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Thursday, July 19, 2012

Economic Inequality in the U.S.: A Conflagration of Accumulated Dead Wood

According to the Congressional Research Service, the share of total net worth held by the less affluent half of American households dropped from 3.6% in 1995 to 1.1% in 2010. Meanwhile, the share held by the top 10 percent increased from 67.2% to 74.5 percent. That is to say, ten percent of the American population holds three-quarters of all of the wealth. The top 1 percent went from holding 30.1% to 34.5% of the wealth. According to the report, "Inequality is the term commonly applied to the concentration of total net worth among the relatively few households at the top of the wealth distribution." The study shows that inequality increased in the U.S. during the 1990s and 2000s.

Perhaps of all the statistics listed in the report, the one that leaps off the page as a harbinger of future problems in terms of democracy concerns the fact that half of the American population holds only one percent of the wealth in the United States. This means that half of the population has little at stake and therefore little to lose. It is a feat of the sheer breadth and depth of propaganda from the top one percent via the corporate media companies that the bottom fifty percent continue to buy into the system, figuratively speaking, rather than revolt. At the very least, to have half of a population excluded is dangerous, even if only potentially at the moment. In terms of quality of life, society itself would have a much better feel to it were the wealth not confined to 50 percent of the population (with the top ten percent of the population owning 75% of the wealth).

No one likes to have one’s property taken, even if one would not be inconvenienced by the removal.  Hence the dreaded term of “redistribution” is excoriated. However, trends such as those described above can come from systemic biases rather than by outright taking from the poor; similarly, a design could “lean” in the direction of economic equality without overtly taking from the rich. To be sure, the super-rich, or multi-billionaires, could legitimately be subject to direct redistribution because after a certain point a person’s additional wealth exceeds that which can be spent. To play investment games with wealth while half of a population goes without (including many without healthcare) can be subjected to critique as evincing a rather warped sense of priorities in terms of values.

Therefore, both the design of the American political economy and the assumption that no amount of wealth can ever be too much from the standpoint of societal values could be subjected to critique. Raising such basic questions after the twenty-year trend of increasing inequality could in turn be part of a wider societal awakening in the context of not only a new century underway by a decade, but also a new millennium. Even back in 2000, the recognition could have been that a new status quo should at least be attempted in a “spring cleaning” of sorts during the first decade of the new millennium. It was not already too late even in the second decade for a wholesale re-consideration by society at large of that which had been taken for granted in the status quo.

In addition to subjecting the corporate capitalist system and the related amount of economic inequality to a fundamental debate, a constitutional convention in each of the fifty republics, and one for the U.S. constitution itself could be called on the basis that a new millennium calls for fundamental re-examination of the status quo, which is no longer rightfully the default. For example, the long trend of declining federalism could finally be subject to a decision either to restore that system or make the de facto near-consolidation de jure too, constitutionally.

Admittedly, my suggestion is a pretty tall order, and therefore very unlikely to see the light of day. Instead, the unquestioned hegemony of the antiquated default is likely to go on, unthreatened by any societal awakening, especially from the half of society with a vested interest in upsetting the apple cart. Indeed, human nature itself my strongly favor tomorrow being rather like today, instead of being rid of all the dead wood (which can easily catch fire).

The 1988 fire in Yellowstone spread “like wildfire” in large part because of the years of Interior Department policy against allowing contained fires to incrementally consume the accumulating dead wood. Similarly, the dead wood of economic inequality (and political consolidation) renders the American empire extremely vulnerable. One indication of this sort of unthinking build-up is the $16 trillion imbalance represented by the debt being held by the U.S. Government as of 2012. The less tangible dead wood may be even more dangerous.

Once a fire starts (e.g., higher interest rates or small riots), it could quickly get out of control before anyone has any idea that the ship called America will founder as if by some mathematical certainty. Fifty-one percent on one end of a balancing scale is by definition a majority. To put it another way, what goes around comes around. Lack of concern for the other half is likely to have its own consequences, even if only for one’s posterity.


Dan Froomkin, “Half of American Households Hold 1 Percent of Wealth,” The Huffington Post, July 19, 2012. http://www.huffingtonpost.com/2012/07/19/households-wealth-american-1-percent_n_1687015.html#slide=more217997

Capital One: Enter Ethicist

The Consumer Financial Protection Bureau announced in July 2012 findings that a vender working for Capital One “had pressured and deceived” credit-card customers into buying products “presented as a way to protect” the customers from identity theft and hardships like unemployment and disability. In a related action, the Office of the Comptroller of the Currency required the bank to reimburse customers “harmed by unfair billing practices” from 2002 to 2011. The bank had billed customers even though it had failed to provide full use of the products sold. “Unfair and deceptive practices will not be tolerated,” Thomas J. Curry, the comptroller, said.

Regulators claim that the bank deceptively pushed plans that promise to forgive or reduce the debts of card holders in the event that they lose their jobs, become disabled or die. The bank also offered credit monitoring, a feature that came with identity-theft protection and “credit education” for customers with a spotty borrowing history. According to the consumer bureau, “call centers for the bank marketed and sold the products to ineligible unemployed consumers and forced the products without the consumer’s consent. In other cases, according to the bureau, the bank employed “high pressure tactics,” including misleading customers into thinking the product was free, mandatory and would bolster credit scores.”

The attorney general of Mississippi, Jim Hood, sued Capital One in June 2012 for reportedly “slamming” customers by enrolling them in payment protection programs without their consent and then hitting them with fees. Nevertheless, a top official at the American Bankers Association, Kenneth Clayton, said that for some people “the value of the product is worth the cost. People buy these products for a number of reasons, including peace of mind and knowing they will be protected if certain untimely life events make it difficult to repay their bills.” This assumes that the customers give their consent, not to mention know that the product exists.

In addition to demonstrating that a company can operate without any regard whatsoever of business ethics as if with impunity, this case implies that industry self-regulation would likely ignore rather than self-police infractions. Typically, a call-center is characterized by a narrow focus on getting the sale, regardless of how. Front-line supervisors are oriented only to the numbers, as are the employees on the phones, given the quantitative basis of any bonus arrangement. Cutting corners is simply part of the culture; no real regard whatsoever for the potential customer enters in. In Kantian terms, the rational being on the other end of the phone is only a means, rather than also an end in himself. “Single-minded” undoubtedly describes the orientation of the human beings working in the call center of the vender hired by Capital One. Fining the bank, and forcing it to reimburse customers, is insufficient to deconstruct this dynamic—it being so tight and so self-contained in the very design of a call center. Undergirding the design and culture is the obsessive-compulsive mentality that no number is ever enough and time is somehow all too short, combined with a sort of sociopathic lack of concern or empathy for the person on the other end of the line. There is a certain distance in just having a voice as the object to be manipulated (and even ignored when it becomes an obstacle).

To make more of a dent in relaxing the oppressive fixation on maximizing numbers by pushing customers even without their even being aware of having consented to the purchase, the upper managements of the companies running or owning call centers could mandate that an ethics officer have access to the call records and the authority to deal with infractions by even removing employees and supervisors. The officer could also hire “mystery employees” to get an insider view on the actual practices and the related culture “on the ground.” With out the realism of such means, holding “ethical awareness” workshops or training sessions is apt to be a waste of time (and resources).

Furthermore, the upper management of a company housing a calling center could instruct middle management to reduce the quantitative pressure. To be sure, this advice does seem overly idealistic, especially relative to giving an ethics officer the authority to fire employees (including supervisors). However, because an upper management could be motivated to take into consideration the less tangible, long-term costs associated with excessive pressure and the related ethical compromises, greater involvement of managers at that level could impact call-center culture by altering the design of incentives and the values that are rewarded or tolerated. A company that is merely a call center is an ethical accident waiting to happen; higher levels, and even other profit-centers, are necessary to moderate the exclusivity in the single-minded obsessiveness.

In short, companies do exist whose people are oblivious to ethical constraints. Such single-minded people are difficult indeed to “reform,” as values die hard. In addition to adding to the amount of the fines exacted by regulators, company boards of directors can insert upper managers and ethical officers “on the ground” to moderate or expunge the relatively narrow mentality that can otherwise dominate there.


Ben Protess and Jessica Silver-Greenberg, “In Its First Action, Consumer Bureau Takes Aim at Capital One,” The New York Times, July 18, 2012. http://dealbook.nytimes.com/2012/07/18/consumer-watchdog-fines-capital-one-for-deceptive-credit-card-practices/?ref=business

Tuesday, July 17, 2012

Poorest at Risk: U.S. States Cut Lifelines

“State finances are teetering with $4 trillion in unfunded liabilities to cover pensions and health care for state workers, along with revenue shortfalls, antiquated financial practices and skyrocketing Medicaid costs.” This according to the Huffington Post, based on a report in July 2012 by State Budget Crisis Task Force, which was organized by former Federal Reserve Chairman Paul Volcker (R) and former New York Lt. Gov. Richard Ravitch (D). Volcker and Ravitch said that unfunded state government pension obligations could total as much as $3 trillion, triple the $1 trillion estimate produced by the states. This is in addition to the $1 trillion in unfunded health care obligations for retired state employees. This does not include the rising Medicaid costs. The report notes that state governments have been borrowing to pay for operating expenses in order to comply with state constitutional mandates for balanced budgets. Those loans and the practice of shifting spending between budget categories make balanced budgets "illusory," the report said. Lastly, Volcker and Ravitch point out that "one-shot" financial measures are common in state governments, including those that pile up debt for the future.

The most striking thing concerning the finances of the states studied (California, Illinois, New Jersey, New York, Texas and Virginia) is the noted threat to the social order itself. "The thing that worries me is the threats to the social order," Ravitch told The Huffington Post, noting that "cultural and social bankruptcy precede financial bankruptcy." "You can't cut human services and cut the ability of government to take care of the people"—meaning without expecting the collapse of the social order. Such a slide tends to be gradual, sliding below the radar screen of the general public.

For example, during 2011 over 500 people in the U.S. died every week because they were without access to health care. That’s like having a full A380 (the double-decker jumbo-jet, larger than the 747) crash every week of the year, albeit without the headlines. The collapse of a social contract happens gradually, without much fanfare because enough of the electorate is unaffected.

Furthermore, the changes that led to an increased reliance on government entitlement programs by the most vulnerable in society were gradual as well. The increasing divorce rate beginning in the 1970s and the increasing geographical distance permitted by air travel during the last quarter of the twentieth century are just two factors making it less likely that families would care for their own. The daily demands of sustenance mean that charitable organizations could not possibly pick up the slack. As a result, government entitlement programs became the default. Compromising them without providing for an alternative could not but put the social order (a.k.a. social contract) at risk, even if this risk is not shared or even noticed by the majority of the electorate.

To obviate the collapse of its social order, a government would have to distinguish between sustenance programs and the other budget categories. To give but one simplistic example, a town can do without its municipal pool for a summer, but a homeless man needs food every day. Cutting ten percent from both categories ignores this vital distinction, and thus puts the social order at risk, even if people do not notice that the man is no longer sleeping on the bench but has died.


John Gelock, “Paul Volcker, Richard Ravitch Say State Budget Crisis Threatens ‘Social Order,’” The Huffington Post, July 17, 2012. http://www.huffingtonpost.com/2012/07/17/paul-volcker-richard-ravitch-budget_n_1677739.html

Monday, July 16, 2012

HSBC: A Bad Corporate Citizen

In a report issued by the Permanent Subcommittee on Investigations in the U.S. Senate on July 16, 2012, HSBC stands accused of helping Mexican drug cartels looking to get cash back into the United States, Saudi Arabian banks that needed access to dollars despite their terrorist ties, and Iranians who wanted to circumvent United States sanctions. These lapses by the largest financial institution in the E.U. are indicators of a broader problem, according to the New York Times, “of illegal money flowing through international financial institutions into the United States.” 

According to the Times, “(a)n independent audit, paid for by HSBC, found that the bank facilitated 25,000 questionable payments involving Iran between 2001 and 2007. In some cases, HSBC executives counseled Iranian financial institutions on how to evade the filters of American regulators, the report says. When the bank developed a way to process transactions for Iran’s largest retail bank, an HSBC executive wrote an e-mail to his colleagues that said, ‘I wish to be on the record as not comfortable with this piece of business.’ None of his colleagues responded and the deal went ahead, according to the report. . . .  The subcommittee also found evidence of widespread wrongdoing in HSBC’s failure to stop money laundering through accounts tied to drug trafficking in Mexico. The bank is accused of shipping $7 billion in cash from Mexico to the United States in 2007 and 2008 despite several warnings that the money was coming from cartels that needed a way to return their profits to the United States.” HSBC was so mixed up in so many bad things it could be likened to KAOS in the television show “Get Smart” and SPECTRE in the James Bond movies. 

The problem of regulatory capture—where the regulated come to have too much power over their regulators—enabled the illicit practices to continue and thus forestalled any accountability. Sen. Levin, chair of the Senate subcommittee, “said that wrongdoing in the financial world has been exacerbated by the relatively light touch of government regulators. ‘As long as a bank just sees that it is going to be dealt with kid gloves, I think we are going to continue to see these shortfalls that have been so endemic.’ . . .  The Office of the Comptroller of the Currency has come under particularly harsh criticism for showing too much deference to the banks it regulates.  . . . In many of the cases detailed in the report, the Office of the Comptroller of the Currency is said to have spotted the problematic behavior. But in nearly every case, the subcommittee found that the agency gave HSBC only a warning or mild punishment and did not push the bank to make large-scale changes.” HSBC undoubtedly knew that the enforcement would be lax, and this in turn had an enabling effect on the financial institution’s managers. In such a context, taking them at their word can only be problematic because they must know that merely saying they will correct the problems could be sufficient to appease a profligate or corrupt regulator and an incredulous public.

                                                                                                                        Sen. Carl Levin               Andrew Harrer/Bloomberg News

Indeed, the company’s managers said in a statement  in answer to the report: “we will apologize, acknowledge these mistakes, answer for our actions and give our absolute commitment to fixing what went wrong.” Sen Levin, however, did not swallow the bait. He said that HSBC had promised to fix similar problems in years past and failed. “While the bank is saying all the right things, and that is fine, it has said all the right things before,” he said. There is a lesson to be learned here. Namely, asseverations by corporate executives such as, “This company is a good corporate citizen” should be taken with a grain of salt, for the claim is in all probability mere window-dressing designed to add reputational capital to the corporate image. Malheureusement, the efficacy of such a faddish jargon as "corporate citizenship" depends on a gullible citizenry.

Moreover, rather than being legal persons for whom spending counts as “free speech” in a political sense, corporations can know no national allegiance by their very design. “Patriotism” does not compute in the calculus of business wherein profit is the exclusive or overriding goal as an end in itself. Everything else, including human beings, is to be used as a means rather than also as an end in itself. For Kantian readers who spot the categorical imperative being violated here, the implication by this reckoning is that the corporation is intrinsically unethical.


Nathaniel Popper, “Regulators and HSBC Are Faulted by Senate,” The New York Times, July 16, 2012. http://dealbook.nytimes.com/2012/07/16/scathing-report-details-money-laundering-problems-at-hsbc/?ref=business

Sunday, July 15, 2012

Eminent Domain and Sanctity of Contract: Mortgage-Relief as “Dangerous”

With about half of the mortgages “under water” (i.e., being more than the houses are worth in terms of market value), government officials in San Bernardino County floated a proposal in 2012 to use California’s sovereign power of eminent domain to buy up the mortgages, cut them to the current value of the homes, and resell the mortgages to a private investment firm, which would allow the homeowners to lower their monthly payments and stay in their homes. The New York Times labels this a “drastic option,” coming from a government that was “(d)esperate for a way out of a housing collapse that has crippled the region.” This characterization of the proposal as “radical” fits with the bankers’ financial interest and perspective. In actuality, eminent domain is typically understood to be a basic power of government.

Doubtless the amounts that the government would pay as it exercises its right of eminent domain would not be satisfactory to the bankers holding the mortgages, for the “mere idea . . . rankled” the bankers, whose leaders claimed that it would set “a dangerous precedent of allowing a government entity to act as a lender and would discourage banks from loans in the area.” The danger may be in the eye of the beholder, particularly if he or she is accustomed to exacting the sanctity of contract as if not even a government could touch it. In other words, the exaggerated response may reflect the mistaken belief that eminent domain is somehow illegitimate for a government. This belief is reflected in the expectation of Ken Bentsen, an official of the Securities Industry and Financial Markets Association, that the proposal would almost certainly be challenged in court.

“If the government has the ability to abrogate the contract at will and at the expense of the bond holder, the investor is going to do one of two things: require a tremendous premium for the risk they are incurring, or just not invest at all,” Ken Bentsen said. “It would be a risk factor that would be impossible to underwrite.” Government does have the right to abrogate or nullify a contract “at will.” It is not as though government were merely a business; governmental sovereignty does not apply to the private sector, yet this does not detract from government’s distinctive role in society. Furthermore, the claim that lending would dry up without a huge risk premium assumes that other governments would not follow suit and that the banks would otherwise be able to enforce the sanctity of the contracts against borrowers under water.

In fact, the bankers’ insistence to have it all their way may have set them up to get far less. Greg Devereaux, San Bernardino County’s chief executive, expressed frustration with the level of the bankers’ opposition to the plan. “If they want to come and talk and propose other solutions, great, but that’s not what is happening. Instead they are just trying to kill it because they have nothing but their own interest in mind.” He has hit on the crux of the problem. Having nothing but their own financial interest in mind, the bankers had opposed even an amendment submitted by Dick Durbin of Illinois that would have permitted bankruptcy judges to modify mortgages.

Under the mistaken belief that sanctity of contract transcends even governmental sovereignty as if under natural law (but not that which prohibits usury!), the bankers applied “drastic” and “dangerous” to the “usurpation at will” by eminent domain, as if it were suspect or at the very least sordid in nature. In actuality, it is the bankers’ insistence on having it all their way that is squalid and ultimately self-defeating. The government’s invoking of eminent domain can be viewed as a reaction to the bankers’ self-defeating rigidity or stubborn selfishness.

Preferring foreclosure to adjusting mortgages that are under water (i.e., remaining book value over the market value of the property), the bankers were sitting ducks for any government official aware of the nature of governmental sovereignty as not being constrained by sanctity of contract. While excessive use of such sovereignty would doubtless detract from parties otherwise willing to enter into a contract, San Bernardino’s plan was hardly over-encompassing or capricious. Indeed, the limitation that the mortgage borrower must be current on payments is a self-defeating and unnecessary limitation imposed by the government on its own plan. Borrowers most in need should not be eliminated at the outset; rather, they should be encouraged to take part, and this would not cause future lending to somehow collapse without customers having to be gauged by banks under the pretense of a “risk premium.”

In short, government’s use of eminent domain is fitting and proper in protecting bank customers from unreasonable bankers in line with the public interest that people not be thrown out of their houses. It is not as if a government were somehow a peer or even a rival of a bank. Rather, government is tasked with providing a floor such that no one faction in society extracts too much from another segment, even if in line with a contract. Government can so act “at will.” The permission of banks is not required, or frankly even helpful, in the workings of governmental sovereignty.

The bankers seem to have been presuming that they themselves, as guardians of the sanctity of contract, are sovereign or at least just as sovereign as governments are. If so, the danger lies in permitting those self-interested associations a role in their capacities as entities distinct from their members in lobbying government officials or regulators even and especially on matters touching on the entities’ respective financial interests. The danger includes distortion and hyperbole rather than greater insight for policy-makers.

It would be sad indeed were the plan of the government of San Bernardino county (i.e., the sovereignty of that government, which is ultimately that of the Republic of California) finally dependent on the financial/political power of the investment company participating as a “middle man” in the plan, specifically in countering the financial/lobbying power of the banks. That is to say, the sovereignty of governments being used in the public good should not have to depend on a particular result of the “invisible hand” of private self-interests as if sovereignty were a market-based outcome of lobbying.


Jennifer Medina, “California County Weighs Drastic Plan to Aid Homeowners,” The New York Times, July 14, 2012. http://www.nytimes.com/2012/07/15/us/a-county-considers-rescue-of-underwater-homes.html?pagewanted=1&ref=business