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Saturday, December 29, 2012

Mario Monti: Succumbing to Power?

He was supposed to have been reluctantly pushed into briefly stepping in as prime minister in Italy to push austerity measures through the state legislature.  According to Deutche Welle, “The 69-year-old former European Commissioner was appointed to lead Italy’s government . . . to restore Italy’s finances following Berlusconi’s departure.” The technocrat was not supposed to so interested in power that he would want to stay on. At the end of December 2012, Mario Monti announced that he would lead a centrist group of politicians against the Democratic Party and Berlusconi’s People of Freedom party in the upcoming election.  Had the former bureaucrat “found religion” in some political cause, or had he developed a taste for power? If the latter, we might ascribe the motive to the human propensity to resist giving up power willingly.
  Mario Monti at the European Commission. A launching point for Italian politics?    source: nytimes
The full essay is at Essays on the E.U. Political Economy, which is available at Amazon in print and as an ebook.

Friday, December 28, 2012

Averting the "Fiscal Cliff": A Solution Overlooked

With just days to avert the beginning of automatic, across-the-board cuts in the U.S. federal budget and the end of the Bush tax cuts and payroll tax reductions, President Obama met with Congressional leaders at the White House following a brief respite over Christmas. The discussion was doubtless on what could pass Congress in time. The U.S. Secretary of the Treasury was also attending, so the upcoming debt-limit could also have been part of the discussion. It could be argued that the perspective itself at the meeting must have been too narrow—too small—even though the crisis demanded leadership.

The complete essay is at Essays on Two Federal Empires, which is available at Amazon in print and as an ebook. 

Speaking after meeting with Congressional leaders, President Obama could have used the crisis to propose a seismic shift in American federalism in line with reducing the federal debt. Getty Images

José Manuel Barroso: Picking Romania’s Government?

On December 9, 2012, Romanian voters approved of the coalition of the then-current Prime Minister Victor Ponta, by a two-thirds majority. However, because Ponta had been in a bitter political feud with President Traian Basescu—Ponta’s coalition tried and failed to impeach the president—it was not clear that the president would nominate Ponta for prime minister even though that post must be approved by the parliament. Basescu did wind up nominating Ponta. The interesting point here is that President Barroso of the European Commission publicly waded into the choice on behalf of Ponta. 
 Prime Minister Ponta of Romania: Propped up by Barroso?           exclusivnews.ro

The full essay is at Essays on the E.U. Political Economy, which is available at Amazon in print and as an ebook.

Thursday, December 27, 2012

Pot in Colorado: Getting High on American Federalism

On November 6, 2012, Colorado’s citizens approved with a 55% majority a marijuana-legalization measure that allows residents over the age of 21 to possess up to an ounce. The measure also allows for the commercial growing and selling of pot. More than a month later, the government of Douglas county in Colorado passed a law prohibiting companies from growing or selling cannabis. Meanwhile, the U.S. law continued to make the growth, sale, possession or use of pot illegal. Over all, it would seem to be a case of federalism as a pretzel of sorts, all twisted up into itself. This case study can be used to point to a more perfect union in terms of federalism.

The complete essay is at Essays on Two Federal Empires.

The pot leaf.   source: Mother Jones (who else)

Friday, December 21, 2012

John Kerry as U.S. Secretary of State

Just after President Barak Obama announced that he would nominate Sen. John Kerry of Massachusetts to be the U.S. Secretary of State, the occupant of the corresponding office in the E.U., Catherine Ashton, welcomed the prospect of working with Kerry.
"I am delighted by the nomination of Senator John Kerry to succeed Hillary Clinton as US Secretary of State. I have had the privilege of meeting Senator Kerry on a number of occasions. His considerable experience, not least as chair of the Senate Foreign Relations Committee, makes him an ideal candidate for this crucial position. Pending Congressional confirmation, I look forward very much to working closely with him, and continuing the excellent cestablished with Secretary Clinton."
I, too, have had the privilege of meeting Senator Kerry. He struck me as a warm yet very ambitious man. At the time, I was on a deficit-reduction kick, so I asked him how his “big government” ideology was consistent with reducing the federal deficit. “I’m a fiscal conservative!” he insisted as he put his arm around my shoulder and smiled. “Oh, come on,” I countered in rather obvious disbelief. “I believe that government programs should be run efficiently,” he explained. “That’s good, but I don’t think that’s fiscal conservativism,” I said, “and it doesn’t necessarily make a dent in the deficit because you could simply add more programs that are efficiently run.” Perhaps Kerry as the U.S. Secretary of State might put his arm on Katherine Ashton’s shoulder and mollify her with something like, “Of course the E.U. is not a federal system,” or “the U.S. is firmly in support of the E.U. and ready to help.” Bill Clinton could even provide background music by playing his sax. Would the European succumb to the “I’m essentially whatever you want me to be”?

                                              U.S. President Obama nominates U.S. Sen. John Kerry to be U.S. Secretary of State.    Reuters
I would like to think that at least behind closed doors, politicians are capable of real talk rather than appearance and manipulation. What is the essential nature of a person who would make his or life that of politics? Do we ever really know them? Is there substance under the shells? Moreover, are the best people ruling? Does the democratic process proffer the best or merely the most pleasing appearance? As the E.U. struggles with the appearance of suffering from a democratic deficit, Europeans might want to reflect a bit on whether “technocrats” are really so bad. At least they don’t have quite the skill to conflate themselves into chameleons. Ashton might indeed have had Kerry’s number, yet no one would ever glimpse this from her glowing statement. Are she and Kerry two of a kind—both politicians managing appearances? How would the rest of us ever know? And yet we are the ones who are tasked with pulling the levers on election-day.

ICE Buys NYSE: Profiting from the Rules

“Tell me what the rules are, and I’ll make money with them.” This statement, made by Jeffrey Sprecher of Intercontinental Exchange, captures well the attitude that business practitioners should have toward government regulation in a republic. That is to say, businesses should be regulation-takers rather than makers. For the regulatees to make regulation to which they themselves would be subject is an oxymoron, or contradiction in terms. At the very least, it involves a conflict of interest. At the macro level, business as “regulation-maker” effectively turns a democracy into a plutocracy. Accordingly, the strategic use of regulation should pertain to the use side, rather than the regulating side. Crafting regulations—essentially dictating them to legislators or regulators—in order to make money from them takes the strategic use of regulation too far.
                                                                                                        Jeffrey Sprecher of ICE.  Making money playing by the rules.  (nypost)
Sprecher began by working at electric companies. He picked up on the need of those companies to hedge energy contracts so he bought a small exchange and built it up around derivative trading. Eventually, he did away with the exchange’s trading floor—preferring 24 hour computer trading. In 2010, the passage of the Dodd-Frank Act of financial reform requires that derivative trading be done through a clearinghouse. Sprecher’s company stood in a position to take advantage of the new rule. In fact, the intent of the new regulation being that regulators could have a better idea of the volume of derivatives “out there,” Sprecher created a derivatives database in his company. In other words, he anticipated in a way that meant more profits, and he did so without trying to manipulate legislators or regulators with a huge lobbying effort. Rather, he anticipated weaknesses in the market and devised company-based solutions that would be profitable. It is no surprise that the Dodd-Frank Act essentially adopted his business model regarding derivatives—effectively forcing it on the industry as a whole.
In fact, observing the heightened scrutiny of swap contracts under Dodd-Frank, Sprecher decided to convert them to futures contracts. Here again, profit was also in the mix. “The reality is that there are incentives to convert swaps into futures, where there’s less competition,” according to Richard McVey of MarketAxess. “There’s no requirement for [Sprecher’s company] to open [its] futures clearinghouse to other exchanges.” This restriction of competition to increase profit is ironic for ICE because in late 2012 came the announcement that the company would purchase the New York Stock Exchange, which had capitalized on monopolizing the trades of its members. Ironically, Sprecher’s actions had undercut this monopolization and here he was exacting his own version in turning “insurance” swaps into garden-variety futures contracts. Business skill can be regarded as the art of knowing when to ride a wave—and which wave to ride.
It should be noted that both the computer-trading and derivative-trading trends furthered by Sprecher’s very company enabled it to buy the vaunted New York Stock Exchange for $8.2 billion rather than something much higher. According to the New York Times in late 2012, the “transformation of the New York Stock Exchange from its position at the apex of the world financial system to an asset to be bought and sold like any other—and one that is not deemed to be worth as much as it would be if it traded more modern derivative securities rather than old-fashioned stocks—has been going on for decades, but has accelerated in recent years.” Essentially, Sprecher took advantage of this trend by making the purchase, and he would capitalize on owning the “temple of commerce” through intra-company synergies even while committing to keep the NYSE floor up and running.
In short, business acumen has no need of being sidetracked into manipulating lawmakers and regulators into formulating rules favorable to one’s particular company. The strategic use of regulation is most profitably accomplished over the long run on the use side. Take the rules as given and make money with them. This is entirely consistent with business in a viable republic. An implication of this thesis is that it’s the bad—both in terms of business intuition and moral disapprobation concerning manipulating public policy for private gain—manager who represents the plutocric threat to a republic.  The business practitioners knocking on Congressional doors are not the brightest guys in the room as regards innate business skill, and they are not the most forthright concerning getting what they want, whether by money or even information. Unfortunately, turning opportunities into profit is instinctive only for some practitioners, while it is forced or contrived in many others, who therefore feel compelled to circumnavigate business by pressuring public officials. It is significant—and telling—that ICE did not have a substantial lobbying presence in Washington, as Sprecher and his subordinates undoubtedly “kept to the knitting,” being good at it, and thus they did well in profiting from gaps in the market and the related regulatory changes.


Ben Protess and Nathaniel Popper, “Exchange Sale Reflects New Realities of Trading,” The New York Times, December 21, 2012.

Floyd Norris, “A Temple of Commerce that Failedto Keep Up with Change,” The New York Times, December 21, 2012.

Michael J.de la Merced, “At the Big Board, Seeking Rejuvenation in Consolidation,” The New York Times, December 21, 2012.

Thursday, December 20, 2012

Is a Stronger E.U. in America’s Interest?

Is a stronger E.U. necessarily in the interest of the U.S.? According to Ed West of the Telegraph, “it’s not clear whether a united Europe would necessarily be more pro-American, automatically siding with the US against the rest. European countries have their own interests with regards the Middle East, Africa and China, which often don’t coincide with America’s, and on a range of world issues European public opinion is fairly hostile to America, decades of American military protection having inspired not gratitude, but resentment. Britain is something of an anomaly in Europe, popular opinion being unusually hostile to the EU and warm to America.” This passage can be taken to task on at least two points.

The complete essay is at Essays on Two Federal Empires, which is available at Amazon in print and as an ebook.

Wednesday, December 19, 2012

The U.S. Trade Deficit: Bad American Labor and Management?

Coming in at 2.7% of GDP, the U.S. trade deficit fell to $107.5 billion in the third quarter of 2012—down 9 percent from the second quarter’s $118.1 billion, which was 3% of the economy at the time. The current account includes merchandise, services, and investment flows. The surpluses in services and investment were out-done by the deficit in merchandise to produce the overall trade deficit. According to the New York Times, the “improvement in the current account in the third quarter reflected a decline in the deficit on goods and a small increase in the surplus on services, led by a gain in foreign earnings made by financial services, insurance and professional services provided by companies in the United States. The surplus on investment earnings narrowed to $50.8 billion, down from $52.1 billion in the second quarter.” Most of the decline in the deficit on goods reflected a decline in the foreign oil bill, according to Paul Ashworth at Capital Economics.
Lest we get bogged down in the purportedly significant differences between 2.7% and 3.0%, $107.5 billion and $118.1 billion, and $50.8 billion and $52.1 billion, respectively, we might take note of the rather stark difference between goods on the one hand (i.e., sustained deficits) and services and investment (i.e., sustained surpluses). Although it was no doubt true that the economic slow-down in China and the debt/austerity-induced recession in the E.U. were reducing demand for American exports, a basic imbalance between exports of American-made and imports of foreign goods is clear from the numbers year after year. Indeed, in 2006 the current account deficit had reached a record $800.6 billion—suggesting that something fundamental was “out of whack.”
                                               This graph isolates the deficits in goods imported/exported.   source: thismatters.com 
The question may be whether Americans were importing too many foreign goods or were too uncompetitive in making goods. Regarding the former, being able to buy a relatively inexpensive television made in China is not in itself a bad thing, particularly to the consumer. The question is perhaps whether the price was artificially low, due for instance to a relative lack of environmental regulations, lower labor costs, or government/bank subsidies. However, even if due to these factors, a low price is undoubtedly welcome to any consumer.
Regarding American competitiveness, was it hampered by labor and environmental standards or simply by unmotivated workers and bad management? Whereas American consumers benefit from cheap imported products, no such benefit can be found in the U.S. to any sector from a relative inferiority in competitiveness.
There is, however, the argument that an “advanced” economy oriented to professional, business and financial services rather than manufacturing can enjoy a higher standard of living if the services are more premium than the goods would be. The pristine notion of the “knowledge economy” captures this point very well. That not all Americans are willing or even able to participate at this level suggests that the term could never completely cover an entire economy. Hence, it is necessary even in an “advanced,” or “high tech” and “professional,” economy to tackle the problem of competitiveness in manufacturing.  Does it come from high regulatory costs (which can be viewed as part of a demand by Americans for a certain “standard of living” writ large), a lack of product development, or an inefficient labor or management force?  Whereas wanting a decent wage-floor or environment as a condition of manufacturing has merit—the cost being that society may have to support people who would otherwise be working in manufacturing—a dearth of ingenuity, bad employee attitudes, and inept management have no such positive aspect.
I was born and raised in a medium-sized industrial city in the “rust belt.” Furniture was the first industry, following which machine tools were the dominant manufacture until competition from Europe took out most of the factories. Speaking a few years ago with a European who had been sent over to oversee a factory that had been taken over by a European company, I was not surprised when he admitted, “the workers here just are not good. They are not motivated and they don’t pick up on the training very good.” Years before that, I had watched a program on the American public broadcasting network about a man’s effort to prepare inner-city black people for job interviews. Midway through his talk, the man admitted to the folks attending, “from your attitude even here, I have to admit I can’t see how anyone would hire you, so I don’t see any reason to continue here.” The man ended the workshop at that point. Doubtless his decision prompted little if any self-criticism from the participants. A bad attitude is perhaps almost impossible to correct from the outside—even with the inducement of money!—given the nature of a bad attitude. Regarding people under thirty, perhaps a year or two at a military “boot-camp” might break down the attitude’s intransience and build up self-confidence and self-respect, not to mention basic civility. Absent such a strategy, perhaps the segment of the American population unwilling (or able) to become part of the “knowledge economy” is inevitably lost—not being able to compete even on a factory floor. The cost to the rest of society goes well beyond money.
While visiting Miami, I witnessed repeated incidents on the buses from the mainland to Miami Beach of black men shouting and even hitting each other, as well as bumping into (and even falling on!) tourists. The black drivers ignored the shouts (including a drunk black man loudly and repeatedly calling a pregnant white woman a “fucking bitch”) and even fist-fights. Even with tourists begging the drivers that the aggressive passenger be dismissed from the bus, the drivers just drove on. In two cases, the drivers asked the men being hit if they wanted to press charges. They replied that they did not, so rather than get the aggressor off the buses or call the police, the drivers simply started driving again. This happened twice in the last 24 hours of my visit!  Near the beginning of my visit, I myself was pushed against the open bus door of a bus at a rail station while I was attempting to board a bus because I had not allowed all of the black passengers to enter first. The black driver refused to call the police or even tell the aggressive black man who had squeezed me to leave the bus. The driver simply replied to me—as I was pinned to the open front-door—“no, I won’t call the police. You shouldn’t have gotten on then. That’s how it is here.” I should have called the police! I was so stunned at the violence and systemic cover-up that I simply wanted to get to my destination. Just after I took my seat, a nice older black woman asked me where I was from. I told her that I had grown up in Illinois. “It must be worse in Chicago,” she remarked. “No,” I countered, “it is worse here. The blacks there are better.” In spite of being the only white person on the bus, I went on. “Even with the blacks killing each other in south Chicago, the people are better there.” She asked if north Chicago was white and the south part black. “No, the north part of the city itself is integrated, while I think the south is black. I was referring to the north—the blacks there are much better than the ones here. Here—I can’t leave soon enough.” Silence . . . complete silence. It then occurred to me that the entire bus—which still had not left the tri-county rail station—had been listening to this white guy talk about blacks very directly.
As it happened, a month or so later I was in Chicago taking a bus when a black man tried to enter the bus by pushing three old white women in line in front of him. The driver, who was also black, saw the attempt and quickly said, “Hey, what do you think you are doing? Get back out of the bus and let those women on first. Who do you think you are?” Then the driver turned to us in the bus and remarked, “It’s all about him, isn’t it?” The offender must have been startled, for he merely replied, “But it is cold out.” The driver pointed out that it was cold for the women too. The three women ended up sitting near me, and I told them (and the front half of the bus) about what I had witnessed in Miami on the buses there—and that it really was better in Chicago and even warmer despite the cold—even in terms of people moving past each other in the isle. “In Miami, the driver would not have intervened and you all would have been pushed out of the way of the guy who was behind you in line. Even complaining to the driver would have had no effect, and the man would have gotten away with it—whereas here that attitude is an exception. It was therefore countered, or pushed back, and therefore not allowed to become the default.” I don’t know whether the driver heard my compliment.
While it is easy to point to the bad attitude of many of the black passengers in Miami, I contend that the incompetence and attitude of the bus drivers there were just as problematic, and my anecdote from a bus in Chicago demonstrates that the attitude need not be enabled rather than challenged. The fact that the drivers in Miami all reacted the virtually the same way suggests that the decadence is systemic there. Put another way, the rudeness and aggression had become the norm and thus could not be checked. Perhaps this is why the drivers simply ignored even the violence—though this is hardly a viable excuse.
In terms of passive aggression, I witnessed drivers of buses going between downtown and Miami Beach regularly and knowingly cram too many passengers (even tourists!) on the buses and then demand that the extra passengers (who had already paid) shout back into the bus for others to step back so the extras could “get behind the yellow line.” To allow passengers known to be beyond capacity on board and then put them in an impossible situation while refusing to take control of the bus by making an announcement for people standing to move back evinces not only incompetence, but also an almost-sadistic mindset. On several occasions, I saw order itself fall apart on buses there as frustrated passengers—even tourists!—openly challenged the unjust and incompetent drivers on this very point.
Leaving Miami, my overall conclusion was that that county should not be part of the United States of America because of the rudeness, aggression and even the break-down in order—all tacitly sanctioned by county managers and employees. The rudeness, by the way, was nearly everywhere, rather than just on buses. I could not imagine any of the aggressive passengers or enabling drivers lasting more than a few days working in a factory, and the bus company managers (who knew of the incidents, according to local passengers) were doubtless virtually unemployable in the private sector too.
In short, the serial merchandise trade-deficits may point to an America that even many Americans do not know exists. That is, the structural imbalance may reflect a decline in American society—both in terms of labor and management—that manifests in a significant number of Americans compromising manufacturing or even being virtually unemployable. Put another way, I suspect that the condition in the American factory was at least as of 2012 part of a much more serious problem wherein even the social contract itself was under threat, or at the very least the American empire was in decline.


The Associated Press, “US Shirks Trade Deficit As Oil Falls,” The New York Times, December 19, 2012.



Friday, December 14, 2012

Honeywell’s David Cote: Carrying the Water in Washington

In the midst of the talks in Washington to obviate the so-called fiscal “cliff” with a bipartisan deal, the Wall Street Journal reported that David Cote, the CEO of Honeywell, a $48 billion “industrial giant,” was at the time “the business executive most in the middle of the fiscal-cliff debate.” The Senate Finance Committee Chairman Max Baucus (D., Mont.) said, "People on both sides of the aisle are sending messages through Dave. He's become an active participant.” For a sitting CEO to have ensconced himself so deeply among the power-players in Washington did not come controversy-free. Even though his company had a vested interest that a deal be reached, the matter of his involvement raises larger implications, positive as well as negative.
                                             David Cote, CEO of Honeywell. Civic duty or getting "his people" back in line in Washington?       Bloomberg News
 "I'm being accused of all kinds of nefarious motives just because I'm a CEO," Cote claimed. He also conceded his cause diverts a lot of time from his job but says he tries to make it up from his personal time. In any case, "the best for my shareholders is a robust economy," he explained, "which can't happen if the country is gridlocked over debt." True enough—a rising tide benefits all boats. However, as the Wall Street Journal points out, “Cote's efforts could benefit his business. Absent a cliff deal, deep cuts in federal spending on defense and many other programs will kick in. Success in averting them could help Honeywell, an aerospace and defense contractor that draws 10% of its $38 billion in annual sales from the government.” This point could not have been lost on the CEO. Honeywell’s stockholders were not volunteering their CEO in a sort of civic duty or good “corporate citizenship.”
Moreover, that the CEO of a major defense contractor was spending so much of his time as a go-between in Washington so a deal that would obviate automatic cuts including defense spending might have a better chance of being reached by Republican and Democratic leaders points to the depth of interest by the military-industrial complex in the task. I would not be surprised to learn that various government officials, including the Federal Reserve chairman, Ben Bernanke, were not themselves “carrying the water” for the government-dependent sector in stirring up doomsday predictions lest a deal not be reached in time to avoid “falling off the cliff.” Besides influencing the debate itself through ads and other, less transparent means, the sector with the most to lose was “bucking up” to keep the defense contracts coming. From this standpoint, it is surprising that Washington’s political elite had not fallen into line and come up with a deal by November.
“We’re not confident that our guys can govern anymore,” Cote observed as he was carrying messages between Republican Congressional leaders and the White House. While this observation could be oriented to the lack of responsiveness to the “sway” of the military-industrial complex in the halls of power, he said his role as political-deal-facilitator has been a "revelation” on how dysfunctional Washington had become simply in terms of being able to get along. "I meet people on both sides I like and find reasonable,” he said, “but they aren't working together." This is particularly significant, given the interest of the complex that a deal be reached. Might it be that ideological differences on government (or even immaturity) can actually bristle at, or even resist the power of money in Washington?
For instance, has ideology in the Republican Party on the role of government in the economy gone against the interests of Wall Street or corporate America, or is the ideology effectively a reflection of the whatever that base determines is its rightful interest? I suspect that there was no way that Republican leaders were going to let a deal slip by, even given the appearances to the contrary in the meantime as the leaders sought to get better terms by waiting until the last possible moment to seal a deal. However, were such a resolution “in the cards” given the underlying “marching orders,” why would Honeywell’s CEO have been spending so much time “carrying the water” in Washington?
That there might have actually even been a chance that the military-industrial complex could be subject to budget cuts is amazing, considering the power of money in the United States. Put another way, why would a man whose total direct compensation in 2011 was $25 million and whose retirement package assets were at $78 million feel the need to carry anyone’s water—especially given that his “Fix the Debt” non-profit had raised $43 by mid-December 2012 and could unleash television ads against “dysfunctional” elected officials who had not “gotten the message.” Something is really up when a real insider feels compelled to get so explicitly and personally involved—even given Honeywell’s financial interest that a deal be reached.
In short, there are wider implications for David Cote’s involvement amid the political class in Washington. His own, his company’s, and his sector’s financial interests notwithstanding, that a person of his stature would roll up his sleeves and get to work in “dysfunctional” Washington suggests that he is exactly the sort of person to who the American Founders would have called on to serve his country out of a sense of civic duty. Even as Obama was being urged to put Cote in his cabinet as Treasury or Commerce secretary, the CEO was saying, "I can't wait to get out of here and back to my day job." This sentiment, rather than a desire to run for office, should be “just the ticket” needed for admission to a fixed term of “duty” in Washington—then freedom. This is what citizenship means—realistically in the context of even vested interests. Even as Cote doubtless had his in mind, he was also going beyond the pale as a CEO actively working to craft a deal in at the highest level of the U.S. Government.
To be sure, David Cote could have been a rare snapshot of the military-industrial complex getting  "its people" back into line in a Washington "unhinged" from its real principals. However, it could also be that the man deserves a lot of credit for stepping up to the plate in a ballpark not typically frequented by CEOs not only to protect his company, but also to tackle the systemic imbalance evinced in a public federal debt of over $16 trillion at the time. If so, the President would have been well advised to use him well—rather than too much—out of respect for the man’s public service. A restoration of the civic duty of citizenship can indeed be distinguished from the threat of plutocracy to a republic.


Monica Langley, “Honeywell CEO in the Middleof Fiscal Cliff Standoff,” The Wall Street Journal, December 13, 2012.

Thursday, December 13, 2012

A British Referendum on the E.U.

Legislators can make the task of getting instructions from the popular sovereign, the people, unduly difficult. In November 2012, the Florida legislature confronted its people with several proposed constitutional amendments written in legalese that even some lawyers found difficult to navigate through. The next month, Boris Johnson and Liam Fox of Britain pressured their state’s legislature to put forth a referendum that, unlike that of Florida, would present the people with a clear choice.

The flags of Florida and Britain             Source: allposters.com
The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Bernanke on the U.S. Economy “Going Over the Cliff”

As the U.S. Government faced down its own deadline before the Bush tax cuts would expire and across-the-board budget cuts would commence, the Federal Reserve, which had been struggling to prop up the economy by buying bonds and keeping interest rates low, would, according to the Chairman, Ben Bernanke, be largely powerless to do more in the face of a recessionary policy on taxes and spending. "We cannot offset the full impact of the fiscal cliff," he said of the Fed. "It's just too big." That he had written a doctoral dissertation on the Great Depression and had specialized on it as a professor at Princeton lends a lot of weight to his judgment on the matter. However, he had also managed to be re-appointed to the Fed and thus knew how to play the game. In the case of the automatic budget cuts, major power-brokers, specifically in the military industrial complex, had a lot riding on Congress and the White House making a deal that would obviate the cuts in defense spending. The chairman of the Fed could have been carrying their water.
Ben Bernanke, Chairman of the Federal Reserve, in front of the lights.   Reuters
In September 2012, Bernanke had announced an open-ended mortgage-backed-security purchasing program that would put $40 billion a month into the economy. At the time, he said, “If we do not see substantial improvement in the outlook for the labor market, we will continue the MBS purchase program, undertake additional asset purchases, and employ our policy tools as appropriate until we do. We will be looking for the sort of broad-based growth in jobs and economic activity that generally signal sustained improvement in labor market conditions and declining unemployment.” Presumably the Fed would continue the mortgage-bond purchases were the automatic budget cuts and end of the Bush tax breaks to forestall a “broad-based growth in jobs and economic activity.”
In terms of economic impact, a stimulus of $40 billion a month, or $480 billion annually, would just about match the anticipated $500 billion hit from the “cliff.” How is it then, that the latter is “just too big”? Were the $480 billion insufficient, the Fed would be free to increase its purchases.  Time magazine describes the stimulus mechanism as follows: “Open-ended purchases of mortgages will have the effect of lowering interest rates, helping more people qualify for mortgages or refinance. But more importantly it will — in theory — have the effect of creating an expectation of generally higher asset prices in the future, which will motivate people to get off their duffs and spend money now. If companies and individuals are indeed convinced that prices will rise in the future, that would encourage them to spend, hire, and jump-start the economy out of its chronic underperformance.” Whereas monetary policy was contracted in response to the Great Depression, the scholar of that mistake could presumably do the opposite should we—in his words, “go over the cliff.” His $480 billion mountain of money could turn his $500 billion cliff into a mere bump.
To be sure, purchasing mortgage-bonds can only do so much. As David Dayen of Firedoglake argues, there’s only so much the lifting of asset prices can do without appropriate fiscal policy to accompany it: “(Y)ou have to question the role of monetary actions by themselves to generate an economic boost, especially at this time. Lower mortgage rates may or may not prove helpful . . . without fiscal stimulus and a reversal of the current trajectory of deficit reduction, we will never get to the desired trend for growth.” However, the Fed could presumably buy up more than mortgage-bonds, freeing banks up to lend more in the process.
Most telling is Bernanke’s claim that the Fed could not increase its stimulus enough to counter the anticipated $500 billion hit from sequestration and the end of the Bush tax breaks—and yet the Fed was already on record that it would spend $480 billion in 2013 unless the economy improved in the meantime. His inflexibility seems arbitrary, or dogmatic, in other words, given what the Fed can do, and this leads me to the alternative explanation that the chairman was actually doing someone else’s bidding rather than proffering a judgment steeped in decades of study. The real task would be one of locating the real power-brokers whose financial interests were so threatened.
Whereas the expiration of the Bush tax cuts and cutting entitlement programs had been perennially on the block for years, the sacred-cow of defense spending was all of a sudden susceptible as well. Hence, I believe, all the dire doomsday warnings coming out of Washington to the contrary, the pressure on a political deal was oriented to protecting the status quo of the military-industrial complex rather than obviating certain economic collapse. That is, even more fundamental than the interest of politicians and the media to over-dramatize “going over the cliff” in order to gain attention, the subterranean financial interest of the American military-industrial complex may have been pulling many strings—many puppets—to veer the debate toward a deal. Even as the major players on stage were posturing, a two-step could have been going on behind the scenes—dancing around the sacred cows. Perhaps the real news behind the Bernanke’s warning is that even the “non-politicized” central bank was “doing the dance.”

John Cushman, “To Bernanke, ‘Cliff’ Says It AllThe New York Times, December 12, 2012.

ECB as Bank Supervisor: States in the Driver's Seat

Although the establishment of a federal regulator of major banks in the E.U. was as yet not approved by the European Parliament or ratified by the governments of states using the euro as well as any other states opting in, the European Council of Ministers signed off in December 2012 on an amendment that would give the European Central Bank authority over banks that have at least €30 billion in assets, make up more than 20% of their state’s economic output, or operate in at least two states (i.e., interstate banking). At the very least, three banks per state would come under the central bank’s oversight. Other banks would remain the responsibility of state regulators. This is an interesting “working out” of federalism, distinctively European-style.
For one thing, that the Council of state finance ministers—representing their respective governments—formulated the proposal while the representatives of E.U. citizens would then presumably have only an “up or down” say on the matter reflects the salience of the state governments at the E.U. level relative to the elected representatives of the people. That is, appointees of elected representatives at the state level have more power at the federal level than do the federal legislators who directly represent the people (i.e., without respect to state).
                                                            German Finance Minister Wolfgang Schäuble at the E.U. Council of Ministers discussing the bank supervisor amendment.             WSJ
One implication of the imbalance of the “confederal” chamber based on international principles over the federal chamber based on national principles (i.e., representing citizens rather than states) is that the interests of the whole can be held up by the vested interests of a particular state government (e.g., Germany).
Another implication is that of a democracy deficit because the directly elected federal legislators are essentially in the back seat. To be sure, the state leaders who are driving the union are elected too, but to state office. Put another way, the legislators elected specifically to the E.U. level are playing second fiddle to officials elected to act in the interest of their particular state. This mismatch is a deficit in democratic terms.
Therefore, rather than focusing only on the substantive powers proposed for the ECB, attention might be given to the process by which the amendment to the E.U.’s basic law (i.e., constitutional) was formulated and sent through to be officially proposed and ratified. At a fundamental level, the states both designed and would ratify the proposal—a conflict of interest due to the relative subordination of the E.U. Commission and Parliament. It is as if the state legislatures would sit in judgment of what they themselves designed, effectively patting themselves on the back while the people’s federal representatives merely nod as though a footnote.


Gabriele Steinhauser and Laurence Norman, “EU Reaches Deal on Bank Supervisor,” The Wall Street Journal, December 13, 2012.

Wednesday, December 12, 2012

How to Beat the Rap, HSBC Style

In HSBC’s settlement with the U.S. Government, the bank has to pay $1.9 billion—about half a quarter’s profit—but avoids criminal charges. The New York Times quotes government officials who said they were hesitant to indict the bank because formal charges could mean bankruptcy, which in turn could roil the financial system itself owing to the bank being too big to fail. That is to say, one of the advantages of being TBTF is apparently that of effective immunity from criminal charges.
 The full essay is in Cases of Unethical Business, which is available at Amazon.

Sunday, December 9, 2012

Luring Business: “Job Creators” in Texas

As of December 2012, Texas was giving out more financial incentives—mainly in the form of tax breaks and subsidies—to business than was any other American state. The government was handing out around $19 billion annually, while at least $80 million was being spent in the U.S. overall, according to the New York Times. Although at the time Texas had half of all the private-sector jobs created in the U.S. during the preceding decade, the Times points to “a more complicated reality behind the flood of incentives.” It cannot simply be assumed that good jobs will be created.
For example, Texas had the third-highest proportion of hourly jobs paying at or below minimum wage. In fact, Texas had the 11th-highest poverty rate in the union. “While economic development is the mantra of most officials, there’s a question of when does economic development end and corporate welfare begin,” Dale Craymer of the Texas Taxpayers and Research Association said. In other words, one might ask how much the benefits from the financial incentive extend beyond the recipients themselves to the general public and Texas. Even though businesses cite “job creation” as a benefit of government help, one might ask what kind of job as well as how many?
That the government may have been relying on the businesses themselves or their “consultants” even as they would stand to gain suggests that a conflict of interest may have blurred the line between decision-maker and beneficiary. Indeed, political contributions from companies to re-election campaigns may have exacerbated the problem.
For example, Brint Ryan, a tax consultant specializing in finding incentives for large companies, was “a familiar presence at the state comptroller’s office . . . which must sign off on many tax breaks”—potentially blurring the line between beneficiary (agent) and decision-maker. He also donated $250,000 to Gov. Rick Perry’s ill-fated run for the White House. Texas had been largely bereft of financial incentives for big business when Perry became the head of state in 2001. He had smarted when Texas lost out to Illinois on a new Boeing plant and he was not going to repeat that mistake. Years later, he could point to expansions by Facebook, eBay and Apple in Texas. “They’re coming because it is given, it is covenant, in these boardrooms across America, that our tax structure, regulatory climate and legal environment are very positive to those businesses,” he said. This does not mean, however, that they deliver on well-paying jobs for Texans. There is also the opportunity cost to the government. As Texas spent more to lure big business, the education budget took a hit. Brint Ryan may have had Gov. Perry’s ear when students and even the poor probably did not.
In short, government officials engaged in industrial policy would be wise to distinguish corporate welfare from “economic stimulus.” The influence of money in the American political system doubtless created a conflict of interest blurring the line between the beneficiaries and the decision-makers. The temptation for policy makers might therefore be to lapse into corporate welfare at the expense of basic services. CEOs who are looking for financial incentives from the government as a way to make more money may claim that their respective companies are “job creators,” but the reality is that those companies are “profit creators” with jobs being a byproduct of sorts. The case of Texas suggests that market equilibrium may naturally be well short of full-employment. If so, government officials should not go overboard with the financial incentives in the mistaken belief that some full-employment market utopia is possible, even if providing corporate welfare does not hurt their own political welfare either.


Louise Story, “Lines Blur as Texas Gives Industries a Bonanza,” The New York Times, December 3, 2012.  

Saturday, December 8, 2012

Preparing For the U.S. Presidency: Building a Resume

How should an aspiring candidate for President of the United States go about attaining that esteemed office?—an office whose occupant was regularly referred to as “the leader of the free world” when part of that world was behind an iron curtain. Mitt Romney spent six years of his life campaigning for the job only to lose it to an incumbent whose record on “pocket-book issues: was mixed at best. Perhaps it is possible to want something too much. Fortunately, a more substantive alternative is also possible.

                                                                                                              Hillary Clinton as U.S. Secretary of State.           
As Hillary Clinton was nearing the end of her tenure as U.S. Secretary of State, Michael Bloomberg, who was nearing the end of his own mayoralty in New York City, encouraged her to run for his office. Being every bit “New York,” the New York Times refers to the option as “trading international diplomacy for municipal management on the grandest scale.” In case anyone misses my sarcasm here, I should add that being mayor of New York City is not merely executive experience on a grand scale. Being chief executive of The City could be comparable to being governor of some states. Accordingly, becoming mayor of the city that never sleeps could give the former legislator and chief diplomat significant experience as a chief executive. Ironically, the latter could be most essential to the presidency.
Alternatively, were Hillary Clinton really intent at the time on running for presidency, political consultants might have been whispering in her other ear, “you need to get up to New Hampshire and over to Iowa.” However, early and regular visits to those states do not, as the case of Mitt Romney suggests, necessarily translate into winning come election day. This is not to say that a third alternative, such as taking a well-deserved break—maybe writing a book—might not be preferable to being mayor of New York City. Nevertheless, in the choice between never-ending campaigning and governing, it would be nice to think that the American people would reward substance over excess eagerness. The people have not exactly demanded of a president that he (or she) be a senior statesman when it comes to governmental experience. John Adams had been U.S. Ambassador to Great Britain (besides having had a hand in the writing of the U.S. Constitution) before being elected president. Thomas Jefferson had been the U.S. Secretary of State (besides having had a hand in, well…you know). Had he lived, James Hamilton might have been president after having served as Washington’s Secretary of the Treasury. Experience can even be ex post facto, as when President Taft joined the U.S. Supreme Court after serving as president.
From the perspective of having several substantive governmental offices, an occupant of the office of U.S. president can have both wisdom and perspective. That is, such a person would be more likely to discern instinctively the forest from those particular trees that demand too much attention. Such a person would be more oriented to the system as a whole, as President Jackson was when he opposed funding the Second National Bank of the U.S. even as he opposed South Carolina’s nullification act (by which the state legislature could invalidate U.S. laws detrimental to the state’s interest). That is to say, the president was oriented to protecting what he saw as a balance in the federal system. His perspective was systemic and thus not primarily partisan or even bureaucratic in nature.
To be sure, putting someone in the office who might be suspected of sporting a suitable countenance is ultimately up to the American people—whether we value it enough. Lest it be pointed out that few candidates could be found, it is also up to the candidates themselves—whether they are willing to substitute more governmental experience for the seemingly endless parade of chicken dinners. To those candidates, I would say: focus on the knitting and the campaigning will take care of itself; focus on the campaigning, however, and the sweater could slowly unravel from all the waving and handshakes. In short: have faith that investing in governing now will pay off later. This could mean trusting in the judgment of the American electorate, or being a leader (hence gaining leadership experience!) by providing a higher example of real presidential material. Of course, the people may not be wise or virtuous enough of character to grasp such leadership, in which case the republic itself will decline even in spite of the suitable candidates.

Michael Barbaro, “Clinton for Mayor in ’13?Bloomberg Asked Her to Consider Succeeding Him,” The New York Times, December 4, 2012.

Tuesday, December 4, 2012

SEC Goes After Chinese CPA Firms: Beyond Diplomacy

The Securities and Exchange Commission brought an administrative proceeding against the Chinese affiliates of five major CPA firms, including the “Big Four,” in 2012. Chinese companies had raised billions of dollars on American (and Canadian) exchanges only for the share prices of the companies to plummet due to questions about bookkeeping and disclosures. The SEC alleged that the CPA firms in China refused to hand over documents in connection with the investigation of alleged accounting frauds at nine Chinese companies. The SEC maintained that firms that audit U.S.-traded companies must follow U.S. law, and the Sarbanes-Oxley Act requires foreign audit firms to hand over documents about U.S.-listed clients at the SEC’s request. SEC Commissioner Luis Aguilar said that the investigations “have been hampered by the lack of access to relevant documents.” For their part, the CPA firms in China (affiliates of American-based CPA firms) pointed out that their audit papers are treated like state secrets in mercantilist China, and that the auditors could therefore be imprisoned for handing the material over a foreign government without permission from the Chinese state. 

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

Oceans Arising on Edifices of Arrogance

A study published in late November 2012 in the journal Science estimates that the melting of ice sheets in Antarctica and Greenland had raised global sea levels by 11.1 millimeters (0.43 inch) since 1992. That represents one-fifth of the total sea-level rise increase in that period. Other contributors include the expansion of the sea water from warming, and the melting of glaciers, as for instance on mountains. In the 1990s, melting of the polar ice sheets in the Antarctica and Greenland was responsible for about 10 percent of the global sea-level rise, but by 2012 the effect had risen to 30 percent.[1] The study does not, however, uncover the underlying cause, or association, lying in a complexity in human nature itself. Our species has vaunted to the top of the food chain and leveraged a brain capable of engineering technological advances that would have seemed magical even just in the nineteenth century, and yet we seem hard-wired to accelerate our course to a self-destructive extinction. This lack of balance is reflected in the increasing extremes in the global climate. In this essay, I begin with the study and steadily work toward uncovering the underlying, subterranean culprit.

The entire essay is at "Oceans Arising on Edifices of Arrogance"

[1] Gautam Naik, “Polar Ice Melt Is Accelerating,” The Wall Street Journal, November 30, 2012.