s realization of its anti-corporate goals. Indeed, their lip-service to the contrary, many of the protesters may not have been sufficiently interested in those goals in the first place.

In a letter to the local police commissioner, the chief executive of the property company that owns Zuccotti Park reported that there had been neighborhood complaints of “lewdness, groping, drinking and drug use.” Without self-policing such behavior, the movement risked undercutting its own legitimacy in the eyes of the wider public. Without legitimacy, the movement would face an uphill battle even to be heard. Furthermore, the behavior could be viewed as having an opportunity cost—that of the foregone focus on how to achieve the anti-corporate aims of the movement. Actions speak louder than words; from my vantage-point, it seems that the protesters could have been more devoted to the cause that presumably brought them to Zuccotti Park.

So while it might be fun for young people to relish their “autonomous plans,” get high and camp out with other like-minded people in the zest of life, the refusal of the group to self-regulate itself may have been the seed of the group’s eventual dissolution without the movement having attained its goals—whatever those happened to be. It is an interesting question whether an aggregate of "autonomous plans" can regulate a movement without even a leader as a spokesperson. But why risk "the cause" to find out?

Every group must necessarily have leaders. Whether centralized or decentralized, leadership is part of any organization. Whether accountable or stealth, leadership is there, and whether as spokespersons or committees, leadership is also there. To eschew mechanisms like majority rule and group decision-making so that every person can feel fully autonomous is not only antithetical to there even being a group, it is also at odds with the realization of the movement’s goals, which presumably are necessary means to the greater autonomy being sought outside of a city park.

In short, the protesters undercut themselves from the get-go by wanting too much both ways. They refused to self-regulate their ideology. They would hate reading this, but I suspect that a crucial error of the movement early-on was to give young people too great a role in, yes, running it. Even forestalling necessary decision-making at the group level constitutes a default-decision. In a way, to eschew any leadership at all evinces a puerile or jejune mentality of stubbornness at the expense of one's goal of reducing the impediments to greater economic liberty. This mentality may also have manifested in the failure of the young in the movement to defer to more seasoned leaders. We can do it better ourselves this time and we want it both ways. We don't want ANY limitations. To this mentality, I echo Burl Ives as the snowman narrator of Rudolf the Red-Nosed Reindeer, where he shakes his white head of snow, smiles, and says almost fatalistically, Ah, youth.

In Homer's story of the Trojan War, Achilles' youthful exuberance defers quite uncomfortably to the experience of King Agamemnon; a war led solely by youthful passion would be a mere series of battles. In Lawrence of Arabia, Alec Guinness as King Faisal tells Peter O'Toole as Lawrence to leave the room so the British and Arab leaders can negotiate on Damascus. Some things must be left to old men, the king teaches the youthful warrior with a credible tone of fatalism at the expense of volition. Successful youth are mature and humble enough to know they can't do it all themselves. Successful leaders can then tap into youthful passion and direct it strategically.

Had the Occupy Wall Street movement self-regulated itself beyond cleaning up the park, the group could have enforced and sustained sufficient focus (and thus energy) on the original anti-corporation goals, wherein corporations no longer own Congress and the largest banks and corporations are broken up because of their systemic risk to the financial system, the economy, and representative democracy. The opportunity cost in broadening the movement is sad, particularly as theTea Party could have readily agreed to protest against big business and the banks. That leftist causes, even that of redistribution, were allowed to join the movement out of sheer ideological convenience and an immature refusal to admit the necessity of leadership demonstrates that the self-regulation evinced in the clean-up of the city park did not go nearly far enough for the movement's own good, and that of the republic for which we stand united for life, liberty and the pursuit of happiness.

Click to add a question or comment on the Occupy Wall Street Protest being undercut from within.


Anemona Hartocollis, “Tidying UP, Pre-emptively, But Showdown May Loom,” The New York Times, October 14, 2011. http://cityroom.blogs.nytimes.com/2011/10/13/told-to-leave-protesters-talk-pre-emptive-strategy/

Thursday, October 13, 2011

Picking a President by Polls

It is one thing to say that something is broken; it is quite another thing to fix it. In such a case, if it ain’t broke, don’t fix it doesn’t cut it. Any pathological fear of change must give way or the brokenness must be endured. During the last half of 2011, over a year before the U.S. presidential election, the election season was already in full swing. Without any primaries or caucuses, the media and “debate” (i.e., talking points) organizers divided the Republican candidates into two tiers. Besides being an artificial dichotomy given the spectrum of support revealed in polls, that they were being used to prioritize among the candidates in the “debates” and more generally in terms of electability is problematic.

Most importantly, a poll is not an election. To relegate some candidates while privileging others (even crowning a “front runner”) ahead of any primary or caucus is without democratic legitimacy because polls have no decision-making authority. In other words, for the media (and “debate” organizers) to rely on polls to discriminate between candidates both in terms of electability and in allotting attention deprives the electorate at the polls or caucuses to break up the pack. Indeed, even aside from the fact that a poll does not constitute an election, relying on polls is problematic.

For one thing, relying on a poll can give the false impression of permanent preferences. Bill McInturff, a Republican pollster who directed the WSJ/NBC poll with Peter Hart in October 2011, remarked, “How quickly candidates have risen and then, like a soufflé, how quickly they’ve fallen back down.” A poll is at best a snapshot, and is thus obsolete even on the next day. Furthermore, the proliferation of cell phones in lieu of LAN lines and of do-not-call lists makes the “science” of polling less exact than even it portends. Indeed, to rely on the telephone in conducting surveys introduces a certain bias. For example, how many homeless people have phones?  Less obviously, how many survey callers get through to corporate executives who have gate-keepers poised to divert such calls?

Even if polling were capable of giving an accurate snapshot, the polls would have to be interpreted correctly. That obvious error can be perpetuated even by a media heavy-weight like The Wall Street Journal should give us all pause in whether we should rely on the reporting of polls. For example, the October 13, 2011 headline reads, “Can Vaults to Lead in Poll.” The WSJ/NBC News telephone poll of Republican primary voters that month put Herman Cain at 27% and Mitt Romney at 23 percent. Unfortunately for the poll and for the headline, the margin of error of the poll is 5.35 percentage points. Now, math is not my strong suit by any means, but the last I checked, 4 (27-23) is less than 5.35. The poll itself does not justify the headline.

Given the margin of error, Romney could claim to be in the lead!  This conclusion too is within the poll’s result. In fact, Romney in the lead is just as valid a conclusion from the poll. So it is indeterminate as to which of the two candidates is in the lead. This why the newspaper's headline is dogmatic. Within a margin of error, no particular result is privileged over any other. To pick out one “result” within the margin of error is dogmatic in the sense of being arbitrary, and yet it is done all the time. Given the graphic above, readers who do not understand statistics and surveying as a  social-scientific method are apt to fixate on the 27% and the 23% as if these figures were engraved in stone.

Moreover, typically people apply a false sense of exactitude when numbers are reported. It is like driving from Pittsburgh to Indianapolis and remarking while passing Youngstown, we will arrive in Indy at 5:45pm. Airline pilots in particular enjoy exercising the error of exaggerated exactitude by announcing the arrival time for the destination even from the departure airport before takeoff. At New York’s Kennedy, a pilot might announce, “we will touchdown in Paris at 6:47a.m. tomorrow morning. Not 6:48a.m. Not 6:46a.m. Rather, 6:47a.m. on the dot. On your next flight, you might point this error of excessive exactitude out to your pilot (after you have landed—you wouldn’t want to provoke a nervous breakdown before you are back safely on the ground at the appointed time).

Besides the problems in interpreting and reporting particular polls, relying on them before the first primary or caucus is problematic from the standpoint of democracy itself. To the extent that Cain’s 27% “front-runner’s status,” anointed by the October poll more than a year before the presidential election, impacts or detracts from the electoral choices of the primary or caucus voters, the democratic process itself suffers. In other words, introducing error into an electoral process does not bode well for a democratic system or a specific electoral outcome. Moreover, willowing down a field of candidates by polls circumvents a democratic system wherein elections are the means by which decisions are made with respect to candidates for public office. In effect, pollsters, commentators and news editors (and executives) have supplanted, or at least jumped the gun on, the primaries and caucuses. The elongated electoral “season” (measured in years) even relative to the primaries and caucuses has provided the vacuum in which the “early decisions” can be made by (unelected) pollsters, commentators, and journalists. The U.S. presidential election process is broken. Whether anything will be done to fix the process remains to be seen. I’m not holding my breath, given the magnitude of the problem and the headlines. Indeed, saying that the process in the fall of 2011 is democratically illegitimate would be like saying that the emperor is wearing no clothes. Resisting the urge to make a joke at Gov. Christie’s expense (he has said the jokes have to be funny at least—he is indeed a class act), I will rest my case here—hoping that I have adequately reserved my readers’ respect.

Click to add a question or comment regarding the use of polls to willow down the presidential field of candidates.


Neil King, Jr. and Jonathan Weisman, “Cain Vaults to Lead in Poll,” The Wall Street Journal, October 13, 2011. http://online.wsj.com/article/SB20001424052970204774604576627282855836292.html

Morgan Stanley: Systemic Mistrust or Bad Financials?

“Morgan Stanley by any measure is a safe and solid investment bank. Except for one: The amount of trust people have in the whole financial and political system. It's just about zero,” according to Jesse Eisinger of The New York Times in October 2011. Even as there is undoubtedly an element of hyperbole in his conclusion—for zero trust in the financial system and governments would occasion far greater problems than the world faced at the time of Eisinger’s report—his broader point that bankers would be held accountable one way or the other for not having learned their lesson on derivatives (and risk more generally) is valid. The subtext is that even though banks like Morgan Stanley were in actuality in solid financial shape, they deserved the negative repercussions from the systemic skepticism that the banks themselves brought about by virtually ignoring risk analysis in preference to a run of profits and (not coincidentally) bonuses.

Eisinger points out that, at least as of October 2011, Morgan Stanley “has almost $60 billion in common equity, compared with $36 billion before September 2008, and its ratios are stronger. Its trading book - which is volatile and where any bank can take sudden, large losses - is smaller than it was. Morgan Stanley has more long-term debt and higher deposits, both of which stabilize its finances. The bank has more cash available in case there's a crunch and a smaller amount of Level III assets, which don't have an independently verifiable value and so must be estimated by the bank. Hedge funds have parked a smaller amount of assets at Morgan Stanley. That's good because in the financial crisis, they pulled them from the bank.” But because all of this could be easily wiped out by a run on the bank occasioned or fueled by a wider mistrust of the financial sector, Eisinger brings up the topic of derivatives as a way of showing that the bankers did not in fact learn their lesson (i.e., all the improved stats may be for naught). Accordingly, the bankers deserved the systemic mistrust even at the expense of any effort having resulted in added financial strength.  

According to the reporter, Morgan Stanley had a face value of $56 trillion in derivatives in October 2011. He notes that JP Morgan Chase had more: a face value of $79 trillion. This is the GNP of some countries. Even though the bankers insisted at the time that they had adequately hedged their long positions, the hedges themselves could fail, especially if the derivatives are positively correlated, as in September 2008 when AIG was completely overwhelmed due to the housing-based derivatives caving in virtually all at once.

In other words, those of us capable of learning lessons know that we should not trust hedges in so far as systemic risk is concerned; the system itself can be overwhelmed by the sheer momentum of a really big wave. So we are back to the issue of trust in the entire financial system, which is and ought to be a drag on even stellar financials until the broader lesson is learned. Unfortunately, that lesson may not be in the immediate financial interest of particular banks due to externalities occasioned by moral hazard (e.g., the possibility of being rescued while another bank, such as Lehman, fails).

Even though governments can step in to protect the broader system (unless captured by the regulated), legislators and regulators cannot force bankers to learn their lesson. A mentality to safeguard even one’s own bank as a going concern cannot be imposed; it must be felt and valued from the inside. All too often, bankers are engaged in “managing” regulations as impediments to be minimized rather than stepping back to ask why the regulations exist in the first place. They might exist for the banks’ own good. If so, the banking lobby trying to water down the Volcker Rule might have been working at odds with those institutions that the lobby ostensibly represents. Be careful what you wish for, Wall Street bankers. You might just get it, especially if you have the gold and therefore can make the rules. It would be ironic if the protesters rather than yourselves had your back, even as you ridicule the masses marching below your towering be-windowed edifices of greed.


Jesse Eisinger, “Between the Lines, Wall St. Banks Face a Deficit of Trust,” The New York Times, October 12, 2011. http://dealbook.nytimes.com/2011/10/12/between-the-lines-morgan-stanley-faces-deficit-of-trust/

On the E.U. Banking Proposal: Comparative Context

“Under proposals outlined by the European Commission president, José Manuel Barroso, banks would be required to temporarily bolster their protection against losses. . . . Extra capital for European banks should be raised first from the private sector, then from [the state] governments, according to the proposal. Only when those avenues have been exhausted should a euro zone bailout fund be tapped, it said. Banks should not be allowed to pay dividends or bonuses until they have raised the additional capital, according to the proposal” (NYT 10/13/2011).

After Lehman Brothers failed in September 2008, the U.S. took “swift action to ensure its banks had a strong cushion of capital,” according to The New York Times. The same logic is said to be in the European proposal. Perhaps in general terms this is true, but a major difference is worthy of note. Specifically, the American banks receiving TARP funds were allowed to pay dividends and bonuses. To be sure, executive compensation faced limitations, but this constraint pales in comparison to that in the E.U.’s proposal, wherein no dividends and bonuses would be permitted. Also, the U.S. Treasury allowed banks to pay back the funds earlier than perhaps advisable because the bankers wanted to be free to pay whatever bonuses they saw fit to sanction for themselves (assuming they controlled their boards, which generally holds, given the separation of ownership and control).

The difference on whether dividends and bonuses should be allowed at troubled banks reflects a rather basic cultural difference between the E.U. and U.S. concerning whether economic liberty ought to be limited even at the extreme. The difference also reflects a different historical experience (and thus value-set) with respect to comfort and convenience.

I contend that dividends and bonuses are inherently “extras.” Admittedly, the bonus system on Wall Street has made its way into calculations of standard or basic compensation. However, if a bank itself is at risk, the need to increase reserves should trump any compensation that depends on the bank’s performance. Otherwise, the implication is that large profits in the short run are to be sought even at the expense of ignoring the impact on systemic risk.

I suspect that the culture of Wall Street has come to embrace surfeit compensation as an entitlement regardless of performance. The aspect of entitlement is particularly disturbing, even if it has become akin to an ingrown toenail (i.e., difficult to eradicate once it has become ensconced—like a house-guest after a week or so). A similar mentality inheres in the dynamic wherein private companies profit while the taxpayers are presumed liable in covering any losses. An entitlement exists, in other words, to enjoy the benefits without having to face the risk of suffering a loss. As the generation that lived through the Great Depression undoubtedly knows, this sunny-side up mentality is a manifestation of being too accustomed to comfort (i.e., having it too good for too long).

The bloody twentieth century in Europe gave Europeans a more realistic perspective on the entitlement of comfort at the turn of, and even a decade into, the next century. Accordingly, European officials have an easier time saying no to dividends and bonuses as long as the banks are at risk. It is a pity that the Americans have such a hard time with this; they unwittingly fall into the hands of the vested interests on Wall Street that have had it too good for too long (especially as investment bankers are “paper entrepreneurs” or middlemen rather than producers).

Click to add a question or comment on the E.U. proposal to safeguard European banks.


Stephen Castle, “Europe Tells Its Banks to Raise New Capital,” The New York Times, October 13, 2011. http://www.nytimes.com/2011/10/13/business/global/eu-set-to-tell-banks-to-garner-bigger-reserves.html

Wednesday, October 12, 2011

Wall Street Writing the Volcker Rule

On Columbus Day 2011—pretty much a non-holiday by the second decade of the twenty-first century—The New York Times observed that the regulations known as the Volcker rule, “intended to limit trading when the bank's money is at risk, a sweet spot for banks, is seen as a centerpiece of the sprawling financial overhaul of the Dodd-Frank Act of 2010. In anticipation, the nation's biggest banks, like Goldman Sachs and Bank of America, have already shut down their stand-alone proprietary trading desks.” OK, but hold on—the long and tortuous route by which any regulation is written was leaving its own mark in the sense that promising loopholes were finding their way into the rule.

Regulators were leaving room for “significant changes,” according to the Times. Wall Street was “lobbying furiously to tame the Volcker Rule, holding roughly 40 meetings with various regulators, warning that the changes will eat into profits at a difficult time for banks.” Those banks were undoubtedly threatening to charge more to their customers if the rule weren’t weakened. “In essence, the [rule] would upend the banking industry's lucrative, yet risky trading system, forcing powerhouse investment banks to resemble sleepier brokerage firms.” It is difficult to see Morgan Stanley and Goldman Sachs readily becoming mere market-makers and deposit and loan banks without a fight. To be sure, Lloyd Blankfein did insist that his bank was only a market maker when he testified before Sen. Levin’s Senate committee after the credit freeze of 2008.

At the time the Volcker Rule was being proposed, it was already apparent that there would be some wiggle-room for the banks. "Unfortunately, this initial proposal does not deliver on the promise of the Volcker Rule or the requirements of the statute," said Marcus Stanley, policy director of American for Financial Reform, an advocacy group. In the proposal, “a number of controversial exemptions emerged. While the regulation prevents big banks from placing bets on many stocks, corporate bonds and derivatives, it exempts trading in government bonds and foreign currencies. The proposal also provided a path for getting around the ban, for instance, when banks hedge against risk that comes from carrying out a customer's trade. Market-making and underwriting are excused, too, though the line is often fuzzy between these pure client activities and proprietary bets.” Lastly, the proposal would allow “banks to hedge against theoretical or ‘anticipatory’ risk, rather than just clear-and-present problems.” Armed with their lawyers and astute financial wizards, Wall Street banks could conceivably continue with business as usual.

Trading in government bonds and foreign currencies, and hedging even theoretical risk presumably with anything constitute an obstacle course that any Wall Street banker could run without breaking a sweat. With so much on the line and public scrutiny less potent at the regulatory stage, the financial-sector lobbyists could be expected to achieve just enough and then some. Once again, systemic risk would not be a factor, and history could repeat itself.

Click to add a question or comment on Wall Street and the Volcker Rule.


Ben Protess, “Banking Industry Revamp Moves Step Closer to Law,” The New York Times, October 12, 2011. http://dealbook.nytimes.com/2011/10/11/banking-industry-revamp-moves-step-closer-to-law/

Slovakia Stands Up, Caves to the E.U.

On October 11, 2011, Slovakia’s Parliament failed to approve the expansion of the euro rescue fund, a development, the New York Times reports, that “brought down the government.” Although the vote makes good copy, it was not at all as dire as the headline suggests. According to the Times, the state’s “leading opposition party said after the government fell that it would be willing to discuss support for the fund, pointing to the eventual approval of the deal. European officials in Brussels were counting on a political solution, but also weighing the possibility of some kind of messy workaround if Slovakia failed to pass the measure.” In other words, the vote had to do with state politics as well as resistance to bailing out a richer state. Once the state government fell, pressure from the E.U. and the new politics in the state government quickly coalesced by the next day to produce a deal in support of expanding the bailout fund. According to the Washington Post, "opposition leader Robert Fico, head of the Smer-Social Democracy party, announced he had struck a deal with the remnants of Radicova’s coalition, promising to back the fund in exchange for early elections that analysts say Fico’s party is well positioned to win." Doubtless that pressure from the E.U. was also in the mix, as E.U. officials were already hinting that the bailout fund could be expanded over the tiny state's objection. “We call upon all parties in the Slovak parliament to rise above the positioning of short-term politics and seize the next occasion to ensure a swift adoption of the new agreement,” European Council President Herman Van Rompuy and European Commission President Jose Manuel Barroso said in a joint statement, according to the Washington Post. In other words, hey guys, get your act together over there in Slovakia or else.

Slovakia was the last remaining E.U. state with the euro to vote on the question of expanding the bail-out fund. That a tiny state of 5.5 million people could  hold the euro hostage points to a major flaw in how changes to the basic or constitutional law of the E.U. are made. The larger question is how the E.U. could obviate this procedural flaw so the union is not held ransom again. Even threatening to bypass a recalcitrant state government as a way of obviating the difficulties with unanimity carries substantial, albeit subtle, costs.

According to the Times, “One European official speaking anonymously because of the fluidity of the situation, said that it would probably be possible to go ahead with the bailout without Slovakia, if necessary. The rules of the E.F.S.F. were laid down in a 'framework agreement,' rather than being written into the bloc’s governing treaty. That allows ‘a certain flexibility,’ said the official, adding that ‘in these sorts of cases, where there’s a will, there’s a way.’” While this statement added pressure to Slovakia to turn around its vote, to require unanimity yet back off the requirement when it is not convenient is a poor way of dealing with a mechanism that is antiquated, given the governmental sovereignty already given up to the E.U. by the state governments. According to the Times, “(c)arving Slovakia out of the financial stability fund would be technically messy and would send a terrible signal about the readiness of all 17 [states] to participate in the permanent bailout fund the European Union wants to set up after 2013.” Technically messy? How about illegal? In effect, it would replace the rule of law with the will of the majority. The Europeans could change the process by which amendments are made to the E.U. to make qualified majority rule the basis without sacrificing the rule of law.  This could pertain to the “euro zone.” Of course, the problem is that all of the 17 states would have to agree to the changed mechanism.  However, a new group could be formed within the E.U., with any state insisting on unanimity not being invited to organize the group. Generally speaking, the E.U. should not be held ransom by the requirement of unanimity; that is like continuing to wear shoes that one has outgrown. One problem would be how to deal with a state like Slovakia that has the euro but insists on unanimity and thus is not in the new group that has the currency.

If the requirement of unanimity is inherently at odds with monetary union, then it is perfectly legitimate to jettison the requirement, even by forming a new group if necessary. In other words, if a state government does not want to give up its veto, that state should not be part of monetary union. To keep such a state in only to obviate the requirement by ignoring it when convenient is to undercut the viability of the union, as well as law itself. To treat such a state as a “second-class citizen” while continuing to pay lip service to the requirement is unfair and duplicitous—and ultimately corrupt.

Click to add a question or comment on unanimity on monetary union in the E.U.


Nicholas Kulish and Stephen Castle, “Slovakia Rejects Euro Bailout,” The New York Times, October 12, 2011. http://www.nytimes.com/2011/10/12/world/europe/slovak-leader-vows-to-resign-if-bailout-vote-fails.html?_r=1&ref=world

Anthony Fiana, "Slovakia Reaches Agreement on European Bailout Fund," Washington Post, October 12, 2011. http://www.washingtonpost.com/world/europe/slovakia-reaches-agreement-on-european-bailout-fund/2011/10/12/gIQApBZZfL_story.html

Tuesday, October 11, 2011

Wall Street and the Populists: A Disconnect

In October 2011, Gerald Seib observed that political and economic pressures were “pushing business leaders into the public cross hairs.” From the corporate standpoint, the time was ripe for the field of business and society, whose topics of corporate social responsibility, corporate citizenship, and stakeholder management had emerged as means by which managers could interface with the broader society. The fundamental matter to be “managed” or assuaged could be said to be divergent norms or values, which in turn can eventuate in antithetical perspectives. Seib was essentially noting that the societal populists and corporate executives were not on the same page. In being geared to creating the impression that the values espoused in a given corporation are in line with societal norms, the field of business and society may not have been equipped to deal with divergent talking points that are grounded in antipodal social realities. Indeed, being invested in one social reality can prevent someone from even being aware of threats from another social reality. Under that scenario, the cues for value-congruence are missed by boundary-spanning managers on the corporate side, which in turn solidifies the discordance between the two social realities. In other words, the pressures mount from the outside, and the validity of the corporate social reality is itself in the cross hairs. To effectively “unwind” this dynamic, the field of business and society must deepen to include the basics of how to see things from a very different perspective without discrediting it from the outset. Value-congruence, and thus the continued legitimacy of the corporate form in modern society depend on this rather-basic yet arduous ability as a precursor.

In the context of the “Occupy Wall Street” protests spreading across the U.S. in the fall of 2011, Seib pointed to the existence of “a radical disconnect between the picture populist critics paint from the outside, and the one business leaders describe from inside.” This disconnect went back to September 2008, when bankers viewed the collapse of the CDO market as a result of over-reaching, dishonest and languid mortgage borrowers and the wider society saw greedy and fraudulent mortgage originators and investment bankers behind the liars loans. This disconnect infuriated the general public, as the business perspective meant that expected contrition would never come from the bankers. In fact, the latter would engage in mass foreclosures without a hint of guilt even as the general public was dumbstruck that people could be so clueless as to inflict injury on insult without realizing it. In short, pressure actually builds from such a disconnect.

In the populist protests, the crowd saw American companies with enough profit and cash to create jobs on-shore yet inexplicable without the will to do so. In the first decade of the new century, American corporations had cut their work forces in the U.S. by nearly 3 million, while increasing employment abroad by almost 2.5 million. In the fall of 2011, Standard & Poor predicted corporate earnings growth of 13.5% for the third quarter, which suggested “to Wall Street protesters that companies were hoarding profits without creating work.” Seib goes on to observe that business leaders saw the inverse. From the business perspective, third-quarter expectations were less than expected. The managers pointed to the benefits of an artificially weak dollar that had already strengthened at the expense of exports. More broadly, businesses were looking at weak consumer demand and increasing costs with government regulations, which make augmenting the domestic work force more costly. Seib juxtaposes this view of a hostile business environment with that of unpatriotic and greedy corporate chieftains.

Debating the respective variables misses the point (or does not go far enough). The underlying disconnect may itself be a threat to American corporations. Indeed, the perspectival disconnect could mean that corporate capitalism could itself be the target of popular angst and dissatisfaction. While the field of business and society has been geared to the corporate “unit of analysis,” it is not clear that the managerial tools used to assuage perceived differences concerning norms (and thus values) will suffice when the corporate form itself has a target painted on its ass. In other words, the bastards may not see the arrows coming until it is too late, due to the rather basic disconnect in perception. Of course, it could be argued that the mega corporations have so much potential power that even a few arrows wouldn’t do much damage that could not be repaired. In other words, corporate capitalism may be so entrenched that it could easily survive being made a target without having to change the way managers view their refined domain of excellence and the broader society of sore-losers.  Even so, it couldn’t hurt to deepen the field of business and society to address the disconnect and how to manage it. Foremost, I would advocate the development of a skill-set that is devoted to being able to see things from a very different perspective without immediately falling over in supercilious laughter that only makes matters worse.


Gerald F. Seib, “Populist Anger Over Economy Carries Risks for Big Business,” The Wall Street Journal, October 11, 2011. http://online.wsj.com/article/SB10001424052970204450804576622914266244804.html

Sunday, October 9, 2011

Protest Movements 101

David Johnston of Reuters opined on October 7, 2011, the Occupy Wall Street “protests show signs of sparking a major change in U.S. politics by creating common ground among people with wildly divergent views. The key to their significance will be whether they foster a wholesale change in political leadership in 2013 or whether Americans return a vast majority of incumbents in both parties at all levels of government.” But are “wildly divergent views” really represented, and did the movement translate dramatic camera-ready protest parades and sit-ins into grassroots work to get specifically anti-corporate candidates past the primaries and into office in 2012?  I contend that from the get-go, the Occupy Wall Street movement set itself on a trajectory antithetical to being able to answer both of these questions in the affirmative. In so doing, the movement’s “non-leaders” sowed the seeds of the movement’s demise—or at the very least of being relegated as partisan and thus contained as a sub-part in the system.

In terms of a diversity of views, a poster board in McPherson Square, where “Occupy D.C.” pitched camp, listed, according to USA Today, “the group’s wide-ranging goals, including economic justice, education reform, repealing the Patriot Act, District of Columbia home rule and an end of the two-party system.” One protester claimed all these agendas are related because, “Everyone has a voice here.” That doesn’t really explain why the goals are related. I contend that the reason is because the group is populated by liberal Democrats.

While symmetrical with the Tea Party in the Republican Party, my pigeon-holing of the Occupy Wall Street movement deprives it of the anti-big-business populism that is salient in much of the Tea Party. Indeed, traditional agrarian Republicanism contained a strident thread of anti-corporatism, as big business, like big government, is fully capable of trampling over the individual. As Sen. Alan Simpson (R-WY) used to say on the U.S. Senate floor, “I’m for the little guy.” This is vintage Republican populism, which the “Occupy Wall Street” excluded from the get-go by failing to delimit itself in terms of topics. In other words, the “Occupy Party” may be undercutting itself by association.

It is in the corporate interest that the movement be relegated as partisan and left-wing. It is in the political interest (and comfort) of Republican officials to keep the movement from engaging in joint operations with Tea Party organizations or absorbing some Tea Party members; that would essentially muzzle representatives like Eric Cantor who would not want to insult those members.

The movement’s organizers (and there are leaders even if they claim to have a “leaderless” movement) failed to resist the ideological temptation to permit liberal Democrats who are “off topic” with respect to Wall Street and big business generally and with respect to government officials to join in anyway. Even apart from being stigmatized as simply partisan, the group ran the risk of running off course, like a sailboat without a rudder in the water. The boat goes wherever the wind takes it. To get an idea of how even just one protest event can slide, a nebulous “Stop the Machine” protest in Freedom Plaza in Washington, D.C. on October 6, 2011 “was intended to protest the ongoing wars in Iraq and Afghanistan . . . but morphed into a multigroup demonstration that decried corporate greed as well as drone attacks.” Even the best placed intentions can find themselves on the losing end of a “morphing” if the boat had no rudder in the water. So a protest event against the corporate takeover of Congress (i.e., a plutocracy) could easily morph into an anti-war rally where pot-smokers beat bongos and dance in tie-dye shirts, while singing songs from another century that was anything but peace and love. While convenient and fun to the protesters, they would quickly lose credibility in much of the wider American society. Considering how much of that society might subscribe to an anti-Wall Street and big business lobby movement, the ideological convenience came at a steep, though perhaps hidden, cost.

As far as the impact of the Occupy Wall Street movement on the primaries and general election in 2012, the most likely scenario is that turnout of liberal Democrats gets a boost. This marginal impact would be indirect, rather than from a deliberate strategy in the movement to transition protesters into campaign volunteers for anti-corporate candidates urged to run by the movement. Ideally, such candidates could be found and supported for the primaries of both of the major parties. For example, agrarian populist Republicans could readily support a Republican candidate who advocates repealing the “legal person” corporate judicial doctrine (and thus corporate political spending), capping executive compensation on Wall Street, and breaking up the banks as well as companies that are too big to fail (or simply a danger to the republic form of governance).  In short, the notion that there is no ceiling for economic liberty can be replaced by a social-contract notion of solidarity based in the viability of a republic form of government and of market competition. As such, the movement’s goals could easily have been bipartisan, with only the Rockefeller Republicans in opposition.  Alas, so close but so, so far.

Had the Occupy Wall Street movement’s leaders been oriented to getting specifically anti-corporate candidates elected on both sides of the aisle, the movement would have limited itself to a few specific policy proporals. The very existence of the mega-corporation (and the mega-compensation levels) could have been at issue. Indeed, specific proposals capable of fundamentally redefining capitalism from its mega-corporate (with mega-lobbies) variety could have been linked to setting up and supporting particular candidates for a variety of state and federal offices. The movement’s leaders would have had to bend over backwards to make sure that Republican populist (e.g., agrarian) candidates were given just as much support. This would likely have included supporting some Tea Party candidates—the movement’s litmus test being stridently narrow yet uncompromising on providing the corporations with some loop holes or watered-down policies. Most importantly, for the movement to have succeeded in terms of policy would have meant supporting candidates who are not liberal! It could almost be said that such self-discipline alone would merit success at the ballot box. In contrast, taking the road most convenient has meant that making a radical change in corporate capitalism is not likely, at least from the “Occupy Wall Street” crowd.

Consider the following observation from Brendan Burke, a truck driver and punk rock musician who studied philosophy in college. “I have heard a thousand different things people are concerned about — inadequate teacher pay, no jobs, the rich not paying their fair share of taxes and all of it was about how we working people are not getting a fair shake.” The thousand points of light here sound to me like a grab-bag from the left wing of the Democratic Party. A small town Republican who is skeptical of big business (and big government) would naturally take one look at these causes and view the entire enterprise as partisan and left-wing. In other words, Burke’s observation confirms my sense that the movement quickly tracked to the liberal Democrat agenda writ large without even attempting to achieve a sufficient focus either on topic or on grass roots mobilization to significantly change the election results in 2012. At most, liberal Democrats will be more likely to make it to the ballot box on election-day in November, 2012. The usual suspects re-elected who had been sympathetic to the movement will have no fire under their bellies to maintain the movement’s push for fundamental change. Once again, real change will be in terms of incremental regulations rather than systemic change. Perhaps this is simply how American governance gets done.

If I am correct in my prediction, the culprit is none other than ideological selfishness or greed at the expense of driving home one radical change. It is ironic that greed (i.e., the desire for more) compromises efforts to curtail monetary greed. Perhaps the protesters were so upset in part because they knew deep down that they shared something with the bankers on Wall street: being driven by an unwillingness to resist the temptation to have more of whatever is in line with self-interest. I suspect that the corporate (and political) elite depended on this selfishness to derail the protest movement, and the protesters did not disappoint.

Given the immense wealth (and thus power) that the large American corporations and banks have, I am utterly astonished that a window could open even a crack to occasion a societal decision on whether the large corporation—the so-called “legal person”—should continue to exist in the United States. Less astonishing, the window began to close even as the movement was beginning to spread. It was a self-inflicted wound. The movement’s fate, as if predestined, will likely be taken to mean that the modern corporation itself has become virtually untouchable, meaning that it cannot be challenged politically within the system. The mega-corporate form thus ensconced in American society, pressure from the related increasing economic inequality will likely build until the system ultimately bursts open, at a much, much greater cost.

There are indeed huge costs in keeping the party going, whether in Goldman Sachs’ tower or on the street below. I suspect that neither Wall Street nor its antagonists—both of whom have been acting like predictable character-actors— grasp this point; both appear so narrow-minded yet proud. I can’t be wrong, they were undoubtedly thinking as they gazed at each other in 2011 from afar. The bankers refused even to acknowledge any culpability for the financial crisis of 2008 and the protesters were so sure they were on the right side of truth that they provided free admission to virtually any friendly agenda. What if a pro-life protester had shown up?

It would be nice if the great silent majority—those Americans who simply go about their daily business while quietly but astutely observing Wall Street and the protesters from afar—would take the reins from the arrogant and the proud in order to enact systemic change. At least from the vantage-point of a decade into the twentieth century, I suspect that many ordinary Americans like you and me had come to the uncomfortable conclusion that our political-economic system had in all likelihood been wrecked along the rocks of unbridled ambition. At the very least, many of us probably felt that, given the financial crisis of 2008 and the consolidation of special-interest power in Washington, both the financial system and the federal system were in need of major repairs, but had received only fine-tuning at most from vested interests. In other words, most citizens were probably wondering: where are the adults? It is indeed difficult to detect any such creatures among either the childish CEOs, such as Fuld (truly a lunatic), Coyne (a card-playing child), O’Neil (an insecure tyrant), Thain (selfishness incarnate) and Lewis (just plain dumb), or the angry yet somehow playful protesters. Tweedledum and Tweedledee could not put Humpty Dumpty back together again. Unfortunately, there is no Mother Goose either; sorry to say, but I'm afraid we must tackle the hard egg ourselves. Hopefully, we will muster the requisite determination before that egg completely spoils amid the stench of the sordid spoils of corporate capitalism in the stygian halls of Congress.

Click to add a question or comment on the Occupy Wall Street Movement and Electoral Change.

See related essays: "Occupying Wall Street" and "A Self-Regulated Protest?"


David C. Johnston, “Occupy Wall Street,” Reuters, October 7, 2011. http://blogs.reuters.com/david-cay-johnston/2011/10/07/occupy-wall-street/

Donna L. Leger, “Protesting ‘Occupiers’ Spread Message Beyond Wall St.,” USA Today, October 7, 2011. http://www.usatoday.com/news/nation/story/2011-10-06/dc-wall-street-protest/50683204/1