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Friday, January 11, 2013

Banking Lobby Extracts Benefits from Consumer Protector

Turning lemons into lemonade: that could aptly characterize the strategy of the banking lobby as the Consumer Financial Protection Bureau (CFPB) was promulgating a broad set of mortgage rules that were announced in January 2013. Rather than merely seeking to minimize more onerous standards, the industry sought to insulate itself as much as possible from getting sued by borrowers. Ignoring the rather obvious self-interest of the banks, the new regulators accepted the bankers’ claim that the legal protection was necessary for the banks to be willing to produce mortgages.
In regulation theory, the reliance of regulators on the regulated for information is well established. In fact, the “regulatory capture” theory, which states that a regulated industry can “capture” its regulatory agency, hinges on the leverage that goes with having information that another party needs. Regulated firms can “orient” the information provided to minimize the cost of new regulation for themselves. Optimally, minimizing the cost to the firm goes with maximizing the cost to other firms, in what is called the strategic use of regulation. At the industry level (e.g., the banking lobby), “strategic use” is oriented to maximizing protection for the industry.
The rules formulated by the CFPB require banks to produce mortgages that borrowers can afford, given their income. Interest-rate increases in adjustable rate mortgages are prohibited if the resulting mortgage payments are not within certain percent-of-income limits. Although banks face a great legal liability under the new rules, lawmakers in Congress felt banks might not produce as much mortgages if doing so increased the chance of getting sued. The CFPB operationalized the “shield” enacted by Congress by distinguishing between prime and sub-prime mortgages. The banks get more protection from borrowers’ suits involving prime mortgages, though admittedly even here borrowers continue to have ways to sue.
The New York Times concludes that “lenders managed to put their stamp on the regulation, winning some important features.” As part of their “fervent lobbying effort,” banks “warned repeatedly that strict regulations could crimp lending at a time when the housing market was just starting to get back on its feet.” In spite of the fact that other sectors do not need legal shields to engage in business, regulators “seemed to give some credence to the concern.” Given the rather obvious financial interest of the banks in overstating the detrimental impact of even the possibility of getting sued, it is incredible that the “consumer” regulators took the bait. In fact, the regulators even added a seven-year phase-in period for the banks, as if anything less would bring the production of mortgages to a halt. If this sounds familiar, it might be because a four-year phase-in period had been put into Obama’s expansion of Medicaid to cover the poor who are uninsured. Both cases have the odor of self-serving industry involvement.
According to the New York Times, the “phase-in period will effectively allow banks to make qualified loans with higher debt burdens.” Combined with the legal shields—particularly the one for prime mortgages—the banking lobby made out pretty good, all things considered. “It seems odd,” the New York Times observes, “that the banks got this advantage, given the abuses during the housing bust.” Indeed, that that track record did not nullify any self-serving asseveration by the banking lobby deserves a certain amount of reflection, assuming that we are not satisfied with naïve or gullible regulators.
                                                 The aim of the new rules is to miminize foreclosures by forcing banks to assess borrower wealth and income with due diligence.  
Perhaps part of the problem is that in overstating the impact of incremental regulatory changes—an overestimation that ensues from thinking too much of regulation itself—regulators are too susceptible to the self-serving claims of the regulated as to the dire effects on the economy as a whole. Moreover, the human susceptibility to superstition, such as in believing that the world would end on December 21, 2012 simply because that is as far as the ancient Mayan calendars went, could mean that regulators put too much stock into claims that a proposed regulation would mean the demise of a sector. Interestingly, the sensitivity to risk here is not typically on the consumer’s behalf. The gravitational pull of the regulated capitalizes on the human susceptibility to fear-of-change. That this pull is operational even for a sector whose occupants have engaged in abuses harming customers suggests that this theory may have the force of a universal law (i.e., hold regardless of context).


Peter Eavis, “In Tighter Loan Rules, Wiggle Room for Banks,” The New York Times, January 11, 2013.


California’s Turnaround: Brown’s Budget Surpluses

By early 2013, California had turned the corner from deficits—$9 billion in 2011 and $25 billion in 2010—to anticipated surpluses—$785 million for the fiscal year ending June 2013 and $851 million in the year thereafter. The lack of balance between billions and millions suggests that Keynesianism may contain a fundamental imbalance in favor of consumption, at least in a democratic context. The prudent proposals by Jerry Brown, California’s head of state and chief executive, point to the ability of a republic to responsibly manage its fiscal business even within the overall imbalance.
                    Unlike a prime minister, Jerry Brown is not in the legislature, but in addition to being the chief executive he is also the head of state.

Specifically, Brown proposed raising total expenditures by 5 percent, which would not absorb all of the surpluses. Even though his plan would increase spending on education and healthcare, he “vowed to push back at legislators eager to raise spending quickly.” After years of cutbacks, it was undoubtedly very tempting to spend all of the surpluses while still being able to brag about a balanced budget. Yet giving into such temptation would entail considerable risk. “I am determined to avoid the fiscal mess that the last few governors had to deal with,” Brown told reporters as he introduced his budget proposal for the 2013-2014 fiscal year. That he was willing to hold even himself back from additional spending in education and healthcare is a testament to his sense of fiscal responsibility over even his own political ideology.

Put another way, Jerry Brown put his role as head of state above furthering a partisan agenda. That Democrats had won a supermajority in both chambers of the legislature makes his self-restraint all the more laudable. Indeed, Connie Conway, the Republican minority leader in the Assembly, said she supported Brown’s messages of fiscal restraint and support for education. Generally speaking, the voluntary self-restraint of the majority party for the good of the whole is supported by the minority party.

Brown’s attempt to set up a “rainy day” fund is prudent and thus in the interest of the republic. The minority party could hardly object. Even so, the proposal could have been improved by dedicating a sizable portion of the surpluses to reducing the government’s accumulated debt. Being debtless is itself a sort of “rainy day” fund in that the government would have greater leeway in raising new debt in a crisis. In Keynesian terms, taxes should even be raised as an economy improves—all that revenue going to paying off all the debt incurred in the last downturn. Whether stemming from an imbalance between booms and busts or in democracy itself, the tendency for government debt to accumulate even between cycles is a serious problem that not even Jerry Brown’s prudence fully answers. Even so, Brown could have done much worse in spending away the anticipated surpluses.


Jim Christie, “California Budget Surplus? Governor Introduces Plan That Eliminates Deficit,” Reuters, January 10, 2013.




Wednesday, January 9, 2013

Mistrust in Business: A Nietzschean Critique

This morning I ate at a Denny’s restaurant. To my surprise, the waitress put the bill on the table along with the food at the beginning rather than end of the meal. My immediate “gut instinct” reaction was that for some reason she did not trust me. It was not as though I had walked in wearing rags, but neither was I in a business suit. Seeing that another waitress waited until the end of the meal to deliver the bill to another table, I was curious enough to ask the manager. He explained that it is Denny’s policy at breakfast to drop the check at the outset of the meal “because there is no dessert.” That a customer might want to add an item during the breakfast suggests that the policy was at the very least not well thought out. Moreover, the logical inconsistency opens up the possible of an alternative, real reason behind the policy. The manager proffered a hint in prefacing that breakfast is particularly busy at Denny’s restaurants. Although the policy could thus merely be a time-saving devise for the wait-staff, the underlying reason could be that it is more difficult for the servers to keep tabs on their respective customers. With the manager’s problematic rationale and his near passive-aggressive dismissiveness of my objection (as well as his notable refusal to compensate me even in part) serving as a sort of confirmation, I came away with the sense that “leaving without paying” was at least in part the underlying fear behind the policy. Such distrust breeds distrust, as well as resentment. In spite of making this transparent to him by indicating that I would not be generous with the tip as a result, he did not seem to grasp the link or even that it is so avoidable. Instead, he clung to the path of least resistance for himself and his restaurant.

In his commentary on the loss of trust in business, government and society, Michael Wolff laments to decline of trust through what he calls “consumer history.” As trust can be maintained with little or no further cost once established, Wolff is perplexed as to why more business practitioners, politicians and even religious functionaries do not rush to fill the gap.
Why are some politicians all too willing to go back on their campaign promises when in office? The prime minister of Japan, Shinzo Abe, took only five days in office early in 2013 before reversing his campaign pledge to wean Japan off of nuclear power. Why do some religious leaders apparently not understand the value of trust in something as intimate as one’s spirituality? The Vatican’s initial reaction to the disclosure of priests sexually molesting children was to look the other way, as if the “trust issue” would somehow go away. Why don’t business managers invest more in authentic trust as distinguished from “brand management”? For example, the photos of food on the menus at Denny’s exaggerate the actual amount of food. The duplicity alone can eviscerate trust as well as cause considerable resentment.
Pointing to the hidden invasiveness of some businesses, Wolff asks his readers, “Would you trust Amazon? Do you trust any company whose main mission is to collect your data? You might acquiesce to it, but do you trust it—or anyone whose central activity is to keep tabs on you? Google, founded on a do-gooder credo, is now the leviathan of data collection and opacity.” Facebook is another such hegemon, whose Instagram announced “it was selling the pictures people had entrusted it with.” That is to say, a person’s own pictures of oneself, one’s friends, family and even home unknowingly put on the market and possibly purchased by marketers. If anything calls out for a constitutional right to privacy, such a practice surely does.
Wolff views the decline of trust in commerce and politics as either a threat to capitalism and democracy or an opportunity for a historical turn-around. In viewing information overload as salient in the crisis, he has absorbed too much of his information age. The problem is one of attitude rather than information. Might it be that people working in business no longer trust the general public and thus their own customers, and thus do not expect to be trusted in return. Why work to build up trust if one doesn’t think one will be trusted anyway? The mistrust of business managers, sales people, and customer service reps creates mistrust, which is directed back on them. The result is an overly tedious manner of “check and double check.”
For instance, when I make hotel reservations, I take extra time to ask whether I would be charged for a room safe whether I use it or not. I ask whether there are any other mandatory charges. In terms of “local calls,” I have even asked which area-codes are covered. On the other side, hotels and especially motels now regularly take deposits as much as $200 for a night’s stay in addition to the room charge. Customers with debit cards are especially mistrusted, as per the differential policy concerning deposits. It is apparently not enough to take down a customer’s driver’s license number. The hypocrisy in mislabeling customers as “hotel guests” only adds to a customer’s sense of duplicity and thus mistrust. At the very least, the practitioners come off as fake with respect to their use of language. What else might they be hiding?  What hidden charges might one find at the end of one’s stay if one does not ask enough questions before reserving a room?
The social glue that lubricates the system of capitalism becomes sticky, and the social bonds even between strangers become increasingly frayed. A similar stickiness has seeped into Congress, also due to a decline in mutual trust. Even in religion, parishioners now take greater precautions regarding what exactly their kids will be doing with clergy. A parent keeping an eye on a priest is not likely to enter into a close spiritual connection with him.
Generally speaking, commercial transactions, representative democracy, and religion all become more difficult. If trust is as easy to muster and as valuable to have as Wolff suggests, the need for the difficulty is all the more inexplicable. For instance, a social media business model should pop up that stresses the privacy of user information. The problem is not too much information; rather, a certain attitude shirts trust as a potential asset. It is not only selfishness, greed and a lack of consideration (and respect) for others. One need only go to Miami to get loads of that sordid cocktail.
There has perhaps been a proliferation of cheating and thus taking advantage of others, while giving up on the value that trust could proffer. The rise of the great cities has substituted anonymity for knowing one’s customers and banker. Anonymity is fertile ground for mistrust as well as duplicity. Furthermore, as the modern business model has come to stress getting as much money as possible out of one’s customers, duplicity has come at the expense of trust.
For example, with the advent of so many differently-priced tiers of seats in coach alone on planes and the complex baggage-charge “regulations” has come greater uncertainty for the customer at the airport. The distrust concerns what one will actually have to pay even after having purchased a ticket. Similarly, a customer who pays for a reserved hotel room at the hotel with cash or a debit card may find herself stranded because a sizable, hitherto unmentioned deposit is also “required.” To subject travelers to possibly being stuck in another city is nothing short of cruel. When the pettiness has to do with secondary issues (i.e., a deposit rather than the room charge itself), the profit-motive is not the driving force behind the cruelty.
This is finally the core of the problem that eclipses trust: a desire to inflict passive aggression accompanied by the instinctual need to dominate others. Seen in this light, the inhabitants of the modern shopping mall on both sides of the counter are not as far removed from other species as one might think. The problem can be put more abstractly as the hypertrophy of the instincts of cowardly aggression and dominance. In fact, the combination may even be a subtle form of sadism that has been made socially acceptable by its sheer ubiquity in the public square.
As long as “control issues” and an overwhelming urge to inflict passive aggression set the contours for public interactions in business, government and society, nothing much will change concerning the dearth of trust. Amassing trust beyond the superficial sort from branding ads and management by “presentment” will be nearly impossible for businesses unless their managers and employees relax their grip on the pettiness at the expense of long-term profitability. Unwilling to face their underlying dominant instincts, business managers and employees will continue to conclude that customers are inherently untrustworthy, even abusive, rather than retaliatory as well. Rather than being untrustworthy, customers subjected to close-minded yet supercilious pettiness are merely returning passive aggression for the passive aggression and resisting the unfairness in the arrogant dominance. To be sure, this does not account for every rude customer, but neither can a customer’s frustration be necessarily relegated so utterly conveniently as idiosyncratic. Power that presumes it can’t be wrong is naturally infuriating, especially if access to the supervisor is closed off as when customer “service” employees convenient “lose” calls while “transferring” them to a manager. Gate-keeping enforced on callers against their will is about as naked as passive aggression conjoined to a lust for power gets in today’s retail sector.
Even so, the ubiquity of passive aggression as a weapon and a fixation on dictating the terms in even the most banal transactions is still nearly invisible to managers, employees and customers. This makes the task of restoring trust all the more difficult, if not impossible. That is, the link between the excessive, albeit camouflaged, aggression and dominance and the resulting resentment is almost never revealed or made conscious on either side of the counter or telephone. This blockage is itself rather puzzling. Distrust is sensed and yet not connected to its roots. As a result, customers put up with much too many plays for control and acts of passive aggression in the name of “policy” while many managers and problematic employees oriented to “presentation” as though on a stage are simply out of touch with what is driving them.
As valuable as trust is, it will be thwarted as long as people choose, enable or react in kind to excessive passive aggression and dominance rather than confront them in themselves. Aggression and dominance are both causes and effects of mistrust. Wolff suggests that “nobody quite knows what trust is anymore. Hence, even people who think they are selling trust are so often selling phoniness or duplicity.” Sadly, such people come to view their fake demeanor as the epitome of professionalism. Actually, the fake smile is fueled by anger and an irresistible urge to dominate others. The masks are enabled by an approach to management that is oriented to appearances rather than attitude. Much too often, professionalism is a weapon of pride rather than a mark of maturity.
In the context of modernity, everyone is a professional in his or her own infallible yet purblind eyes. This is deemed so even without a college education. From this seemingly-solid basis, it is easy to assume a perch from which one presumes the right to dominate and inflict pain—indirectly of course given the underlying weakness. As Nietzsche suggests, dislodging such a “new bird of prey” can be incredibly difficult, even for the strong. Those from among the weak who are nonetheless driven to dominate the rest of the herd and even the strong are not strong enough to dominate. Therefore, the new birds of prey inflict pain both out of their anguish for being too weak to lead and as a means of achieving the dominance they crave. In contrast, the self-confident strong have no need to be cruel. The weak have somehow been able to beguile the strong through guilt (modern morality) into accepting the artificial dominance. That is, the dominating birds from among the flock have somehow been able to foist their illusion of superiority on the strong, who thus unnecessarily submit even though they can fly higher.
By the twenty-first century, corporate “branding” of trust, a dominating form of weakness claiming a share of social reality, had come to replace higher trust that is authentic. Even so, human beings in any age instinctively know authentic trust. We can sense strength (and weakness). This intuition comes out of strength, and yet it has been insufficient to dislodge the fake, one-sided trust that is so convenient to the petty.

Whereas Wolff looks to technology to prioritize information as a solution (as if the problem of trust were predominantly cognitive), I contend that attitude-change resides at the core of any possibility for a restoration of trust in commerce as well as politics and religion. Perhaps the solution is as simple as replacing the excess of pride, pettiness and especially passive aggression with even just a little heart-felt compassion that goes with serving others rather than contrived corporate scripts. As simple as this recipe may be, putting it into action would face considerable resistance from those culprits who presume they cannot be wrong or at fault and yet are in power. Such is the nature of weakness that seeks to dominate beyond its innate pith.


Michael Wolff, “Trust Used To Be Worth Something,” USA Today, January 7, 2013.


Tuesday, January 8, 2013

Assad’s Absolute Sovereignty of Syria

By the end of 2012, over 60,000 Syrians had been killed and over half a million had fled as a result of the civil war in Syria. Shortages of food and shelter were worsening inside Syria for civilians. In early January of 2013, a spokesperson for the U.N. said that the international organization was unable to feed a million residents in combat zones. Acute fuel shortages in Syria were contributing to the rising price of bread—at least six times greater than the pre-conflict price. Additionally, an outbreak of violence in a large Syrian refugee camp of 54,000 refugees in Jordan amid a winter storm was reported. “The incident followed a night of heavy storms, during which torrential rains and high winds swept away tents and left parts of the camp flooded,” an official in Save the Children said in a statement. One might ask what was really behind the deteriorating conditions.
At first glance, the culprit is merely that of two centers of power fighting for dominance within Syria. World history had been littered with such conflicts. However, this explanation does not explain why other countries permitted the harm in Syria to worsen. Lest one be content to ascribe the impotence to a web of international alliances and politics, it can be asked whether principles could have been holding back otherwise willing interventionists.

In a rare public address, President Assad of Syria claimed early in 2013 that the sovereignty of Syria, which is for him the top principle, is “based on the principles and goals of the UN Charter and the international law which all stress on the sovereignty, independence and territorial integrity of countries.” National sovereignty is absolute. In making this well-established principle explicit, Assad could have drawn on western political theory—namely, the thought of Jean Bodin and Thomas Hobbes.
In the war-weary context of the seventeenth century, Hobbes wrote that the king needed absolute sovereignty, even as the definitive interpreter of divine law. Any constraint in the latter on a king would pertain to his afterlife, and therefore not bear on a king’s actual conduct. Jean Bodin too had viewed divine law as a constraint on otherwise absolute sovereignty, though for that theorist the king is not the definitive decider on divine law. Accordingly, such law could in principle act as a constraint on a king even in this world. Even so, other powers could not intervene at the expense of national sovereignty.
 Unlike Bodin and Hobbes, Assad defended absolute sovereignty out of fear that Syria would be brought into submission by foreign powers. “A country that is thousands of years old cannot be dictated to,” Assad said, by foreign powers.  “Syria has always been, and will remain, a free and sovereign country that won’t accept submission and tutelage.” Anything less than absolute sovereignty means becoming the vessel of an imperial power. In making this point, Assad could have drawn on dependency theory in international political economy. The sovereignty of developing countries is compromised or surrendered by their subservient economies. In being “allowed” to export only commodities, for example, a developing country could be at the mercy of one or a few countries that are the principal buyers. Those countries could keep the developing country from industrializing so as to retain economic and even political leverage.
In other words, Assad’s position combines the Bodin-Hobbes notion of absolute sovereignty with a theory of economic development that stresses the structural subservience of developing countries. In fact, dependency may lie at the root of Assad’s notion of national sovereignty. The problem with Assad’s rendering is that sovereignty can be viewed as limited without necessarily entailing submission to a foreign power.
Beyond the geopolitical and related mercantilist interests of particular countries, the international community could come to a consensus on how far a government can justifiably go in inflicting harm domestically under the principle of national sovereignty before outside powers would be justified in intervening. In terms of such harm, wounding or killing unarmed residents would trigger relatively close limits on national sovereignty, while the harm unleashed in a civil war would have a higher threshold. Rather than involving submission to the foreign powers, the limitations on national sovereignty would be geared to stopping the harm by removing the extant government from power. Once the government whose legitimacy had been lost internationally is expunged, the emphasis of the international community would turn to assisting the people in the construction of their own new government. To be sure, Assad would view such an approach as a cloak used by imperial Western powers to dominate Syria. The international community would thus be well-advised to stress its own restraint in placing limits on national sovereignty.
Given the sheer extent of harm inflicted on the Syrian population by the end of 2012, however, the international community would be justified in intervening in Syria to immobilize Assad’s government even without concern for the “submission” argument on behalf of absolute sovereignty. That the world stayed on the sidelines, essentially allowing the situation “on the ground” to worse so much, suggests that the dominance of the Bodin-Hobbes notion of absolute sovereignty was still too great, and thus should be subjected to critique. In other words, the powers around the world in favor of intervening should not have felt like they would be imposing in stepping in to stop the violence. The notion of a country being under temporary international occupation because a government had lost its legitimacy due to the harm inflicted or permitted was well overdue even before Assad’s government had gone after unarmed protesters.
The matter of default itself, particularly its staying power (as though a house guest who will not leave), is the true culprit that kept the world at bay as Syria degenerated in a cycle of increasing violence and suffering. Why it is that the default can continue to enjoy hegemony even when it should be subject to critique—this is the underlying question before us here.
Assad can claim that Syria’s sovereignty is absolute. This does not necessarily make it so, even ideationally. He can claim that absolute sovereignty is a necessary bulwark against becoming the agent of another country, but this does not mean that is assumption is valid. In making his claim, he could rely on the default and thus count on the related trepidation of the international community in intervening even to stop horrendous suffering.
If the U.N. is necessarily bound to the notion of absolute sovereignty (even if kept so by one member’s veto), then the international community would be well within its prerogative to form a new international organization (even without necessarily having to leave the U.N.)  that is oriented to placing and enforcing limits on national sovereignty. Such an organization would say, in effect, “No, we will not stand by as great harm takes place within a country.” Would not bystanders be justified in saying something similar as a boyfriend beats his girlfriend in public and restraining the man? Were he to claim that being restrained in that instance would imply or result in him becoming a slave would hardly be taken seriously, and yet Assad’s claim of Syria’s absolute sovereignty had its defenders abroad and even held other powers at bay when they would have been justified in intervening to stop the harm. Were the dogmatic basis of Assad’s claim made transparent (i.e., obvious), the notion that sovereignty is somehow absolute would finally be viewed as artificial in nature rather than as part of the basis of Western civilization; the demise of the reigning default would not have to wait generations needlessly before being realized.


Rick Gladstone and Nick Cumming-Bruce, “Aid Groups Report New Level of Misery Among Displaced Syrians,” The New York Times, January 8, 2012.