bank reform

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Extreme or Not Extreme?

That is the question.

A friend of mine pointed me to Thomas Friedman’s latest effort in the New York Times. It’s too long for me to copy over en masse, so let me highlight a few things.

Set aside the silly column title: “Up With Extremism”, I assume Friedman had nothing to do with that choice. The thrust of the article seems to be that we are in need of some radical policies if we are truly to deal with our various problems. Let’s assume we can all agree on what these problems are, although it isn’t evident to me, at least, that such a consensus exists anywhere. Which, perhaps, is more than half our problem. In any case Friedman certainly thinks the problems are obvious because he then goes on to advocate a series of policies that he considers extreme, but also necessary.

Here’s his first proposal:

“A single-payer universal health care system. If it can work for Canada, Australia and Sweden and provide generally better health outcomes at lower prices, it can work for us, and get U.S. companies out of the health care business.”

My question is this: what on earth is ‘extreme’ about this? Universal health care is the norm throughout the civilized industrial world. Not having it is the exception. Given this reality I consider it extreme not to have universal health. The proposal to provide universal health care is therefore an attempt to move to the moderate, centrist, and more normal position. It is not extreme.

Likewise Friedman’s proposals on tighter gun control, limitations of money in politics, centrally established educational standards, increased infrastructure spending and so on.

Where I do side with Friedman in using the word ‘extreme’ to describe a policy is when he gets to taxation:

“To pay for all this, a phased-in innovation and tax agenda that incentivizes start-ups and hiring. That means: Slash all corporate taxes, income taxes, personal deductions and corporate subsidies and replace them with a carbon tax, a value-added consumption tax (except on groceries and other necessities), a tax on bullets and a tax on all sugary drinks — with offsets for the lowest-income earners.”

Really, this is extreme. It is simple supply side stuff, but plops the burden of taxation on consumption, rather than incomes, which will increase inequality even further, and is very regressive. This is a radical departure from the last century’s general acceptance of a progressive tax schedule.

Then he adds this:

 “An independent commission appointed to review Dodd-Frank and Sarbanes-Oxley to determine which, if any, of their provisions are needlessly making it harder for entrepreneurs to raise capital or start businesses. We need to be sure we’re preventing recklessness — not risk-taking.”

Presumably the American Association of Bankers must have written that proposal. Dodd-Frank is an abomination of a law, not because it imposes capital constraints on the banks, which it does rightly, but because it is almost 11,000 pages of incomprehensible legalese written by bank and regulatory lawyers whose livelihoods depend on interpreting obscure laws. Glass-Steagall, the law that prevented major bank calamities in America for the best part of seventy years before it was gutted and then trashed in the 1990’s took up about 40 pages. Dodd-Frank is an archetype of why we need political reform: the industry has its hands all over the law. Yet it bleats about the “anti-business” nature of it, and apparently has been able to convince people like Friedman that the banks have a good case.

The big banks caused the last crisis, they need to be broken up and reduced in scale so they cannot repeat that level of damage. Ensuring there is no such thing as a “too big to fail bank” would be a radical departure from current policy. It would earn the right to be called extreme – with respect to the industry friendly regime we currently have. So if we are going to review Dodd-Frank it is to strengthen and extend it, not to cast aspersions on its possible effect on high risk lending.

One final thing: the banking industry became a leach on the economy when it shifted from being a provider of credit and began to absorb capital for its own profit padding. Bank regulation needs to get banking back to the boring old days when bankers acted as allocators of capital to the real economy and not as end points for investment.

I won’t respond here to the usual suspects who believe all that is ill in the world flows from rotten private banks – having been a banker myself I just won’t get involved in that debate. But I will argue that banks need much tighter regulation than they’ve been subject to in the past two decades.

Back to Friedman: unfortunately his list has the hallmark of elitist centrist ‘sensibility’. He includes a pile of things that are extreme nowhere but in America, that are sensible and much needed – thus hardly extreme – and then in order to achieve a political balance he tosses in a few pro-business supply side giveaways of the kind that have failed to produce any positive economic value over the last few decades. This may be politically astute in an era of so-called extreme politics, but that can only be the case if our political environment has shifted so radically such that erstwhile sensible policies are now viewed as ‘extreme’.

Instead of calling it what it is, and arguing that our political ‘center’ is actually quite a bit to the right, he is reduced to calling some sensible and centrist things extreme. Which, I suppose, is useful in its own right.

But that’s my point, not his.

 

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Too Big To Prosecute?

Add another advantage to being a big business: apparently you’re too big to prosecute. I came across an article in the New York Time’s DealBook concerning the deal being made between JP Morgan Chase and the government. The bank had, it seems, turned a rather blind eye to the evil machinations of Bernie Madoff and his epic fraud.

So far so good. Banks are supposed to be on the look out for such schemes and to blow the whistle rather than fatten up on fees derived from them.

But here’s the rub:

According to the article prosecutors came perilously close to filing a criminal complaint, but demurred because of the potential unintended consequence of having the entire bank unravel and collapse. This has been a fear of the government’s since its pursuit of Arthur Andersen over its negligence with respect to  Enron drove it out of business. Andersen’s demise cost us 28,000 jobs, although I doubt any were lost long term. here’s the relevant paragraph from the article:

“The government has been reluctant to bring criminal charges against large corporations, fearing that such an action could imperil a company and throw innocent employees out of work. Those fears trace to the indictment of Enron’s accounting firm, Arthur Andersen, which went out of businesses after its 2002 conviction, taking 28,000 jobs with it. Ever since, prosecutors have increasingly relied on deferred-prosecution agreements, which rebuke companies without threatening their health. …”

This strikes me as yet another example of the way in which big business benefits from absurd and unjustified deference from our regulators. A smaller business or an individual would, most likely, not have been treated so politely. After all if a corporation is an individual for the precise purpose of presenting the public with a prosecutable “person” – which was the old premiss for treating a business as a person before the Supreme Court mistook money for free speech in the Citizen’s United case – then the knock on effect of lost jobs ought not play a factor. There is muddled logic afoot.

If a company is a single person for legal purposes, it cannot also be several thousand people for economic purposes. If we are so concerned about all those jobs, then we need to open up the company and allow a more direct prosecution of individuals who commit crimes on its behalf. We prosecute individuals within corporations for their personal crimes all the time, so we have no problem seeing a difference between crimes committed by the business and crimes committed by people who happen to work for the business. The Madoff case seems to be one where the prosecutors think the business itself committed crimes, or at least transgressed the law, and yet refuse to follow up fully on that thought for fear of consequences that are outside of the proscribed punishments.

So JP Morgan Chase gets away with it, not because the prosecution thought it was innocent, but because it is so darned large and might cause a knock-on panic on Wall Street.

Now I get that the prosecutorial hesitancy might be based on the higher standards of proof required in a criminal case, but the article clearly implies it was more than this. I hope not. I would hate to think our regulators were so afraid of big banks that the quiver and quake rather than enforce the law.

That can’t be hastening. Can it?

Oh, and about the fine being levied: it sounds very large, but as we have all been painfully made aware, so is JP Morgan Chase. It will hardly notice the fine, which right now is said to be $2 billion. It’s about time that fines against big businesses were sufficient to grab the attention of management and shareholders. Enough, that is, to get them to weigh the risks of engaging in dodgy business before the fact. And enough to force shareholders to ditch managers who ignored the law after the fact.

I doubt Jamie Dimon will be fired because he runs a criminal organization. Look for yet another internal reorganization; yet another renewal of focus on “trying harder not to do wrong”; yet another PR campaign; yet another employee awareness campaign; and yet more meaningless handwringing in the executive suite. In other words yet more nothing.

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There They Go Again

Are you tired? I’m tired. Our national dysfunction is sucking the energy out of everything. And here they go again.

There have been a flurry of reports about the precise date when the Treasury department can no longer fudge paying the national bills. We will have hit the dreaded debt ceiling.  Presumably we’ll get a bump on our heads. Or something.

Anyway: I have ranted enough about the lunacy of having a debt ceiling. It is just dumb, the debt we are piling up is a consequence of past legislation, not current or new legislation. Besides the deficit is shrinking fast – too fast – and thus the pressure is off on the accumulation of debt. The immediate need to tinker with the budget is, therefore, far less of an issue than it was a couple of years ago.

But we knew that was going to happen didn’t we? After all even in an anemic recovery like ours the safety net costs start to go down as things pick up.

So why am I tired?

Because that self-imposed, and very foolish, debt ceiling is once more being used by the Republicans to blackmail us into accepting their extreme agenda. You know, the agenda rejected in last year’s election.

Today they submitted a laundry list of things they need done in order to support raising the debt limit. It’s an impressive list. It’s also very long. And absurd. Here’s part of the list as per the New York Times:

“They include a one-year delay of the president’s health care law, fast-track authority to overhaul the tax code, construction of the Keystone XL oil pipeline, offshore oil and gas production, more permitting of energy exploration on federal lands, a rollback of regulations on coal ash, blocking new Environmental Protection Agency regulations on greenhouse gas production, eliminating a $23 billion fund to ensure the orderly dissolution of failed major banks, eliminating mandatory contributions to the new Consumer Financial Protection Bureau, limits on medical malpractice lawsuits and an increase in means testing for Medicare, among other provisions.”

So they want to encourage pollution, slash into bank reform, neuter consumer protection, protect bad doctors, and make wealthy people pay for medicare. Well, that last one isn’t so bad. But the rest? A laundry list of sweetheart stuff for big business and other major players in the 1%. A bigger slap in the face for regular folks is hard to imagine.

This is tiresome. The Republicans have become so monotone. Not black and white. Just white. Pure white. And they’re not even shy about it.

No wonder we have no hope of dealing with inequality. They think it’s a good thing. I sometimes decry them as trying to send the country back into the 1800’s or into a type of Ayn Rand winner-take-all world. But I think I’m wrong. The truth is worse. This is overt class warfare on behalf of the privileged few.

And that story doesn’t end well.

When the wealthy disconnect from society, as our current plutocrats have, their commitment to any form of “common good” is eroded. They restrict their lens to their own issues and problems and ignore those of anyone else. They pretend they can survive without the rest. They demean them and resort to nasty tactics like defunding social programs in the name of “freedom from government”. Which they don’t actually mean because they are quick to mobilize big government when it suits them. As in bank bailouts.  This self centered approach to the deployment of government is why recent Republicans have tolerated big expenditures by Washington. In the last three to four decades the run up in the national debt has been bigger under Republicans than Democrats. They used the debt to do things they wanted. They see government expenditure as fine as long as the “right people” benefit. So Citibank is saved for the stability of the nation and is not labeled a “moocher”. Whereas the unemployed or the poor are seen as lazy and thus not worthy of help.

That is class warfare whether you want to see it or not. It is as clear as day. It is the story of the entire Reagan era. It was typified by Romney and his 47% comment that resonated so well on the right.

Can the nation reform itself to get rid of the plutocrats and their control before things get much worse?

I don’t know. But I am tired of these fights. These endless anti-democratic fights. The plutocrats lost the last election, but like spoiled brats everywhere, they are now stamping their feet and refusing to acknowledge that loss.

Until we break their power this will go on, and on, and …

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The Shiller Hedge

One of the reasons economists can be really annoying is that they always hedge. Or rather the more ethical, sober, and diligent ones do. This is, I think, because they have no strong theoretical footing. There is too little definitive in economics. Most of it is couched in excessive caveats. And even then it rarely says much that matches what we observe happening. Instead of saying “if this … then that”, most economics says “if this, if this, if this, if this … and if this … then maybe that, but only if this as well”. Worse, most of those caveats are other-wordly. Thus making the entire enterprise surreal.

But enough of that.

The result is that when a clever fellow like Shiller opines on something potentially incendiary or provocative, he feels obliged to be ultra-careful. Almost to the point of being noncommittal. The theoretical ground work being sufficiently unreal and riven through with unreal assumptions that any statement based upon it is necessarily equally riven through with doubt.

So when Shiller launches a shot at the financial industry it comes across as a nuanced and very balanced argument. Certainly restrained and well considered. And thus not much of a shot at all. You could be forgiven for not realizing that Shiller is lambasting finance and all who sail in it. In fact you could be forgiven for thinking he thinks finance is jolly good, in an economics kind of way.

If you look at banking and finance as an allocative device whose social function is to direct funds to the best projects available at any given moment you wouldn’t be far wrong. So you could then go on and try to measure how well its done. That’s very difficult because there’s a mess of other stuff that could get in the way of good allocation, but over time that stuff ought to be overcome.

So the question is: has our unregulated banking and finance system done a good job? Is our available pot of funding well allocated?

No. No it’s not.

This is, I think, part of Shiller’s message. The financial system has become something that makes money, not through good allocation but by through trading for its own sake. It diverts funds from the real economy – building factories, or financing new businesses for instance – and channels those funds into rent seeking activities.

Rent seeking being an activity that has no purpose other than to create a profit. No value is added to the economy at all, but the banks make a profit anyway.

And since rent seeking is easier than asset allocation – which is risky and requires tenacity and skill – it attracts hordes of clever folk who see an easy route to riches. They thus don’t go off into the economy and do socially useful things that end up creating jobs and wages for others, they sit at trading desks and gamble in order to earn fat bonuses. Or they run funds that buy companies and then fire the employees in order to recoup their investment and earn a profit.

What Shiller is trying to say is that deregulation was a total bust; that finance absorbs way too much talent; that the economy is thus messed up; and that we ought to be doing something about this.

Fortunately I am unencumbered by Shiller’s professional need for restraint. I see no need to hedge.

So I can say it: our banking system is screwed up and bankers are still ripping us off. Which is awful considering what the industry did to us a few short years ago.

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Parbuckle Policy?

For those of you buried in your debt debacle, government shutdown, defund Obamacare bunker allow me to offer you an insight into effective activity: the parbuckling of the Costa Concordia. What a success. The operation to re-float the stricken cruise ship went without a hitch. It was the most complex and largest effort of its kind ever undertaken, costing around $800 million so far – more than the worth of the ship when it was in good shape – and occupied a motley crew of 500 engineers, salvage experts, divers, and ten biologists. The latter being there to oversee environmental concerns.

I had no clue what parbuckling was up until now, but clearly its a careful, well thought through, and cooperative effort, with the goal being the ultimate shunting off for scrap of the 114,000 gross tonnage monster stuck on the rocks just off a little Italian island. The statistics alone are awesome. Thirty thousand tons of steel were used in the operation. Huge sponsons were attached to the exposed side of the ship and then fifty-six chains, each fifty-eight meters in length and weighing about twenty-six tons, were used to winch the ship off the rocks so that seawater  could flood into the sponsons and act as a weight to pull it upright. Once accomplished, those same sponsons were then filled completely so that they weighed the ship down and settled it thirty meters deep onto a one hundred and fifty meter long platform atop an artificial seabed made up of sixteen thousand tons of fill. There the ship will sit throughout the winter while it is fitted and fixed enough to be floated and hauled away to the scrapyard.

Phew. well done everyone involved.

Now maybe we can employ a similar process to overhaul US economic policy.

Perhaps we can winch it upright and off the rocks. Let’s face it: policy has been stuck aground for a very long time. We have made no progress, but the damage has accumulated steadily as the natural course of the economy has corroded and scarred it deeply. Eventually, if we are very lucky, we could even tow our policy off to the scrapyard and build ourselves a shiny new one.

Well, I can dream. Parbuckling is much more interesting than economics on two fronts.

One is the tired and fruitless quasi debate within the economics profession itself. After years of crisis nothing substantial has changed, nor is there much prospect of change. The same players say the same things. Chastise each other the same way. And generally display a total disregard for the social damage they managed to inflict with their false theories. Not that anyone is admitting to falsehood. Economics has creaked to a halt. It hit the rocks sometime ago – I would argue about seventy years ago, but that’s just me – and since then has devolved into a massive game of he-said she-said mudslinging, fact avoidance, and dyspeptic repetition of increasingly politicized nostrums. I don’t think we should dignify the edifice it has become with the moniker of “theory” any more. It has been exposed as a set of opinions of varying complexity and varying degrees of irrelevance. That there is an economist to fit any political idea no matter how half baked or extreme tells you all you need to know about how “scientific” economics is. The profession, such as it is, needs a good parbuckling, but won’t get it from within the safety of academia where path dependence dominates and prevents concerted action.

The second is the continued anti-social rantings of the Republican party. It would be nice to have some serious right of center ideas being floated to spark sensible discussion about policy. Other, of course, than the ones that the Democrats float so that they can have a debate amongst themselves. Right now we do not have a loyal opposition. By that I mean we don’t have a right of center party responsible enough to compromise sufficiently to keep the wheels moving whilst expressing an alternative view. The modern Republicans cannot bring themselves to compromise on some topics while oppose on others. So they simply oppose. And thus grind everything to a halt.

I always get criticized for blaming everything on the Republicans. Why, I am asked, is it not reasonable to blame the Democrats and/or Obama for not compromising too? I can only shudder at the blindness implied by the question.

Blindness to the extraordinary right wing shift in America over the last four decades. The entire economic debate takes place on territory once thought of as right wing. Now it is considered centrist. The total triumph of right wing ideas back in the early 1980’s and cemented into place in the 1990’s even when a Democrat was in the White House, has left us a false sense of balance. There cannot be two sides to a discussion when all we are talking about are variations on a right wing theme. Or, put another way, how can the Democrats compromise when they have already conceded the big talking points? Asking them for more is asking for total capitulation of any long held loyalty to their core values. The shame is that some feel obliged to do that. Obama being one.

No one is fighting for the working family. Somewhere it became accepted that stagnant wages were not a political issue. Or that to speak of inequality was to be rude and offensive to those who have been lucky in life and  made a pot load of money. Or that unemployment of 6% to 7% was “normal”. Or that the salaries and bonuses of the elite – not just CEO’s but the entire corps of professionals that litter the top layers of  wage earning – were justified by their “contribution”. Whatever that is. And a contribution that hasn’t noticeably altered our economic competitiveness much if at all. Along the way it also became acceptable for banks to syphon off capital for their own use – aka gambling – rather than lending into the real economy. It also became normal for our corporations to be rewarded for undermining wages here by shipping jobs abroad. It became usual to discuss the impending doom of our social programs despite the lack of evidence that they were, in fact, doomed. And it became perfectly reasonable to funnel mountains of cash into our elections and thus corrupt democracy and hand control to the very rich.

Of course no one is fighting for the working family. They don’t count. Our elite is solving the problems that affect the elite. It isn’t leading the nation.

And this is why the entire impasse nowadays is so intractable. In economic terms, we have ended up as a right wing country far from the old centrist 1950’s and 1960’s. We will shift back, but right now there’s no room anymore to compromise from the left without giving up entirely on the concept of working families, middle class and other bedrock concepts of those centrist years.

The right has a similar problem, although as the active agent they are responsible for the next move. Having deregulated, favored profits, handed over power to big business, demeaned social programs, denounced government, undermined unions, and overseen the stagnation of wages, they have produced the modern economy. It is built in their image, whether they like or admit it or not. And it is stuck. Their trajectory is to go further to the right into extreme and uncharted territory. They criticize those of their own who falter at the prospect of this. They call them not conservative enough. They have had a forty year run of policy success, albeit sometimes from Democratic sources – Clinton is culpable for much financial deregulation. They have won the big battles and used up their old ideas. Any further victories have to come from ideas further afield. This implies a total break with the past. However good it may have been.

The point is that the right no longer about those bedrock concepts. It is obsessed with its idealist and ideologically extreme vision for America. In order to fulfill the goals of its more extreme members it has to careen along and undo all the post-war consensus. It has to plunge us back into the late 1800’s. That group of extremists is large enough to pull the entire Republican party along. It is not mainstream. It is not centrist. And it cannot abide compromise. Which is why it resorts to hostage style tactics when faced with opposition or failure. It cannot come back from the brink without admitting defeat and setting in motion a move back to the center. That would imply undoing some of the policy victories of the Reagan era – admitting that Obamacare is a good program is an obvious example. So it cannot admit that it lost the last election. It cannot countenance the onset of Obamacare, and it is willing to employ scorched earth or destructive tactics to force itself on the rest of us. It has nowhere to run.

So our economic policy is stuck on the rocks like the Costa Concordia, slowly rotting away, a hulk looming over what could otherwise be a pleasant and wealth making recovery.

It needs parbuckling. It needs salvage. But until the extremist stranglehold is broken the engineers cannot get to work.

Oh, and its only a couple of weeks until the debt ceiling crisis.

Back to the bunker.

 

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