The Federal Reserve on Full Employment: A Democracy Deficit?

The American economy expanded during the second quarter of 2012 at an annualized rate of 1.7 percent. Meanwhile, the unemployment rate for all of the American states combined was expected to remain above 8 percent. In this context, the chairman of the Federal Reserve, Ben Bernanke, remarked, “It is important to achieve further progress, particularly in the labor market.” In other words, the free market cannot be relied on to reach full employment. More is needed. “Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.” In other words, the central bank would enact a pro-employment policy. From the standpoint of democracy, the choice of the Fed to engage in such a policy is a double-edged sword.

                                                                                                   Fed Chairman Bernanke.                    Reuters
 

On the one hand, Bernanke was able to defy political pressure from Republicans to refrain from such a measure. Sen. Charles Schumer (D-NY) said that the Fed chief “should not let any political backlash deter him from following through and doing the right thing.” At the very least, short-term political pressures oriented to an upcoming election should not be allowed to thwart more long-term policy oriented to full employment.
 

On the other hand, from the standpoint of democratic legitimacy, a policy enacted by a body that is buffered from elected representatives can be problematic. Ironically, it was Bernanke who had urged Henry Paulson of the U.S. Treasury to appeal to Congress to pass the bank bailout (TARP) because only such passage could have democratic legitimacy. Accordingly, Sen. Bob Corker (R-TN) had this to say of Bernanke’s musings on a pro-employment policy from the central bank. “Policies from Congress, not more short-term stimulus from the Fed, are the ingredients necessary for restoring growth in the American economy.” The senator could have cited the U.S. constitutional convention, whose delegates had vested the U.S. House of Representatives with the sole power to initiate spending (i.e., the power of the purse). It is particularly dangerous for a body insulated from political pressure to engage in economic stimulus if that body has the unlimited power to create money. At the very least, inflation could ensue from too much stimulating; and yet, it should not be supposed that the market itself can reach full employment.
 

It may be that the constitutional design of American federalism wherein the various checks and balances on the federal level operate in effect to “push” policy down to the republic or state level. Employment policy from the Federal Reserve could simply be the point of least resistance. In other words, the central bank may be the only option short of the state governments when the Congress and the U.S. president are at logger-heads. The cost is not simply in terms of democratic legitimacy, for the American founders made federal legislation difficult to enact in part so the federal government would not encroach on the powers reserved to the member states. In other words, action by the Fed may take the pressure off the federal elected representatives, but at the expense of federalism (i.e., the state governments being able to check the federal government). To be sure, full employment is a worthy objective, but the “how” and “by whom” are also worthy of consideration.
 

Source:

Binyamin Appelbaum, “Fed Chairman Makes Case, in Strong Terms, for New Action,” The New York Times, August 31, 2012. http://www.nytimes.com/2012/09/01/business/economy/fed-chairman-pushes-hard-for-new-steps-to-spur-growth.html?_r=1&hp

 

Full Employment in a Republic: Hollande’s France

Facing an unemployment rate of 10% in his state, with youth particularly hard-hit (23% for those under the age of 25), Francois Hollande of the state of France announced in August 2012 a new initiative for the legislature to pay most of the salaries of tens of thousands of young people hired in 2013. Young Europeans have  been hard-hit by the laborious labor laws that make it difficult for companies to let people go. Some E.U. states, including France, have proposed modest tax breaks for companies that hire people just entering the workforce, but no one is under the impression that such proposals will redress the underlying structural problem.

 Hollande, a Socialist, of the E.U. state of France.            The Telegraph

Fundamentally, there is no guarantee that a competitive market will come to an equilibrium at full employment. Accordingly, government has a legitimate role in picking up the slack, such that ideally any able-bodied adult who wants to work can have a job. In the state of France, the plan being proposed by Hollande in August 2012 would have companies that hire a person between 16 and 25 for at least a year pay as little as 25 percent of the person’s salary (for up to three years). In this way, the state hoped to create 100,000 new jobs in 2013 and 50,000 in 2014.

While managements would doubtless see this as a bargain, the question is whether other jobs would be put at risk given the 25 percent of the salary being paid by the companies. A clever manager might try to increase the proportion of the employees for whom the company must pay only 25 percent. Increasing the proportion would mean letting some non-subsidized employees go. The cost structure assumed could be a basis of sustainable competitive advantage if competitors do not also have such an arrangement. In other words, do government-subsidized jobs in the private sector add much in the way of the total employment of a company (and thus of the economy as a whole)?

One might also consider the matter of France’s deficit. Under E.U. law, it cannot exceed 3.5% of the state’s total economic output. Hollande’s strategy going into office was to offset the additional spending with a tax increase on the rich, yet even in anticipation of this some rich French were relocating to Belgium, a state with lower income taxes on the rich. California, which at the time also had an unemployment rate of just over 10 percent and a youth rate of 23 percent, also suffered from a budget deficit and a proposal by Brown to increase taxes. Unlike France, however, California faced no federal law limiting the deficit. In this respect, the E.U. was already a more consolidated federal system than was the U.S.

In short, the problem of individuals undercutting a policy for the whole is evident. A company’s manager seeking to take undue advantage of subsidized labor is like the rich person who seeks to avoid paying higher taxes by going to another state. To be more effective, government policy needs to figure out how to minimize such opportunism that is at the expense of the whole. Thomas Jefferson and John Adams both assumed that a virtuous citizenry is required for a republic to work. In the cases both of France and California, reaching full employment and achieving fiscal balance in the government may well come down to whether the respective citizenry does not try to exploit the requisite government policies.

It could even be said that a society or civil contract that is disvalued in the face of widespread opportunism deserves to fail.  Managers use “corporate citizenship” as window-dressing, yet without any sense of obligation to anything beyond the company. Doubtless there are rich people whose motivation to minimize even taxes they can pay dwarfs any sense of staying put and riding out the storm with everyone else (i.e., we are all in it together). If we are not all “in it,” then there is no We, as in We the People.

Source:

Sylvie Corbet and Sarah DiLorenzo, “French Government Offers to Pay Most of Young Hires’ Salaries,” The Huffington Post, August 28, 2012. http://www.huffingtonpost.com/2012/08/29/french-salaries-young-hires_n_1839663.html?utm_hp_ref=business

No Guilt at Citibank

In the days leading up to Labor Day 2012, Citigroup announced that the bank would pay $590 million to settle a class-action lawsuit by stockholders who contended that the bank’s management as well as some directors had misled the stockholders about the bank’s exposure to subprime mortgage debt in 2007. The bank had used improper accounting practices to show an inflated asset base. The shareholders claim that the bank assured them that it had sold billions of dollars in collateralized debt obligations based on subprime mortgages. However, the bank had actually guaranteed the securities against any losses. To further disguise the risks to the stockholders, the bank moved the guarantees to separate entities. Unfortunately, the settlement is insufficient as a means to thwart banks such as Citibank from misleading investors. Legislators might want to look at two reforms in particular.

The full essay is at "No Guilt at Citibank."

See: Cases of Unethical Business, available in print and as an ebook at Amazon.com.  

The West Crawling on Syria

Those who laud the efficiency of the market mechanism are particularly wont to point to the slow mechanizations of government machinery. Cautiousness along with a subtle bias in favor of the status quo may be the culprit. For example, after perhaps a year of urgings by Western governments for Assad of Syria to step down, finally a lone governor of a large E.U. state ventured to say that his state would recognize Assad’s opposition as the legitimate government of Syria. “France asks the Syrian opposition to form a provisional government — inclusive and representative — that can become the legitimate representative of the new Syria,” Francois Hollande was quoted by news agencies as saying on August 27, 2012 during a speech at the Élysée Palace. “France will recognize the provisional government of Syria once it is formed.” It is perfectly reasonable to ask whether the statement would make any difference in Syria.
 

Part of the reason why European states formed a union was because a united front would have more power both economically and politically. Were the E.U. Parliament to offer to recognize Assad’s opposition as the legitimate government of Syria, the announcement would have more punch behind it. This is why the American states consolidated their foreign-policy power at the union level. Simply put, the world would be more likely to deem it as important.
 

Beyond the question of whether the E.U. should take on a greater role in foreign policy (the union does have a foreign minister) is the matter of why Western governments were so reluctant (or slow) to recognize Assad’s opposition as the government of Syria. American officials had stated that Assad had lost the right to rule because his government had turned on so many Syrian civilians in killing them. The recognition of another government is more or less implied. Why not make it official? Why hold on so to the status quo, even after it has been deemed to be illegitimate?  Put another way, why must so many people be killed before even an implied step is taken?
 

Strategic concerns typically weigh heavily in the formulation of foreign policy. The possible reactions of China and Russia were no doubt salient in the calculations of the foreign policy experts at the time. Even so, it seems that too much cautiousness (i.e., avoiding even a low-probability negative reaction) goes with the calculating orientation itself in the formulation of foreign policy, which can be at the expense of common sense. If Assad was no longer held as the legitimate ruler of Syria, it follows that some other person or group could (and should) be recognized as legitimate. Furthermore, that such recognition would trigger Russian military retaliation should have been regarded as a stretch at best. The result of the excess cautiousness is that Russia and China were essentially able to proclaim the status quo as the default (a default whose legitimacy had been explicitly refuted in the West).
 

Put another way, the desire not to rock the boat even just a bit by paddling can be self-defeating if the boat is filling up with water. The mechanism by which Western governments formulate and implement foreign policy may be too mired in statecraft at the expense of not only common sense, but also the human rights of a people elsewhere in the world.
 

Source:

Kareem Fahim and Rick Gladstone, “France Says It Would Recognize Provisional Syrian Government,” The New York Times, August 27, 2012. http://www.nytimes.com/2012/08/28/world/middleeast/rebels-claim-to-shoot-down-syrian-helicopter.html?_r=1&ref=world

 

 

Foe of Glass-Steagall: Break Up the Big Banks

A few years after the financial crisis of 2008, Sanford Weill, the man behind the $70 billion merger of Travelers and Citigroup in 1998, urged the separation of investment banking from commercial banking. “Have banks be deposit takers, have banks make commercial loans and real estate loans, have banks do something that’s not going to risk the taxpayer dollars, that’s not going to be too big to fail.” Even though banks had been able to exploit loopholes such that Glass-Steagall had essentially been eviscerated by the mid-1980s, Weill’s lobbying helped take down the law formally in 1999.

Weill might be illustrative of the saying, “be careful of what you wish for; you might just get it.” By enabling Citigroup to be a financial supermarket, he also made the bank “too unwieldy to manage, hunched over by the weight of disparate businesses with little in common and with byzantine corporate structures that made running the behemoth incredibly difficult,” according to the New York Times. In such a condition and yet too big to fail, the bank needed bailouts by the U.S. Government in September 2008. Referring to breaking up banks like Citigroup, Morgan Stanley and Goldman Sachs, Weill told CNBC on July 25, 2012, “I’m suggesting that they be broken up so that the taxpayer will never be at risk, the depositors won’t be at risk, the leverage of the banks will be something reasonable.” Why this thinking had not gone into the Dodd-Frank Act of 2010 may point to the inordinate influence of the regulated on law-making affecting them.

In other words, the public interest in U.S. law may be dependent on business coming to the realization that additional regulation is in the firms’ own financial interest. This does not bode well for the public interest, being so conditioned. For the regulated do not normally have such an enlightened self-interest. In the case of Weill, he may have realized that especially with the incentives in Dodd-Frank, banks could be more profitable were they smaller. For example, the law requires additional capital reserves for the biggest banks. Nevertheless, greater profitability can result from losing the disproportionate costs of integrating disparate businesses in a huge financial supermarket or combination (this was Rockefeller’s name for Standard Oil Co, as it replaced competition with coordination via a monopolistic organization). Dodd-Frank comes up short even in terms of why being big may not pay.

So why, one might ask, did Weill want a financial empire in the first place? Even if empire-building does not pay off financially in proportional terms, running a bigger company can pay off in terms of experiencing the pleasure of power over others. Moreover, one can feel that one’s hackneyed managerial tasks (even as a  CEO) are somehow significant, if only in terms of getting into the headlines. In explaining big business, more than a financial calculator is necessary. In the end, the bankers’ resistance to Dodd-Frank breaking up the biggies may have come down not just to ignorance, but also to the lust for power (rather than merely for money). Whatever the dominant motive, it is pretty clear that Congress has been following in its wake rather than molding or channeling it from out in front.

Source:

Michael J. De La Merced, “Weill Calls for Splitting Up Big Banks,” The New York Times, July 25, 2012. http://dealbook.nytimes.com/2012/07/25/weill-calls-for-splitting-up-big-banks/

South Korea’s President: Emblematic of a Culture of Corruption

Mired in corruption, President Lee Myung-bak of South Korea reflected on the matter on television in July 2012. “The more I think about it, the more it crushes my heart,” he said. “But whom can I blame now? It’s all because of my negligence . . . . I bow before the people in apology.” He had offered a similar apology the previous January during his New Year’s speech. Although Kim himself was not as of July implicated, three relatives, four senior staff, and several former senior officials in the cabinet and government-run companies had been indicted or convicted.

According to the New York Times, “The president’s brother, a former lawmaker, has been charged with accepting bribes from two bankers. Prosecutors said the bankers asked him to help prevent regulators from shutting down their banks. The bankers have been charged with embezzlement and bribery, and their banks’ operations have been suspended.” Moreover, Kim was just the latest in a series of South Korean presidents politically damaged by corruption scandals. It would appear that personal profiting from one’s governmental (or business) position was at the very least a part of the South Korean culture, if not tacitly accepted in government circles.

In my albeit rather limited association with South Korean business, I have found the organizational culture to be extremely hierarchical in the sense that officials at the top have near carte-blanche (i.e., near absolute) power from the perspective of their subordinates. Additionally, the underlings tend to cover up any mistakes or failures from their bosses, whose world is thus held as though in the clouds. In such a context, corruption can be rife.

It should be noted that the extreme psychological distance in the organizational world in South Korea is not without a basis in fact. The mentality of an employee at a customer service call center is oceans away from that of even a mid-level manager, who in turn can be distinguished from an organizational leader. Often times, only the latter has the maturity to relegate the red tape by prioritizing common sense and even just that which is natural in human-to-human interaction. It is not uncommon, for instance, for people used to a certain height to instinctively sense and relegate the gate-keeping games of the herd. I suspect that in South Korea, the latter know they are eons away from their superiors. The latter can use this natural distance to their own advantage in covering up bribery and kick-backs. To this extent, the distance assumed by the underlings is unjustified, even if on a general mentality basis it is fully natural (and justified).

Therefore, even though the corruption in South Korean government and business is hardly justified from an ethical standpoint, a Nietzschean would quickly point out that distance is natural, even necessary, for the strong such that they not become infected by the narrowness of the herd. In the West, the organizational creature can be rather insistent that its mentality must be binding even on those above. In South Korean culture, by contrast, a lower mentality may have a better sense of its place, and thus of the inherently limited nature of its reach. That is to say, the presumptuousness of the herd animal is checked, whereas it roams like an undisciplined child in the West. The question regarding South Korea is thus how corruption may be checked without tossing the baby out with the bathwater. 

Source:

Choe Sang-Hun, “South Korean President Apologizes for Corruption Scandals,” The New York Times, July 24, 2012. http://www.nytimes.com/2012/07/25/world/asia/lee-myung-bak-of-south-korea-apologizes-for-corruption-scandals.html?ref=world

Facebook Selling Users’ Personal Data: Unethical?

With advertising accounting for more than 85 percent of its revenue, Facebook has faced great pressure in the wake of its lackluster IPO to translate its unique asset, the pile of personal data it collects from 900 million users, into advertising revenue. I contend that Facebook’s handing over that data without first grouping it is unethical on a gut level.

The full essay is at "Taking the Face Off Facebook."

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.

Source:

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.

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

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.

Source:

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

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.” 

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

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.

Source:

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

See: Cases of Unethical Business: A Malignant Mentality of Mendacity, available in print and as an ebook at Amazon.

American Newscasters Blindly Floundering

In mid-2012, just 21% of adults in the U.S. told Gallop they had a “great deal” or “quite a lot” of confidence in TV news. In 1993, the percentage had been at forty-six. Ideological differences do not seem to matter (ranging only between 19-22%). Interestingly, the 18- to 29-year-old group had the most confidence. In terms of education, the more educated one was, the less likely one was to have a great deal of confidence. Newspapers did not fare much better, coming in at 25 percent. 

 By chance, on the very day I read about the Gallop poll, I came to the conclusion that the Huffington Post must be utterly addicted to the U.S. Presidential campaign—then already at least a year old and with just less than half a year left. Nearly every headline seemed to be about something that Mit Romney had said (or not said). Every little thing was blown up into a major crisis—to the point that I had come to skip the headlines completely. It occurred to me that the Huffington Post had lost credibility, at least to me, because of its lack of perspective. The dramatics alone reaffirmed my decision to get my news from Europe, even concerning what is going on in the United States! Tellingly, very little indeed was being reported concerning the "important" presidential campaigns (Gott sei dank)

Accordingly, I had given up watching any American news channels or shows in April 2012. I had come to realize that all too often opinion was being sold as news. All too often, journalists were interviewing other journalists as experts (other than on journalism). Such interviews I would call journalistic masturbation—fit only for other journalists to watch. Just a week before the Gallop poll came out, someone casually remarked to me that if Americans would just watch the news on a European station, they would quickly realize how far off the reservation the American newscasts and news networks had wandered in terms of reporting the news.

In addition to the journalists interviewing other journalists and the “talking heads” commentators dominating the “news,” the obsessiveness on one particular story within any given 24 hours news-cycle (and limiting “international news” to two or three countries in the world where the U.S. has a particular interest) can easily give the viewer the sense that the world is much smaller than it actually is. It is a fallacy to suppose that the narrowness of coverage means it is more in depth rather than merely repetitive. Furthermore, one should not assume that the narrowness is for want of enough time in a given broadcast; typically after ten minutes in the evening newscasts of the major non-news networks (i.e, ABC, NBC, and CBS), a magazine format takes over, with "human interest" stories replacing news reports.

In short, television news is broken in the United States, and the journalists are blind to it even as they portray themselves (ironically) as self-appointed experts (i.e., talking heads) on policy. Because the correction needed is not merely by degree, it is doubtful that the situation could be rectified without a new infusion of people in the business. In the meantime, I recommend Deutsche Welle (German and English versions—webpages and television channels) and TV5 Monde (en francais), as well as the BBC.  Hopefully these European newscasts won’t follow their American cousins.

Source:

Gallup Politics, “Americans’ Confidence in Television News Drops to New Low,” July 10, 2012. http://www.gallup.com/poll/155585/Americans-Confidence-Television-News-Drops-New-Low.aspx

Maryland and Kansas: Distinct Taxing and Spending Policy Ideologies

Coming out of the recession that followed the financial crisis of 2008, Maryland “raised income taxes on its top earners . . . to preserve services and spending on its well-regarded schools — leading some business groups to warn that the state might become less competitive. Kansas, controlled by Republicans, decided to try to spur its economy with an income tax cut — which Moody’s Investors Service, the ratings agency, recently warned would lead to “dramatic revenue loss” and deficits that will likely require more spending cuts in the coming years.” Two very different political societies in one Union. This might sound familiar to Europeans looking at their own Union. Yes, Virginia, the E.U. and U.S. are indeed commensurate. 

The full essay is at Essays on Two Federal Empires.

Libya (and the E.U.): Writing a Constitution

Should writing a constitution, or “basic law,” be done piecemeal by successive amendments (e.g., the E.U.), or all at once (e.g., the U.S.)? In terms of unions of states, the answer might depend on how comfortable the state leaders are with transferring governmental sovereignty to the union. Whether at the state or union level, if “all at once” is the desired way, it is worth pondering whether a committee of a legislature should be assigned the task, or alternatively whether delegates to a dedicated convention should be selected—either by popular election or appointment by a legislature. These questions may seem antiquated where a constitution has stood for some time. Even so, in July 2012 in the midst of a legislative election, Libyans had a vested interest in the rather pressing questions.

According to the New York Times, the election in Libya selected a 200-member legislature that was initially expected to draft a constitution while it governed the state for 18 months. However, the interim Transitional National Council stripped the legislature of that authority just two days before the vote in an attempt to placate Libyans in the eastern part of the state who protested that the legislature would be stacked in favor of the more populous northwestern region around Tripoli. (One hundred members are from the west, 60 from the east, and 40 from the desert south.) “The council instead decreed a new election to choose a smaller panel to draft the constitution that would be composed of equal numbers from each region.” While sufficient and fair representation is a legitimate concern, an additional benefit of a convention is that pressing issues of governance, which are necessarily salient to legislators, can be bracketed to some extent. That is to say, a convention can have more room to look at the big picture with a more long-term perspective. Ideally, the delegates would be sequestered such that they are immune from pressing external pressures, though this is admittedly not possible at the union level, wherein the delegates represent sovereign or even semi-sovereign legislatures.

Whereas a convention at the union level must contend with the strictures placed on delegates by their respective states, delegates at the state level must deal only with local elites, rather than with entire legislatures (this is yet another reason not to conflate a state with a union thereof). Whereas a sovereign (or semi-sovereign) legislature has a legitimate right to tightly instruct its delegate, a delegate elected by the people of a locality of a state can legitimately not receive any instructions. Sequestering such delegates, who are dedicated to the sole task of writing a constitution, can effectively bracket momentary and partisan political pressures.

As the ballots were being counted in Libya, the New York Times surmised that the interim council’s last-minute change would probably be overturned by the new legislature. To be sure, the candidates for the legislature campaigned to be part of a constitutional assembly. Even so, it would be sad were the advantages of a dedicated convention beyond questions of local representation relegated or ignored, particularly given the conflict-ridden relations between the tribes and regions of Libya at the time. Getting delegates from all the tribes and regions together in a room and bracketing them from the outside such that they could sit down and take some real time to focus on basic questions of governance would be particularly worthwhile.

Concerning the value of getting a group alone to focus for a few months or so on a system of basic law, or constitution, would not be a bad idea for the E.U., particularly given its common currency and the existence of some anti-federalist states not using it. Although the states, being semi-sovereign, would have the right to appoint the delegates, the conflict-of-interest facing the states on whether to give up additional sovereignty suggests that it might be better were the citizens of the E.U. elect the delegates, perhaps in the districts used for the E.U. Parliament.

In conclusion, Libya (and Egypt) as well as the E.U. in 2012 amid a chaotic change of government and a serious debt crisis, respectively, reminded the world that basic or constitutional questions had not suddenly become passé by the twenty-first century. Setting up or establishing a new system of government, whether for a simple republic or a union of such republics, is difficult in itself, even without the inevitably pressing political pressures. Isolating some reflection dedicated to the task by people with power to propose a system of government is very important, yet strangely this point is typically discounted or disregarded altogether by people in power.

Source:

David D. Kirkpatrick, “Braving Areas ofViolence, Voters Try to Reshape Libya,” The New York Times, July 7, 2012.