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Friday, May 18, 2012

The United States as Religious and Secular Societies

E pluribus unum, or “Out of many, one,” is a motto for the United States—the American States that are united. The many can refer, I suppose, to the sheer number of inhabitants stretching across a continent and beyond. The word could also refer to the diversity of people living even in a large American city. Finally, the word could refer to the Union consists of many different socio-political societies, or republics—again possibly referring to the number of states or the fact that they differ so from one another.  It is the last interpretation that I want to explore here, for it alone gets at the fact that the U.S., like the E.U. and China, are at the empire-level (or scale) in twentieth-century (rather than medieval) terms (i.e., scaling).

The complete essay is at Essays on Two Federal Empires.

  Yellow: most "religious."  Blue: least "religious" (as per regular attendance). Notice the "river" of yellow running through the (political) "red states" in the middle of the map. Even so, "yellow" is doubtless not homogenous.

Thursday, May 17, 2012

Toronto Police as Aggressors at G-20 Summit

Police employees “ignored basic rights,” jailed people illegally, used excessive force and escalated violence at protests surrounding the G-20 meeting in Toronto in 2010, according to the Office of the Independent Police Review Director. The report could lead to charges against police employees and strengthen the hand of civil lawsuits filed against the police department. Because the police employees acted with an attitude of impunity, anything less than stiff prison sentences would be insufficient as a deterrent.

After a small group of violent protesters went on a “looting rampage” through Toronto’s shopping district without being confronted by police, the department’s deputy chief ordered his subordinates on the force to “take back the streets.” The incident commander in charge at the time told investigators that the deputy chief “wanted the streets that had been made unsafe by the terrorists that were attacking our city to be made safe again by restoring order.” This statement itself evinces a problematic attitude.

Specifically, looters are not terrorists. To claim otherwise demonstrates distorted perspective, which in turn points to an underlying psychological bias. Although not against the looters, the police nonetheless sprung into action, arresting peaceful protesters and even passers-by.  Other people were arrested in homes and other residences without proper warrants.

According to the report, the deputy’s orders were followed in ways that not only broke the law but often involved excessive force. The attitude of the police employees includes a presumption of impunity with regard to using excessive force. This is the most damning aspect of the report, for such an attitude is extremely difficult to change.  That the people arrested were held for hours in cells without toilets, food, or even water attests to possible sadism in the department.

Given the underlying attitude, the culprits on the police force must be severely punished for their aggression or they will be enabled to commit further abuses as though with the impunity they assume is the case. That decent police employees put their lives on the line to protect even citizens they don’t like does not mean that the sort of attitude described here should be tolerated and enabled rather than firmly thwarted by firings and stiff prison sentences. With the privilege of using force legally comes great responsibility. The penalties for acting at odds with it should be severe, given the significant possibility of undetectable abuse (given the huge differential in power). In other words, police employees are well aware of this differential, and given human nature, even this awareness can be dangerous.


Ian Austen, “CanadianPolice Violated Laws in G-20 Sweep, Inquiry Finds,” The New York Times, May 16, 2012. 

Wednesday, May 16, 2012

Market and/or Government: Reducing Systemic Risk in Banking

If the five largest banks—JP Morgan, Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley—are too big to fail and yet substandard operationally on account of their respective complexities (e.g., investment banking added to commercial banking), might it be that the market-based decisions of investors will relegate the giants, which by the way had price-to-book value ratios of between .37 to .77 in May 2012, thereby solving the problem of systemic risk?

Smaller banks may be favored by investors because such banks do not “suffer a conglomerate discount,” according to the Wall Street Journal. “They also don’t have big investment-banking or trading arms.” These “arms” are relatively volatile and opaque businesses, and they may be more susceptible to the E.U. debt crisis due to the trades in derivatives. Finally, being less complex means being easier to value, and this can give investors added confidence, particularly as risk management has not exactly been done well at the largest U.S. bank by assets (i.e., JP Morgan)—though Goldman did well in hedging against the bear housing market (and its derivatives).

Therefore, investors could swing the balance away from the biggest banks, though such a shift would take time—barring a herd-like mentality. Regardless of their numbers, the biggest banks can run on the sheer solidity of a well-known name. The shock at the $2 billion loss demonstrates just how much reputational capital had been in the name, “JP Morgan Chase.” Indeed, Jamie Dimon, chairman and CEO of that bank when the huge loss took place, has argued nonetheless that being big allows the bank to compete globally, make large investments in technology and provide broad services to multinational companies. Even though his self-serving pitch omits the problem of risk (e.g., losing $2 billion trying to reduce risk), discounting the inefficiencies and risks that go with greater complexity can take a while, at least in terms of the market as a whole, because the big guys are not exactly going to lay down and give it up to the smaller guys without some pushback. Indeed, the big guys have considerable market and political power that can translate into hidden advantages written into regulations.

Even if the object is merely apparent, given the power of the big banks, it makes sense then that the U.S. Government sought to help at least “level the field” between the large and small by instituting capital surcharges for systemically important (i.e., large) banks. “We are creating incentives right now for institutions to get simpler, less complex and less volatile, and the market is going to be pushing people in that direction,” says William Isaac, FDIC chair during the 1980s thrift crisis and now head of Fifth Third. The question before us here is how much the market’s push can be relied on to get us to a place where systemic risk can be tolerated.

Even with a level playing-field, will investors favor smaller banks with higher price-to-book values sufficiently to cause the biggest banks to lose some lift and float closer to the ground? Even with the capital surcharges, is the playing-field level? Finally, is “level” enough for investors to favor smaller banks, which represent less systemic risk?

In the 1980s, the market-based approach to regulation, such as in the arrangement in which pollution permits could be bought and sold, sought to fuse public policy objectives with the efficiency of the market. I remember well having been steeped in that ideology in business school. Any objection to the approach in class quickly got a sarcastic, “Ok, Ted”—short for Ted Kennedy (or “you socialist!”). As an MBA student, I volunteered to assist a professor on a paper singing the praises of the efficiencies possible in self-regulation applied to securities dealers (NASD). In retrospect, I view my approach and that of the broader ideology as incredibly naïve, even if the efficiency aspect was well-intentioned. A solution allowing for efficiency “automatically” had a certain intellectual beauty to it, which I suspect some advocates experienced as akin to an unexpected good orgasm at a French whorehouse.

Rather than police bad boys, an industry will naturally seek the lowest common denominator if the government allows the industry to be regulated by self-regulation. The industry itself can then benefit by everyone cutting corners. In other words, short-term profit outweighs the long-term reputational capital to the industry itself from policing bad apples rather than joining them. Government is uniquely situated with regard to the common weal, or public good, to guard and protect it from short-sighted encroachments by aggrandizing players and even entire industries.

Therefore, it would be a mistake to think that systemic risk could be reduced by the biggest banks regulating themselves and their industry. It would be a case of wolves guarding the hen house. The question thus boils down to whether government regulation (uncaptured by the regulatees) or the market mechanism should be relied on to reduce systemic risk, or whether some combination of the two (i.e., government regulation "encouraging" the market) is optimal. If regulations unimpaired by bank lobbying are even possible in the U.S., it might be that the market has the final word anyway. The question then would be whether the market naturally seeks to reduce systemic risk, or is such risk an externality to the market and thus within the reach only of government.


David Reilly, “Bank Investors Bail onToo-Big-To-Fail,” The Wall Street Journal, May 16, 2012. 

Tuesday, May 15, 2012

A Conflict-of-Interest in Lobbying

At the JP Morgan stockholder meeting on May 15, 2012, as the FBI was opening an investigation into the bank’s $2 (or $3 )billion loss on credit derivatives, Chair/CEO Jamie Dimon gave what the Huffington Post calls “a spirited defense of the bank’s efforts to lobby against stiffer financial regulation.” He argued that the bank’s interest is the same as the stockholders—namely, to make the financial system strong and sound. What he omitted was the part about the bank’s interest including its own profit, even if systemic risk of the system is increased as a result. In general, any business looks primary after its own interests, and only then to the general interests of the system.

The full essay is at "An Unethical Monstrosity"

Is Modern Banking Fundamentally Flawed?

Jamie Dimon, CEO of JP Morgan Chase and board member of the New York Federal Reserve (a banking regulatory body), advocates not only that financial regulation reform is not necessary, but also that deregulation is the best course for the American financial sector. Meanwhile, JP Morgan lost $2 billion in an effort to reduce risk. President Obama quickly pointed out that if one of the smartest bankers in the room can preside over such a massive loss, then a deregulated financial sector would likely present us with an unacceptably high level of risk to the entire financial system (and economy). Elizabeth Warren suggested that relying on bankers to regulate themselves would not reduce the systemic risk. The alternative would seem to be strengthening financial regulation, even though—according to Sen. Dick Durbin—“the banks own Congress.”

Perhaps the problem with systemic risk in modern banking goes deeper—beyond how it can be effectively regulated—meaning made regular in line with the public good—and, moreover, beyond what our reigning modern perspective will permit us to acknowledge, let alone see. In ecclesiastical terms historically, lending was classified as a kind of charity, specifically to the poor, as the rich presumably are not in need of lent funds (by definition). In other words, the leverage assumed by the wealthy and corporations is unnecessary. Starbucks needs the funds to build four hundred more stores in China. Wal-Mart needs additional money to buy land for new stores in major American cities. Capital from stockholders is presumably not good enough. The capped cost of leverage relative to a lack of limit on profit attracts greed to favor borrowing over raising capital through stock. The vested interests of existing stockholders (often including the executives who control their corporate boards) seals the deal on leverage as the drug of choice, even if it is not in the long-term best interests of the respective companies. Such a view of borrowing and paying (and earning) interest is worlds away from the original purpose of lending.

Viewing a loan as alms to the poor, lending with interest was originally thought to be unjust. At the very least, it was viewed as unseemly to profit in the giving of charity (although modern corporations do it all the time and get tax deductions for it, besides good public relations). Furthermore, the property (i.e., the substance of the money) lent was viewed as being inseparable from its use (i.e., as a means of exchange). The substance of money is its use, according to that view, so charging more than the money itself (i.e., the principal) is undeserved surplus. Such profit was historically reckoned as being theft. It is not good form to steal from the poor to whom one is giving alms. It is like biting someone while handing him a $20, which he needs to buy lunch (and will return later).  “Hey, I forgot my wallet today and I didn’t bring my lunch. Can you help me out? I’ll pay you back tomorrow.” If of charitable good-will, the acquaintance would reply, "Sure, here you go." If of ever greater (i.e., self-less) good-will, the lender would add, "and don't worry about paying it back." This is lending at its finest. Demanding that the borrower pay more than simply returning the $20 would represent far less than accepting the principal back. Beyond unfairness, taking interest regardless of the borrower's circumstance evinces self-idolatry.

Specifically, for a lender to receive surplus (above the principal) without labor or uncertainty (having transferred the risk to the borrower by requiring repayment) is not only unjust because it violates the risk/return relationship (i.e., a higher return is justified by assuming more risk), the certainly assumed (artifiically) by refusing to accommodate or share in any losses incurred by the borrower is rightfully only that of God. That is to say, it is self-idolatry to assume a divine quality like certainty. Furthermore, the power that some lenders presume to have over delinquent borrowers can be interpreted as an attempt to claim God's power (omnipotence) for oneself. Altogether, arrogance and the infliction of harm come from making oneself an idol (i.e., as if divine).

That which usury risks in terms of morals and self-idolatry is utterly foreign to us moderns. The original charitable purpose of lending is also lost to us in part because we are so used to our own view of lending being the default and the necessary of commercial lending in our economy. Moreover, we assume our assumptions cannot be wrong, and so we do not question whether merely charging interest is inherently unjust and a sin against God. We assume we know the purpose of lending as if it had no history.

In 1612—exactly 400 years before this writing yet late enough that commercial lending was already well-ensconced in the economy—Roger Fenton, a Puritan divine in England, opined strenuously that the sin of usury is inherently unjust. “Where we finde no iustice, what hope can there be of charitie?” Salomon puts mercy as the opposite of usury. “Wherefore vsurie may well be termed a biting . . . it eateth out the very bowels of compassion.” Usury perverts the act of charity, “turning it into an act of selflove.” Usury is against “the Canon of that Charitie which seeketh not her owne, to respect the good of others; [usury] is turned to his owne proper lucre and gaine.” (Fenton, 1612, p. 106)

Injustice does not admit of mercy manifesting as charity. We moderns are so wrapped up in our self-love that we can scarcely imagine lending as an act of compassion. The Canon of Charity to which Fenton refers is the Golden Rule, whose equity guides the Calvinist view of justice as love and benevolence to all. Such benevolence is fueled by selfless love (agape), rather than higher self-love (caritas) directed to God. We moderns can scarcely recognize this theory of justice, so used are we to strict legal justice which limits one’s duty to paying for one’s crime. That the other theory of justice might be applicable to lending is apt to strike us as odd at best.

Nevertheless, the problem behind even the best bankers of today being reckless even as they advocate for deregulation may extend beyond the antiquated debate on regulation to include the making of something borne of something natural (compassion) into something artificial. That lending was designed to be a species of charity may mean that problems are necessarily entailed in using banking for leverage.

By analogy, a person might have been brought up one way and therefore have considerable trouble in adjusting to a way of life that is at odds with that upbringing. The problem facing the person would go beyond simply regulating the new life because a basic inconsistency is in such a drastic change. Were the person to know only the new life, having forgotten one’s upbringing, she would have no clue as to why she feels fundamentally ill at ease. She would look for things in her new life to assuage the difficulties, which nonetheless transcend that environment and therefore require a more basic solution.

Besides relying too much on debt for personal and business use, we as a society are cut off from the original (i.e., designed) use of lending as a means of mercy rather than to profit. Perhaps our perspective is more limited than we think, and the problem much deeper than we realize. Given that “cloudie conceits do hang in the braines of men, which cast a dye and tincture vpon the vnderstanding,” seeing usury “so much practiced of all sorts . . . men are euen thereby without further examination much moued to thinke it lawfull.” (Fenton, pp. 108-9). Yet further examination demonstrates just how limited our tiny window in modernity is—even in spite of our lauded technological development. Our “advancement,” in other words, may blind us to being so wrong about lending even as it is ubiquitous in our world.

By 2012, for example, $1 trillion in student loan debt had accumulated in the United States. Rather than the mercy of charity in waiving interest and even the principal in particular cases of dire need, such a load on poor students represented the hubris of a society run amuck on its own conceit and greed. Such a disparity exists between such selfishness and charity that the notion of debt forgiveness even for the poor is thought of as an unforgivable unfairness rather than as charitable equity that is essentially agape seu benevolentia universalis.


Fenton, Roger, A Treatise of Usurie (London, 1612). In The Usury Debate in the Seventeenth Century: Three Arguments (New York: Arno, 1972).

Monday, May 14, 2012

California Fiscal Policy: The Crowding-Out Effect

In the U.S. Constitutional Convention of 1787, some delegates expressed the concern that giving the General (federal) Government the authority to tax income would eventually result in a “crowding out” of the ability of state governments to raise revenue. Over two hundred years later, in 2012, California had cut its budget by 20 percent over the previous three years and was still faced with a $16 billion deficit. Unlike Greece, California cannot avail itself of bailout funds from the federal level. Additionally, the Federal Reserve, like the European Central Bank, is barred by statute from bailing out a state government. Even as the U.S. Government places certain requirements on California’s budget that make it more difficult for the Government of California to make cuts, it could not avail itself of the bailout (TARP) that had benefitted Wall Street banks and the Michigan auto industry.

The complete essay is at Essays on Two Federal Empires.

Sunday, May 13, 2012

Tsipras against Austerity: Merkel Bends on Stimulus

Under pressure to join a unity government in Greece with the New Democracy and Socialist parties, Tsipras of a “radical left”Syriza party was holding firm as of May 13, 2012. Even as the resulting prospect of new elections and a possible reneging on the agreement by Greece, there is something to admire in Tsipras’ position.

              Greek president Karolos Papoulias meeting with leaders of the three main parties (Tsipras on right) AP

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