“Well written and an interesting perspective.” Clan Rossi --- “Your article is too good about Japanese business pushing nuclear power.” Consulting Group --- “Thank you for the article. It was quite useful for me to wrap up things quickly and effectively.” Taylor Johnson, Credit Union Lobby Management --- “Great information! I love your blog! You always post interesting things!” Jonathan N.

Saturday, October 29, 2011

Marx on Occupy Wall Street

My essay advocating that the Occupy Wall Street protests focus on the large corporation itself (i.e., that the large corporate form be expunged from modern society) rather than on a myriad of redistribution agendas is along the lines of Marx’s theory of revolution wherein the proletariat finally throw off the chains and subdue the hitherto hegemonic capitalists. The redistributive push falls short because even increased redistribution would be within the political-economic system that the corporations essentially run (i.e., including Congress). If the protesters are serious about confronting corporate capitalism, their movement should be radical rather than reformist because reforms are within the system that works for and by corporations. A radical agenda makes the existence of the modern corporation itself the issue. Absent taking that entity out of the equation (i.e., system), corporations will be able to relegate any proposal geared to “reforming” the system. At the time of this writing, this was already happening. Indeed, the movement itself was enabling this by allowing the protesters’ general message to pivot from "corporate capitalism" to "crony capitalism." This subtle shift was in the corporations' interest, for it meant that they themselves were no longer the target (i.e., only the "bad" ones).

Even the radical alternative, wherein the very existence of the huge concentrations of private capital are the target, may be doomed to relegation, if not utter failure, if corporations have so much power that they can turn a radical impulse in to a reformist whimper. Making large corporations illegal from within the system may be like expecting water to go up-stream. Perhaps society can be rid of the large corporation only from a source extrinsic to the system within that form has emerged and become hegemonic. I suspect that a lot of pressure would need to build up for an external “shock” to overcome that system, given the tendency of corporate capitalism to mitigate the power of radical agendas by labeling them as "extreme." I think Marx believed that at some point the pressure from the proletariat would reach the threshold at which the lava of discontent can break out of the strictures of the system undergirding the huge private concentrations of capital. I tend to agree, though I think a lot of pressure would need to build up for the energy to be sufficient to overcome the momentum of the system’s status quo. The process of pressure-building is perhaps much longer than the protesters suspect because they discount the corporations' wherewithal to effectively use the media and political elite to preserve the system by relegating threats.

It may be that we need to view the pressure-building process from a longer-term perspective. Rather than getting caught up on the sensationalistic “play by play” stories on the protests in various cities around the world, we could view the movement itself as a wave on a rising tide that might not reach shore as a tsunami until well after we are dead and gone. The tide itself, even if not the tsunami, is perhaps inexorable if the system is indeed heavily biased in favor of the "haves" at the expense of the "have-nots." In other words, in the self-perpetuating political economy, the holding companies will only get stronger; individual companies may downsize, but that is oriented to making them stronger. Even so, the efficiency in economy of scale suggests that as long as the current system continues to exist, the large corporation will endure as a basic form in corporate capitalism.

The Occupy Wall Street movement can be interpreted as saying that the injustice latent in the large corporation itself outweighs its greater efficiency. That injustice transcends that of economic inequality to touch on the injustice of a republic-turned-plutocracy. Even the protesters recognize that a clear break from the present system would be necessary to thwart the trend away toward increasing economic inequality and decreasing representative democracy, I suspect that even those folks sense that far more energy than was present in their own wave would be necessary. In other words, reform is not sufficient, while the puissance needed for the radical alternative requires more pressure to build.

This is not to say that a totalitarian state is inevitable “on the other side.” Marx's theory of revolution need not include Lenin's statism. Even though a strong state may be better able to stave off the encroachments of capital (which seeks, perhaps even inherently, to render obstacles impuissant), the cost in foregone liberty would be too great. The present plutocracy can be replaced by representative democracy even though the latter has the drawback of being bound to eventually morph into corporate rule. In other words, even the eternal recurrence of the cycle that begins with democracy and ends in plutocracy is preferable to a strong state capable of putting capital in its place yet incapable of respecting popular sovereignty.

The political-economic cycle is perhaps like that of Chinese dynasties. At some point, a given dynasty (such as the Ming) inevitably “turned south,” only to be eventually replaced by a new one (the Qing). Confucius, for example, lived when the Chou dynasty was in decline. Could he have known how close that dynasty was to succumbing to the next one? Similarly, do we know precisely when the volcano of popular discontent will erupt and level the large bewindowed towers extant on Wall Street at the time of this writing? Given the amount of vested power invested in the status quo during the downside run of the cycle, I suspect the Occupy Wall Street movement is further from the end than the protesters think.

European Banks’ 50% Write-Down: Discounting Debt Insurance (CDS)?

In “Europe’s Rescue Plan,” The Economist (October 29, 2011) opines on the “fixes” that had been announced just days before by E.U. leaders on the public debt crisis. I find three points of note that are particularly worth elaboration. "Bond markets may be suspicious of guarantees made by countries that would themselves be vulnerable if their over-indebted neighbours suffered turmoil." This downside is that of systemic risk. When Wall Street banks began to tank as the value of their CDOs declined, so too did AIG, which was to fund the insurance policies (CDSs) on those CDOs. In other words, we tend to discount the possibility that the entire ship could tank.

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Thursday, October 27, 2011

Hedge Fund Lobby: Breaching Ethics

In a rule adopted by the SEC on October 26, 2011, hedge funds over a certain size must report information—the amounts required depending on the fund’s size. The devil, as it were, is in the details. In this case, they reflect the intense lobbying of hedge funds and their advocates. As a result of the lobbying, according to The New York Times, the “changes call for only the largest funds to report the most detailed information, eliminate any penalty of perjury for misleading reports and delay for six months the initial reports for all but the largest funds.” Whereas the matter of the amount (and type) of information required involves or potentially puts at risk the funds’ secret strategic competitive advantages and the matter of a start date involves technical points such as how much effort is needed to cull the required information, the elimination of any penalty for perjury does not correspond to any legitimate business concern. Indeed, it makes on sense to require information if it can be misleading with impunity. It is as if the SEC regulators had told the hedge funds, You will have to submit information to us but it can be misleading. The fund managers would be apt to reply, Oh, ok.

The full essay is in Cases of Unethical Business, available in print and as an ebook at Amazon.com.  

Chinese Censorship: Beyond the FCC

Regarding the Chinese government’s attempts to rein in microblogging and television programming, the New York Times observes, “Political censorship in this authoritarian state remains absolute.” It is therefore perhaps all the more surprising that bloggers in China have been able to post “whistle-blowing” reports at the expense (and embarrassment) of the political elite. That this has occurred at all suggests that once a Jennie gets out of its bottle, it is difficult to reverse course. This is the traditional Western view. Using television programming as a case study, I submit that the picture is actually more complex than the antiquated "black and white" version may suggest. 

On October 25, 2011, the State Administration of Radio, Film and Television ordered 24 regional television stations to limit themselves to no more than two 90-minute entertainment shows per week. The requirement is aimed, according to the ministry, at rooting out “excessive entertainment and vulgar tendencies.” The additional requirement for two hours of news every evening suggests that “excessive entertainment” may refer not only to the decadent sort of programing commonly called “reality shows” in the West, but also to the desire to have a balance of programming available on the public airwaves. Lest the regulations seem too draconian particularly to Americans, having a check on the proliferation of decadent programming spurred on by its low production cost may be something that many Westerners over 30 might favor. That public airwaves are public means that the public, through its government, has a right to regulate the content. For example, American televisions must include public service ads (PSAs) among the paid ads. Even so, the Chinese ministry’s order that television stations ignore audience ratings goes too far in the other direction.

The difficult task of balancing the fact that the airwaves belong to the public with the equally valid point that programming to at least some degree should reflect what people want to see, as per the definition of entertainment, can be evaded by running to either pole; it is far more difficult to manage the competing points. Programming the public airwaves need not succumb to “bottom feeding,” such that one or two segments of the population are effectively allowed to define entertainment for the whole even if this is in the networks’ short-term financial interests (i.e., cheapest programming and largest audience). No constraint on catering to the lowest common denominator can have the effect of facilitating a cultural trajectory into decadence.
At the same time, entertainment cannot be imposed; people simply won’t watch a boring show on public safety. Even forcing people to watch does not mean that they will be entertained. Authoritarianism may seem powerful, but it cannot easily access the inner recesses of the human being. Acting to protect the public airwaves from being monopolized at the expense of the whole need not slip into a control fixation. Indeed, the proliferation of television channels and internet programming even beyond television programming means that particular networks can specialize on specific market segments (either in terms of programming or audience) without segments of the public at large being ignored.

Whereas the Chinese government is too extreme in the authoritarian direction, the FCC in the U.S. could also be criticized for standing by as television networks maximize their profits by catering to “reality show” viewers at the expense of programming that bothers to use actors. Of course, people do not have to watch such shows, but if such programming dominates a significant number of programming venues, the wider public may have a legitimate claim—if not to equal time, then at least to a bit more being offered that is oriented to their tastes. For example, some people might not be edified by Jerry Springer or Jersey Shore—wanting something more like West Wing, LA Law or Boston Legal even though such shows are more expensive to produce. Should the content on the public airwaves be decided by profitability alone?

Imagine, if you will, turning on your television and finding either news shows serving as mouthpieces for certain talking heads, or series “show-casing” low-class, non-actors engaged in “drama” (the term itself has morphed from its ancient Greek association with temple-worship to the absence of any self-discipline, similar to how “professional” has become democratized to fit virtually any occupation). Even though the Chinese government is not known for its lightness of touch, its decision to try to impact programming at the expense of popularity contests might not be as outlandish as it seems. This is my point, rather than that the Chinese government should be defended for having a draconian demeanor. Both consumer demand and the public interest can be reflected in what is broadcast on television. Government regulation along with a market economy is, as of 2011 at least, the best the human race has come up with to accommodate both points. The picture is not black and white (or at least anymore). Perhaps both the Chinese ministry and the FAA could move a bit to the center.

While the market mechanism can function well in allocating non-essential goods and services, it may be vulnerable to succumbing to the “systemic risk” of being reduced to a lowest common denominator functioning like a vortex or black hole of sorts. It is a legitimate function of government to look after the public good, and this can include stepping in when a market mechanism succumbs to some decadent exuberance wherein a minority preference trumps the good of the whole. A government need not be obsessed with maintaining public order and decency (as though in 1950s America) to exercise its duty with respect to the public airwaves.

Sharon LaFraniere, Michael Wines, and Edward Wong, “China Reins in Entertainment and Bloggers,” The New York Times, October 27, 2011. 

Inequality in Corporate Capitalism: Beyond Redistribution

I contend that a concern that too much income or wealth is concentrated “at the top” in the U.S. does not necessarily translate into a demand for redistribution; rather, the inequality itself may be thought dangerous to the viability of a representative democracy (i.e., a republic form of government) and inherently unfair. Even though redistribution may be entailed as large banks and business corporations are dismembered, ridding the system of the concentrations of wealth does not in itself mean that those “at the bottom” should or would necessarily become richer. For example, to say that CEOs should not be allowed to make millions of dollars, especially when their companies or banks lose money, does not imply redistribution because there is no claim that the compensation be directed to others for their benefit. The point is that the compensation itself is unfair. Indeed, saying that corporate capitalism is itself unfair because some people benefit beyond what they deserve is not to say that their benefits should be redistributed; rather, the point is simply that such benefits should not be allowed.

The Occupy Wall Street protesters should have started out by demanding that corporate capitalism be extirpated or expunged from the American society and polities without demanding redistribution. Neither corporate downsizing nor selling off businesses or divisions would necessarily entail redistribution to the lower and middle classes. I suspect the beneficiaries of the transition would be stockholders (while upper echelon executives see less almost immediately in cash and stock income). Even though lower and middle income people could gain, the real driver behind the decrease in the economic inequality would be that the super-rich are not so rich. This is not to say that economic equality would be the goal; talent and effort justify more compensation. The problem is when the system is tilted so the inequality in compensation is allowed to far beyond its legitimate basis. To the extent that the system of corporate capitalism was itself in the protesters’ crosshairs, then simply redistributing wealth to momentarily mitigate the amount of economic inequality would fall short.

In fact, the protesters would have been more credible (and successful) were they to have distanced themselves from the topic of redistribution because they would quite obviously stand to gain from it. In refusing to police the “redistribution” signs opened the protesters up to a conflict of interest wherein their own private interests could be seen to bias their claim to acting for the good of the whole.

Sadly, the protests were enervated from within by a lack of resolve to focus on a few key points; the movement’s own failure to delimit itself in terms of demands allows for such competing agendas as redistribution to emerge and gain a footing. The Wall Street Journal dispatched reporters in five cities to interview over 100 protesters. “The picture that emerged is a motley conglomeration of people with widely varying goals—and some with no clear-cut goals at all other than to denounce greed.” There is “a tolerance—and, sometimes, sympathy—for causes well outside of the mainstream.” Inside the demonstrations, “there is broad acceptance of a wide range of opinions and agendas—even those that occasionally border on the absurd.” This atmosphere provided the context in which redistributive agendas could encroach on the more fundamental point that corporate capitalism itself should be replaced with something perhaps more akin to Adam Smith’s version (i.e., not necessarily with socialism).

Douglas Schoen, a former strategist for Bill Clinton, surveyed 198 protesters in New York City. Schoen reports his results as the following: “The demonstrators believe in redistribution of wealth, government-provided health care and education no matter what it costs, increased regulation and protectionist trade legislation.” Schoen concluded the protesters were well to the left of the independents needed by the Democrats to win the White House in 2012, so his summary may be biased to show the movement in a less than favorable light. For instance, he missed the objectives voiced by some of the protesters to eliminate the “legal person” status of a corporation—and, indeed, corporate capitalism itself. Even so, his survey shows that it redistributive goals were among the protesters’ agendas. The same thing can be seen in a report in the Huffington Post.

According to the Post “The gap separating the richest 1 percent of Americans from the rest of the country has emerged as arguably the single most prominent rallying cry of the Occupy Wall Street movement. . . . The Occupy protesters identify themselves as "the 99 percent" —referring to the majority of the population that has had to contend with limited economic and social opportunities while money continues to accrue to the very wealthiest citizens.” The “limited economic and social opportunities” intimate a desire for redistribution from “the very wealthiest citizens.”

To be sure, if the economic/political power of “the very wealthiest citizens” is a threat to the republics (and unfairly gotten), a tax on them would be justified and this implies redistribution through government spending. Even so, that spending can be for the good of the whole rather than funneled to the poor exclusively means that the redistribution can be to the whole rather than from X to Y within the whole. Furthermore, the redistribution itself would not be the point, and as such would only be a temporary byproduct as the concentrations of excessive private wealth that constitute an inherent threat to the viability of representative democracy are rendered innocuous to the body politic (and the economy). 

While not without merit, the ancillary “redistributionist” demands brought with them a certain opportunity cost in foregone focus. In fact, I would not be surprised to find that pro-business groups funded “redistribute” signs amid the protests; it was undeniably in the business interest to discredit the demand that the modern corporate form itself (including the “legal person” doctrine) be made illegal beyond a certain cut-off in assets and/or revenues. This demand is particularly toxic to American business because both corporate capitalism and its sordid impact on the American system of representative democracy are front and center, and thus at risk in themselves. It is not about limiting a CEO’s bonus or taxing corporations more for entitlement programs; rather, the mega-corporation itself—as an economic template—is the target. In short, the protesters missed a great opportunity to make the focused claim that extreme economic inequality itself is inherently unfair (i.e., without adding into the mix the virtues in redistribution) and that modern corporate capitalism itself causes it and leverages it in corrupting the halls of government with still greater inequality as a result.

It is the inherent unfairness of extreme economic inequality, rather than any of the benefits from redistribution, that lies at the root of the rise again to populism and is the basis of the complaint; the system of modern corporate capitalism is culpable too as the structure or conduit through which the inequality is magnified. The extent of the inequality can be seen in the following comparisons: the total income of the top 1% is the same as the total income of the bottom 60 percent, and the total wealth of the top 1% is the same as the total wealth of the bottom 90 percent. That is, one percent of the population has as much wealth as ninty percent have.The wealth of the one percent is thus extremely concentrated. 

On October 26, 2011, the Huffington Post reported some statistics on the degree of economic inequality in the U.S. at the time. The report is worth quoting at length:   

“Income for the wealthiest Americans has nearly tripled since 1979, while remaining relatively stable for the rest of the country, according to figures released this week by the Congressional Budget Office. The numbers offer a striking illustration—the latest one in a long series—of how wide the gap has grown between America's richest citizens and everyone else. For the richest 1 percent of Americans, income rose a full 275 percent between 1979 and 2007, —accounting for inflation—according to the CBO. For the poorest 20 percent of Americans, meanwhile, income rose just 18 percent in the same time period. For the middle 60 percent of earners—that is, the 21st through 80th percentile—income grew by just under 40 percent. And for the 80th through 99th percentile, income grew by 65 percent. That's a rapid climb, but the top 1 percent experienced a rate of growth more than four times as fast.”

“Above all else, the CBO's figures suggest that the richer you are, the richer you'll get over time. But this is far from the first report to reach that conclusion: Numerous studies have shown that America's very highest earners have been steadily pulling away from the rest of the population for a generation. Even as income for the richest 1 percent has nearly tripled since 1979, wages for the lower and middle classes have hardly moved. . . . Today, the 400 richest people in the country control more wealth than the bottom 50 percent of households, and the U.S. ranks roughly alongside countries like Uganda, Cameroon, Ecuador and Rwanda  in terms of the gap between its poorest and wealthiest citizens.”

It is highly probable that the extent of the inequality in wealth had arguably surpassed that which could be justified in terms of fairness (i.e., from more compensation for greater effort and talent). Behind the figures lay a system of corporate capitalism that had furtively rendered the republican form of government into a plutocracy (i.e., ruled by and in the interest of wealth). This is the point—not that more income should be redistributed within the existing system.

In conclusion, redistribution short-circuits the more fundamental demand that the political economy itself be re-configured—rid of the mega-corporations and the billionaires—because the system itself has become inherently unfair as evinced by the extreme inequality in income and wealth. Besides being unfair in terms even of Adam Smith’s moral sentiment, mega-corporate (rather than small and medium business) capitalism engenders or facilitates concentrations of wealth even after they have become dangerous to both the economy and democracy. The systemic risk to which the market is vulnerable is that the system itself is geared predominately to further increase those concentrations at the expense of economic justice and political democracy. In other words, corporate capitalism knows no limits within itself concerning concentrations of capital. Regarding externally-imposed limitations, the large corporation inherently seeks to enervate any extrinsic obstacle, including legislatures and regulatory agencies. The mega-machines will continue to amass capital unless the large corporation itself becomes the target and is found by a threshold of people in a society to be irreconcilable with fairness and accountability. Efforts to merely refine the existing system will surely founder. In other words, the point is not increased redistribution, even if that is a byproduct in the transition.

See related essays: "Occupying Wall Street: A Self-Regulated Protest?" and "Protest Movements 101"


Alexander Eichler, “One Percenters’ Income Nearly Tripled In Last Three Decades: CBO,” The Huffington Post, October 26, 2011. http://www.huffingtonpost.com/2011/10/26/income-inequality_n_1032632.html

Douglas Belkin, Tamara Audi, and Danny Yadron, “Protests Put Democrats in Bind,” The Wall Street Journal, October 25, 2011. http://online.wsj.com/article/SB10001424052970203911804576651410222669534.html

Tuesday, October 25, 2011

Britain at a Crossroads?

The prime minister of the state of Britain faced a “rebellion” in his own party on October 24, 2011 as eighty conservatives backed a nonbinding referendum on whether the state should secede from the union. “I don’t vote against the government lightly, but I think when there is a matter of principle then that must come first,” Nick de Bois said. “We have a considerably changing dynamic [in the E.U.] and given that . . . and the fact that anybody under 54 has not had a chance to vote on [whether Britain should secede from the E.U.], it is appropriate to set in motion that opportunity,” he said. De Bois’ sentiment mirrors that of Thomas Jefferson, who argued that each generation should have the opportunity to affirm or cancel the social contract of the generation before.

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Monday, October 24, 2011

Sarkozy to Cameron: “Shut up”

"You have lost a good opportunity to shut up," Sarkozy said to Cameron during a bitter two-hour exchange which held up a meeting of all 27 European Union states on 23 October 2011, according to the  Guardian. Translating the relatively polite European English into American slang, Sarkozy’s statement becomes, Shut the fuck up.

"We are sick of you criticizing us and telling us what to do," Sarkozy added. "You say you hate the euro, and now you want to interfere in our meetings." Cameron had insisted on participating in the euro zone meetings because he anticipated that, perhaps along the lines of taxation without representation, unfavorable regulations would be imposed on Britain without its consent, according to The Telegraph. Cameron also claimed that the euro zone crisis was having a "chilling effect" on all European states, including Britain. He insisted that all 27 E.U. state governments, rather than just the 17 using the euro, should be able to have the final say over Europe's rescue package, according to The Guardian.

Was Cameron trying to have it both ways by having refused to transfer the governmental sovereignty necessary for monetary union yet going on to demand being entitled to a vote on monetary policy regarding the euro? Might it be that the prime minister presumed himself to be in a superior position from having evaded the common-currency trap, and thus he felt entitled to tell the E.U. “euro” states, which had found themselves in a pickle, what to do? Alternatively, if British banks are called on to take sizable losses on their Greek debt holdings and/or to increase capital reserves, the state government would indeed be entitled to participate in the decision-making process at the E.U. level on those proposals.

Cameron would doubtless go further, insisting that just the fact that Britain would be adversely affected economically by a Greek default justifies the British prime minister in having a seat at the table. At the time of the E.U. conference, the Huffington Post observed: “Europe already is entering a continent-wide economic slowdown, as manufacturing output recently reached an 18-month low, according to the Wall Street Journal, and European economic growth fell to its lowest rate in two years,  according to The New York Times.” Any mishandling of the Greek situation could easily rock the European economic boat, which Britain is in. In other words, if the debt crisis had gone well beyond the matter of the euro, then Cameron had a legitimate point that the entire E.U. should decide on a solution. This could mean that all 27 states contribute to the European Financial Stability Facility, for otherwise it would be difficult to bracket the involvement of the non-euro states in the decision-making process. In other words, if the most serious of the financial problems involve European banks and wayward E.U. states rather than centering on the euro itself, then all of the states should be involved in the decision-making at the E.U. level.
Sarkozy and Cameron eventually reached an arrangement on October 23rd that the 27 E.U. state governments “would initially debate the measures to write down Greek debt, increase the size of the bailout fund, and recapitalize European banks, but ultimately the euro zone would have final say over the rescue package  [on October 26th] , according to The Guardian.” Presumably British banks would not be called on to write down their Greek debt, and this might cause banks in the “euro zone” states to demur. The same goes for any recapitalization requirements. As for the bailout fund, that would rightly be governed by the states that had contributed to it.

Perhaps the squabble between the two state leaders can be seen by the rest of us as a harbinger of the difficulty involved not just in achieving fiscal integration within the “euro zone” requisite for stable monetary union, but also in there potentially being two levels of fiscal integration in the E.U. itself. The E.U. would have a major structural/procedural/political problem if the “euro zone” states were to cede additional governmental sovereignty regarding their fiscal or budgetary/tax policy and Britain were to insist nonetheless on having a vote on particular “euro zone” fiscal policy proposals that might affect it even though it had not agreed to cede the sovereignty to being subject to “euro zone” decisions, including those on which Britain participates. That is to say, extending the “two tracks” tradition of the European Union to fiscal policy (including state budgeting and taxation) could mean that an “outer” state such as Britain is negatively impacted by a decision made by the players in the “inside track” and yet not be able to have any formal involvement in the decision-making. Rectifying this would mean that the “outer” state government could participate in “inside” policy while not be subject to it. Is the prospect of being negatively impacted by others’ policy sufficient in the E.U. to justify the right to vote on the policy even without being subject to it? It would seem that exasperating its “two track” tradition might put the Europeans in a double-bind. If so, it may be that E.U. state governments may all have to bite the bullet and cede more governmental sovereignty, whether or not they adopt the euro.


Bonnie Kavoussi, “Nicolas Sarkozy To David Cameron: ‘You Have Lost a Good Opportunity To Shut Up’,” The Huffington Post, October 24, 2011. 

On the Hegemony of the Bonus System

Craig A. Dubow, Gannett’s former chief executive, had a short six-year tenure that was, by most accounts according to The New York Times, “a disaster.” David Carr reports: “Gannett’s stock price declined to about $10 a share from a high of $75 the day after [Dubow] took over; the number of employees at Gannett plummeted to 32,000 from about 52,000, resulting in a remarkable diminution in journalistic boots on the ground at the 82 newspapers the company owns. . . .  the company strip-mined its newspapers in search of earnings, leaving many communities with far less original, serious reporting. . . . Not only did Mr. Dubow retire under his own power because of health reasons, he got a mash note from Marjorie Magner, a member of Gannett’s board, who said without irony that ‘Craig championed our consumers and their ever-changing needs for news and information.’ But the board gave him far more than undeserved plaudits. Mr. Dubow walked out the door with just under $37.1 million in retirement, health and disability benefits. That comes on top of a combined $16 million in salary and bonuses in the last two years.”

Besides the inherent unfairness in an incompetent manager getting millions of dollars in compensation (for championing incompetence?), it is morally problematic when, as Carr puts it, “the consequences of bad decisions land on everyone except those who made them.” As already pointed out above, in the midst of Dubow’s “championing” (this word is so broad it has scarce any real meaning), “the number of employees at Gannett plummeted to 32,000 from about 52,000.” One could just as easily point to Bank of America’s downsizing of its labor force in the wake of Ken Lewis’ shopping spree at Countrywide and Merrill Lynch. Lewis really did exemplify the “walmart” mentality applied to banking: an almost-complete indifference to quality in a desire to be everything to everyone. The “exporting” of bad consequences while exuberant rewards are retained indicates that the corporate executive compensation system in the United States is fundamentally broken. The fixation on aligning an executive’s incentives with the financial enrichment of the stockholders has not functioned as anticipated.

For one thing, the vesting of stock, which is meant to orient an executive to the longer term financial interest of the stockholders, is typically bypassed as an executive gets the equivalent in cash (or stock) from his or her new employer. An executive can thus discount having to look out for the eventual downside in his or her decisions.

Moreover, the sheer amount of the compensation cannot be justified on the basis of a competitive upper echelons labor market (which functions more like an oligarchy). Indeed, the degree of fixation on the bonus system alone has resulted in larger payouts (as executives make decisions primarily from the standpoint of the impact on their bonus). David Carr points to the excess as mentioned in a USA Today editorial: “The bonus system has gone beyond a means of rewarding talent and is now Wall Street’s primary business. Institutions take huge gambles because the short-term returns are a rationale for their rich payouts. But even when the consequences of their risky behavior come back to haunt them, they still pay huge bonuses.” Carr’s overall point is that this hypertrophy allies to corporate America—not just Wall Street, though certainly it is salient there too.

When John Thain of Merrill Lynch gave lip-service to serving the stockholders, even his own subordinates knew he was more concerned with having to play second fiddle to Ken Lewis at Bank of America than with keeping Merrill’s stockholders from losing everything (as Lehman Brothers’ stockholders did). Even as Fleming got $29 per share as a buyout price from Lewis, Thain preferred a line of credit of billions from Goldman Sachs in exchange for a 10% ownership that would keep Thain on top. That was Thain’s driving motivation: to remain CEO. Meanwhile, the general public assumed that CEOs, including Thain, were motivated to act in their stockholder interests—that boards of directors insisted on this agency. However, where a CEO is focused on his or her bonus (Thain insisted on $40 million cash bonus even as Merrill was losing billions) and position (and thus future bonuses) and the CEO controls “his or her” board, the stockholders are in actuality left unknowingly fluttering in the wind—relying on a system of executive compensation that supposedly aligns the executives’ motivation with the financial interests of the stockholders. Much too much is being assumed here, yet assumptions, like habits, are difficult to break.

Click to add a question or comment on the bonus system in executive compensation.


 David Carr, “Why Not Occupy Newsrooms?” The New York Times, October 24, 2011. http://www.nytimes.com/2011/10/24/business/media/why-not-occupy-newsrooms.html

Sunday, October 23, 2011

Volcker on the Market and Regulation

Paul Volcker, former Chairman of the Federal Reserve, may strike the conventional "wisdom" as an oxymoron regarding the market mechanism and government regulation. I contend that he could teach that "wisdom" a lesson or two.

Regarding systemic risk, Volcker has called the perils of institutions that are too large or interconnected to be allowed to fail the greatest structural challenge facing the financial system. He said we must shrink the risks these companies pose, “whether by reducing their size, curtailing their interconnections or limiting their activities.” This goes beyond what The New York Times refers to as his “addressing capital requirements (make them tough and enforceable), derivatives (make them more standardized and transparent) and auditors (ensure that they are truly independent by rotating them periodically).” To reduce a large corporation’s size, interconnections, or business activities is essentially to say that a company that is too big to fail should not be permitted to continue to exist unless it is downsized. So it is not enough to increase the capital requirements of a large, $1 trillion plus bank that is too big to fail; the bank itself must shrink. Even though market pressure could lead a bank such as Bank of America to downsize, that mechanism is not enough; government should step in to make sure the downsizing is adequate even if the market is ok with the status quo. Essentially, the message is that the market mechanism itself is insufficient to obviate systemic risk. At the same time, Volcker wants to bolster that mechanism by riding of it of the effects of large players that are guaranteed by government even as they are not controlled by it. 

Regarding Fannie and Freddie, Volcker, who was once a presidential appointee to Fannie’s board said, “A public agency intervening in the mortgage market in a limited way doesn’t bother me. But if you want to subsidize the mortgage market, do it more directly than hiding it in a quasi-private institution.” The very nature of a “quasi-private institution” is abhorrent to him because the profit motive does not go well with being protected on the downside by a government. “You ought to be either public or private; don’t mix up private profit-making opportunities with an institution that is going to be protected by the government but not controlled by it.” Such a mix can be expected to result in distorted incentives, such as unduly risky behavior. Furthermore, the mix enables government officials to hide the government’s potential liability from the guarantee. Referring presumably to Treasury officials, Volcker said, “They didn’t want the mortgage to be a government expenditure. It was a volatile thing to put on the budget. They made the wrong choice.” The choice can be explained by the fact that it followed the path of most convenience from the standpoint of democratic accountability. Therefore, from both the standpoint of economics and political theory, private should be clearly distinguished from public as regards institutions. Volcker was not saying, however, that government ought to stay out of the housing market—only that such involvement should not be mixed with the profit motive.

To be sure, Fannie and Freddie have powerful defenders on Capitol Hill and at the White House. Extracting the two mortgage guarantors from the housing market would be an up-hill battle. Vested power in the U.S. can make use of the government’s many access-points, moreover, to stave off change. This is also true regarding proposals to regulate mutual funds. “Because they are not subject to reserve requirements and capital requirements,” Volcker observed, “they are a point of vulnerability in the system.” Yet in a letter to the Financial Stability Board, an international organization charged with developing strong regulatory and supervisory policies for financial institutions, the Investment Company Institute said: “We do not believe banklike regulation is appropriate, necessary or workable for funds registered under the Investment Company Act of 1940.” Strangely, Americans tend to take the rather-obvious positions of such vested interests at face value and accord them validity. Well ok, the conventional wisdom might conclude, then I guess we shouldn’t regulate mutual funds then. The conflict of interest in the mutual fund industry’s own position regarding regulation ought to have the immediate effect of relegating that position in the public debate and in Congressional offices.

Interestingly, Paul Volcker simultaneously disavows relying exclusively on the market mechanism (e.g., regulating to minimize systemic risk) and advocates keeping any government involvement in the market from mixing with the profit motive. In other words, he opposes distortions on that motive even as he is not laissez-faire. Because he is fine with a role for the government in the housing market as long as the public sector involvement does not work through an institution’s profit motive, I view him as being closer to the "government regulation" position than the "free market" position. Even so, he should not be pigeon-holed as “free market” or as “big government” because he does not line up with the "purists" on either "side." Even as he is for financial regulation such as the Volcker Rule, he wants to stress the importance of an "arm’s length distance" between business and government in a market. Government can act in its unique way to protect the market itself (i.e., minimize systemic risk by breaking up firms too big to fail and regulating shadow banking) even as the profit motive is protected from government-backed distortion. The rest of us can take a lesson from Volcker’s wisdom. Accordingly, we might want to avoid easy slogans being bandied about on either “side” of the ideological aisle.


Gretchen Morgenson, “How Mr. Volcker Would Fix It,” The New York Times, October 22, 2011. http://www.nytimes.com/2011/10/23/business/volckers-advice-for-more-financial-reform.html