Grover Norquist and Smurfing

November 25, 2012

"Smurfing" is the term The Economist (Nov 24 2012) identifies as the label given smuggling of cigarettes wthin the United States.  According to The Economist, the cigarette tax in Virginia is $.30 cents per pack, whereas in New York State, the tax is $4.35 per pack. Predictably, there is a huge trade of smuggling cigarettes up I95 from Virginia to New York.

The question is to Grover Norquist and those of the far right who want to dismantle all Federal Government (except, of course, the military, which they want to expand): How does it make any sense for the 52 states of the Union to have different cigarette taxes? This differential results in 3 major problems: (1) we encourage smuggling; (2) states with high taxes lose a major part of the revenue they had hoped for--e.g., The Economist says New Jersey, with a tax of $2.70 estimates that 40% of the cigarettes sold in their state are smuggled in; and (3) we then have to devote a huge police expense to trying to catch smugglers.

Grover and friends, wouldn't it be better for everyone if the 52 states got together (that's what a federal government does) and voted on one cigarette tax, with the proceeds of that tax to be distributed to each of the states in which it is collected?

Of course, this would be likely to result in less aggregate expense than the 52 states currently spend on all this, would eliminate the smuggling and the smugglers, and it would not take much federal government staff of expense to arrange this new arrangement.

I will be waiting for a good explanation of why this would not be a good idea, and just one (small) example of a reason for a federal government (as opposed to returning all powers to the states--or, would that be to the cities and/or the communities--how are do you wish to go)?

An American in England

November 11, 2012

Watching the two scandals that have emerged regarding BBC journalism across the last two months has been troubling in terms of our capitalist system.

On the one hand, we do need to hold leaders of businesses such as this more accountable for performance of their businesses, but there is a significant counter tendency to throw out the leaders regardless of who's responsible for what went wrong.

There can be two mistakes that are made in the way this kind of thing comes down: The first is when the wrong evaluation of responsibility takes place. Examples abound. Often, this is when the economy takes a left turn and the business suffers. Sometimes, often, there is no executive who could rightly be judged to have anticipated this and to have had a plan in mind to avoid it. Nevertheless, we throw out the CEO and others sometimes, and we go out to find another executive. All of this adds up to "whitewashing" the situation and forcing a "scapegoat" to be held responsible for the problems, plus a huge loss of effectiveness while a new team is installed and comes up to speed. This is done by Boards, often, to preserve their own positions--it's more risky for them to stick with the present executives through a crisis, although that might well result in better long term value for the enterprise. It looks better for them to be "decisive" and throw the team out.  Presumably, everyone can go away feeling satisfied that this kind of thing could never happen again--but it inevitably does.

The second way is when someone like George Entwistle is forced to resign, when his time in office is so short--54 days in his case--that it is normally extremely unrealistic to expect he would have been able to uncover journalistic flaws and holes such as to prevent these two scandals developing. And, best as this American in London can see, he has not tried to cover anything up, was busy setting about to get to the bottom of it and fix the system.

British broadcasters even criticized him for his not reading the Herald Tribune on the morning of the revelation that the 2nd scandal was clarified--the accused of sexual abuse did not do it, he later learned. Entwistle had been off early to make a speech that morning and hadn't time to read the paper. Broadcasters interviewing him criticized him for bad priorities--which seems ridiculous on the surface--if he had known such information was to be revealed, he surely would have read the paper, but no one knew that!

We don't know this executive. Perhaps he's not the best who could be found. Nevertheless, England, you're moving too quickly to judge someone who hasn't had the opportunity to try to make a better BBC for you. And, how is that most of the press has been so complimentary to the oversight trust and its executive?  Didn't they choose Entwistle, and what support did they give him to get started? All of the people and processes that resulted in these problems are the creation of his predecessors, and some of the subordinates, some of whom he would surely have properly disciplined, given time to make sure his findings were fair.

In a case like this, why is there no-one who is willing to stand up and defend the long and proven journalistic record of the BBC and also to defend the right for this man to have a chance to make it better? Why does everyone seem to want to take the position of being the most "moral?" What if he had been there 43 days? 33? There are often two sides to morality around an issue, and we believe you erred in this one by leaping to what is seen to be the side that will gain most popularity with the vast public. Where is the leader who is willing to stand up for what she thinks is truly fair and best?

This kind of thing happens in the US too, but in this case, England, shame on you!

Immigration

November 8, 2012

We are hoping that the 48th President of the US will make immigration reform a major agenda item.

As Michael Teitelbaum of the Sloan Foundation so clearly outlined--here are some of the diametrically opposed underlying assumptions: Immigrants are seen...

• as either major contributors to national prosperity... or as serious drains on national income. 
• as ambitious and hardworking strivers who seek to better their lives by immigrating... or as 
  freebooters seeking the benefits of publicly-­‐financed health, welfare and education benefits 
• as committed to and demonstrating real success in integrating into US society... or as perpetuating social divisions and poverty by choosing to reside in immigrant enclaves 
• as enthusiastic supporters of US society, indeed adoptive patriots with a high propensity to national service in the US military ... or as residents-­‐of-­‐convenience, of questionable loyalty, who seek only economic advantage and contribute to political divisiveness, extremism and even terrorism 
• as the world’s “best and brightest”, talented scientists and engineers whose high skills contribute to US competitiveness ... or as poorly-­‐educated and low-­‐skilled workers whose US 

There are several basic issues, all arguing in favor of restructuring and liberalizing our immigration policy: The first issue is our heritage. We are a nation of immigrants, which is now threatening to close the door on immigration. Don't we give any credit to the benefits of immigration that across less than 250 years, raised the US from a few disgruntled European immigrants, to the status of the strongest nation in the world? There has to be some credit given the drive, energy, hope, determination, and persistence that immigrants of all kinds brought to our shores. This is one of our unique distinctions in the world--that we are a nation that can tolerate and accept people of other cultures, religions, languages, and we can find the way to integrate and yet respect the differences of peoples from everywhere. Let's not forget our heritage!

Now, 250 years later, we have a very tangible, indisputable reason--we are a nation which is aging, with a birth rate inadequate to generate youth to work and pay into the social security system to provide care for a population which will live much longer than we expected, thanks to many things, including the advancements of the science of medicine during our lifetimes. If we cannot produce the youth, we need to invite them to our shores--they are waiting! We take in about 6.5 million annually now, but that's inadequate to meet the needs of our aging population.

Then, there is the contradiction of our driving the world to embrace globalism, free trade, and all of that, launched by the Reagan administration and supported by every administration since then. We have dominated the international governmental organizations' leadership staffing and their agenda and policies, all of which leads to the developing world being pressured to open their borders to foreign trade. There has been much good to attribute to this drive. We can take partial credit for helping to enable China and India to free 500 million people of poverty since 1980, as an example. However, this drive led by the US has also meant that there are many countries where the opportunity of globalization could not be captured, at least not in the methods demanded of them by the World Bank and the IMF, populated by Washington ideas and policies.

Many of these countries had no benefit and some had increased unemployment, deeper poverty,as they found their limited (usually agricultural) based industries suddenly forced to cope with cheap imports, in some cases resulting from subsidies from wealthy governments seeking to protect their own wealth interests. Examples are the US subsidizing of cotton farmers in the US, such that cotton farmers in sub-Saharan Africa cannot compete, or the EU imposing tariffs on banana imports from countries other than their former colonies.

And, while we promote this openness of trade (to our benefit, far and away more than that of any other country), we deny the disadvantaged of those countries to come to the US and find a job, pay taxes, and have a chance at a life that is better than where they are. How can these two policies co-exist?

Then there is the moral issue: We were born in the US. We need to imagine, just for a moment, how we would feel if we were born in sub-Saharan Africa or in a poor town just south of our Mexican border. Do we really imagine that, seeking the best opportunity for ourselves and our families, we would not try almost any way possible to have a chance at the opportunity in the US? I know I would swim the river for the opportunity!

That leads to what Conservatives may find to be the lynchpin of their anit-immigration argument. I find it so ineffective to hear that a conservative ran into a legal immigrant taxi drive who is frustrated with illegal immigration. That is probably true of most who suffered through our extraordinarily difficult process, but it doesn't man anything in terms of the answers to the big questions.

It seems that for conservatives, everything hinges on the reportedly 12 million illegal immigrants, mostly from Mexico, that live in our country. It almost seems that if they can win the argument to deport all the illegals, then that's the whole issue resolved--just keep the system we have, build higher fences, etc.

Parenthetically, we don't know, but can imagine that a good many of those illegals in the US may well have tried to immigrate legally--and if you haven't immigrated legally, or tried to, you may not know how extraordinarily complex and difficult it is to do so, depending on your country or origin, to some extent. So, many of the illegals may have tried to be legal, but were denied, and perhaps many were denied for what the State Department calls "discretionary" reasons, which means that while I found nothing wrong with your record, I just have a bad feeling about you--and there is no recourse available if I am the agent handling your case.  We have skilled lawyers available in the US for those who can afford it, and they tell me they know which one of our immigration offices and which officer is most amenable to people of certain types of backgrounds, and which are not. What kind of system is this?

As to those who are here illegally, no one can dispute that they should have come legally, but the burden of that is on both them and on us, for the difficulties we imposed on their coming. But, they're here. And, for those who are paying taxes or are willing to do so, and do not have a criminal record, let's give them a chance and let go of the irritation and all the associated unresolved issues as to who is responsible--us or them, and let them stay. For the others, we need a broader set of criteria to break them down into groups and evaluate, assist, etc. For those involved in crime, etc., deportation may be appropriate, but even here, we need to examine the issues involved.

We need to liberalize and streamline our rules and procedures. And, it's not right to just admit the wealthy who can buy homes or start businesses and hire people--yes to them, right away, but we also need to be open to people like those who came across on the Mayflower--most of them were not engineers or business investors.

Lastly, there can be little doubt that the world is careening toward one world--just take a look down your main street and notice the dramatic change in enthnicity of people who share space with you. We can go about this worldwide integration reluctantly, with resistance, even force and violence, or we can go about it willingly, thoughtfully, and with belief we can find the good in it--as we have so many ways across our 250 years. But, either way, it is inevitable--the world is becoming one world. Let's be leaders in the integration.

Fixing the Banks

November 6, 2012

Having devoted two posts to defending the personal integrity of most bankers, who have been excoriated not only by Joseph Stiglitz, but by America's common man as well (with rhetoric from left wingers and anyone who can hope to gain from such blame assignment, and this is a rather all-inclusive group), we now turn to what's wrong and what to do about it.

Stiglitz is right that the bonus and stock option system of bank management is wrong. It tends to reward for short periods of performance, like one year. What's needed is a longer period of evaluation, minimum of 5 years, long enough to let the performance of their decisions play out.  And, any amounts paid out in the early years should be minimal percentages, with clawback provisions in case loans, derivatives, or other assets created or decisions taken, turn out to have negative consequences.

Now, let's point out that the same is good across all of industry. It's not only bankers who use the short term incentive plans and have no significant penalties for failure across a longer term. If we want this to be the model in our particular form of capitalism, we could actually require that by a simple set of laws.

Another benefit would be to take Dodd Frank to a stronger level and take out all trading in derivatives, except to the extent it is at customer request to hedge interest rate exposure. We got partially there with Dodd Frank, but not all the way. Such types of activities and investments which are not clearly for customer business transaction support should be put into a separate entity by those who want to engage in it, with separate shareholders and separate management--e.g., the Wells Fargo Bank for Derivatives and Other High Risk Activities. Such entities would instantly be held to a much higher standard by their clients, considering that they are no longer protected by the strength of the bank and it's huge base of customers. Capital demands on these institutions would be much higher, and those who want to play in this casino can do so without affecting the public.

This would, of course, leave bankers who want to write mortgage loans to their personal clients, to have the right to sell those loans. So, they could structure packages of such loans, dividing them into segments for investors of varying risk/reward appetites, and sell those structured products. Products of that sort are sometimes called credit derivatives or mortgage derivatives.  They wouldn't be allowed to trade in those loans for their own account, but they would be allowed to buy them for their wealth management clients.

We should have minimum net worth and risk acceptance policies for wealth management investors who  accept products such as derivatives and hedge funds in their portfolio's.

Next would be a limit on size. There is simply no way around banks being too big to fail except that. We try and try to come up with regulations that will prevent excessive risk taking, but for institutions (of any kind) which are leveraged 10:1 or thereabouts, there simply will always be a risk of failure. More on regulation momentarily.  So, we should define what is the maximum size to allow a bank to grow to, best defined in share of market. 5% would be a decent limit for consideration. Right now, we're around 50% of the market when combining the four largest banks in the US. That's too large.

The problem with regulation: We need regulations, but if they are too complex and if they require too much transaction analysis, the regulation is not effective. The reasons are that banks pay a great deal more for their decision making employees, such as lenders, and if the Federal Reserve's hires, who generally know far less about loan analysis, try to 2nd guess the bankers, it just doesn't work. They are directed to find problems, so they find some--but what they find are usually not the pockets of greatest risk, and an enormous amount of time and money is wasted on the part of the Fed and also the bankers. Better would be simple rules which end up forcing the unconventional loans to a different group of uninsured institutions.  Of course, this means some market controlled inefficiency ala Adam Smith, but the tradeoff is worth it.  Here's an example of a simple regulation: Minimum 15% down payment on any real estate loan, no matter the credit strength of the borrower--and the 15% cannot be borrowed from any other party--must come from liquid resources of the borrower. This is easy to monitor, and those who need to borrow (and can justify) with less down, can do so at non-bank, non-insured institutions. Of course loans with 15% down can still default, but at least there would be a lot less--and the regulators can't figure out which of the below 15% loans are risky, anyway. Many of those borrowers pay on time, but the down payment minimum would eliminate a significant segment of risk.

Here is another sure fire way to reduce risk for loans made by banks: limited liability. Banks should be prohibited from making loans with the borrowers exculpated from liability. There should be a minimum of liability that is required when borrowing from a bank, whether the borrower is consumer or commercial. 10% would be a good start. Competitive pressures have pushed banks to yield this valuable provision, and if it were universally required, bankers would welcome it.

And when commercial banks syndicate (sell to others) portions of the loans they create, they should be required to hold until full repayment, a portion of the loans made--again, 10% would be a good start. That way, they can't persuade themselves that it's a good loan for others.

Political campaign limitations should be voted in by the America people, since the Supreme Court is unwilling to do see it this way. We should not have massive amounts of money funding millions of advertising campaigns to enable election of people friendly to the wealth of the nation. This includes friends of bankers, but by no means limited to that industry.

And, those who work in government should sign a pledge not to work in any industry with which they had any association while in government, and we should not permit those in private industry to take on government oversight jobs involving the industry from which they came. A waiting period of 5 years should be sufficient. Similarly for lobbyists--5 year waiting period going in either direction.

This is just a start--but it would get us off to a good beginning to lesser risk, fewer failures, and less downside to the American public.

Bankers and Their Problems/Mistakes

November 2, 2012

In our previous post, we defended the integrity of the employees of banks, who in our opinion, are little different from those in the technology industry or elsewhere, in terms of their adherence to law and regulation, desire to do the right thing, or, on the other hand, in terms of the (small) percentage who are intentionally attempting to cheat in order to gain advantage.

We asked the question: "Is there a moral obligation that goes beyond the law and regulation?" E.g., if one is abiding by the law and regulation, in any industry, then is it fair, or is it reasonable, for us to expect behavior to adjust to an even higher "moral standard?"

Neoclassical economists (and most Republicans) would seem to answer that we have too much government (law) and regulation, in the first place, and self interest will provide the best results in the marketplace, assuming minimal government intervention. We don't know of any prominent right wing writings that call for a higher moral standard than already exists as defined in the current law and regulation, which they regard as excessive.

We argued that Stiglitz unfairly vilifies bankers for behavior that was in the vast preponderance of cases, well within the law and regulation--otherwise, our system is well designed to punish, and, as he complains, there was relatively little malfeasance and punishment found and delivered. And, while none of the administrations across the last 30 years in the US or the UK has significantly increased regulation, it still is true that our two countries are two of the most regulated in the world, with the most stringent laws.

Should we say, then, that the biggest banks (investment banks included), with the greatest talent, should not create new innovative instruments, such as credit derivative products? These are products which are admittedly extremely complex, extremely hard to explain to unsophisticated investors. But these products, when successful, efficiently deliver great benefits to the market. Those who want to invest in high risk can buy a tranche of the high yield and high risk portions. Those who want little risk can buy the lower yield portions.  The combination of all this creates highly marketable instruments which deliver a lower overall yield in the market, and lower mortgage costs to the homebuyer. What's wrong with that?

And, sometimes, in the ups and downs which are now characteristic of our financial markets since Reagan/Thatcher unleashed neoliberal economics, there will be market crashes, in which the best educated of the analysts were simply wrong--they underestimated the downside risk of the market collapse in their models. They didn't do this intentionally--they simply tried to use a "reasonable range" from best to worst outcomes. If one uses the worst worst imaginable outcome in modeling any future scenario, one would never make any investment--isn't that right? We assume examples are not needed--it's so self evident to all when we think about it.

Is this any different, really, from what we might see, and defend as the nature of our wonderful "capitalism" in any other industry? Don't we find that there is a continuous stream of failures in all industries as competitors fight for opportunities? Most of the startups fail, and we hope that the few which succeed will provided returns to more than make up for the losers. Blackberry devices may be failing, while iPhones may be succeeding. Investors in Research in Motion are losing money. Investors in Apple are making money. If Apple had used the worst possible scenario for various technology failures, their device would cost so much that no one would buy it. As it is, it's the most expensive.

So, if the creators of credit derivatives, or many of them, with this new product, failed, why do we impose a different standard on them than we impose on Research in Motion? We certainly could argue that the management of that mobile device company misled us with promises of its overwhelming virtues. But, we don't. Why?

Did the bankers make mistakes? Yes! Did the bankers benefit from largess of government? Yes, in at least three ways--regulation (and the process of poorly administering regulations) and law that was less than effective; and, by reason of the Federal Reserve's providing such low cost money as to subsidize the banks through "rents," as it is known in economics; and, by "bailing out" the big banks when their excesses brought them to near disaster. It's also true that top management of the banks did not suffer enough in terms of their salaries/bonuses/jobs, but in our opinion, that's more a characterization of our entire economy--all our public companies--not just banks. Auto companies were bailed out, too.

And, again, none of this was "illegal" or in violation of regulation. It was government (if we include the Fed, not free of government influence) that decided to do these things. So, why doesn't Stiglitz focus more on the mistakes of improper governance, rather than piling criticism on the banks? Is it perhaps because he too falls into the camp of believing in small government and thus cannot stomach the thought of better regulation and stronger laws?  Admittedly, he does address the rent seeking of the banks through the Federal Reserve, so we gather he would like to change that. The bailouts were not the decision of the banks, well received by some troubled banks and resisted by stronger ones (JP Morgan and Wells Fargo, for example). That was the government. Should we criticize the bankers for that?

So, we can criticize the banks for making mistakes. We can criticize them for sending their lobbyists and their campaign contributions. We can criticize them for failing to predict the disastrous drop in the economy in 2007/8, and for aggressive risk taking which they undertook in the heyday of 2004-7, before the drop, underwritten, so to speak, the cheap money policy of the Fed (government). We can criticize them for straying away from their primary purpose of taking deposits and lending to the public. We can say their management profited too much. But, we can't say they were generally operating outside law and regulation--that's not proven and that's not true. Arranging "robo-signing" of mortgage documents was not an attempt to deceive anyone--it was just a poorly executed attempt to deal with the overwhelming volume of requests for mortgages (resulting from the Fed driving down interest rates in its attempt to prioritize its focus on inflation over its responsibility for full employment). It was just another mistake, like any other in the capitalist economy.

Before concluding, let's return to the question of morality--is Stiglitz making a plea for bankers to rise to a higher level of conduct than is required by law or regulation? Is he saying the credit derivative products are immoral--perhaps because they are too complex for many to understand, or because the risks of such instruments at times of cyclical crisis are high? We are arguing that the basic criticism should be in the absence of appropriate government (and Federal Reserve) action, which was driven by the growing influence of vested wealth interests in every segment of our society.  But, let's agree on one final observation on human nature--given the nature of our capitalism, it is not likely that any call for a higher moral standard is really going to result in significant change, unless such calls are directed more critically toward changes in government and regulation.  Any other view of such a plea could only be interpreted as a call for something other than capitalism. This will be the subject of later posts.

Milankovic's excellent book of 2011 (The Haves and the Have-Nots: A Brief and Idiosyncratic History of Global Inequality) puts it well: “The root cause of the crisis is not to be found in hedge funds and bankers who simply behaved with the greed to which they are accustomed (and for which economists used to praise them). The real cause of the crisis lies in huge inequalities in income distribution that generated much larger investable funds than could be profitably employed. The political problem of insufficient economic growth of the middle class was then “solved” by opening the floodgates of cheap credit.” P196

Most all of the failures of banking should be seen as failures of our brand of financial capitalism, and if we want to change it, that's not going to happen by simply criticizing the banks. It has to happen at the level of how the government manages the economy--we are in need of an overhaul there!

Introduction to Globalization

November, 2012

Before signing up the SOAS course, I naively thought that globalization was about the movement of people. I thought it was most significant in what we see here in San Francisco, or even in my home town of High Point, North Carolina, a much smaller town. In every place we visit in the US and in the world, we find a wide array of languages, ethnicities, customs, dress, behaviors, that were not prevalent when I was growing up. I though globalization was a social issue--dealing with how do we all best "get along" with each other, accept each other, and cooperate in making our communities meet our needs.

It is about that, of course, but it turns out to be much more, as defined by many scholars and authorities. It's also about trade (and trade tariffs, embargoes, restrictions, etc.). It's also about economics. This is a very big part of the study and understanding of globalization, as our jobs, wealth, and many of the benefits of our lives are defined in terms of economics. It's also about how governments collaborate or fail to do so, and about the rules of the road in terms of how we best maintain the quality of the planet and share the burden or maintenance in a fair and rational way. It's about culture and faith and whether we are drawn more to homogenity or whether we can protect the valuable elements of our individual beliefs and cultures. It's about all of this and more. And, it's not new--we have been trading and moving around this planet for thousands of years. But, it does seem to many that the pace of globalization is accelerating rapidly and bringing with that heightened pace, a whole new set of opportunities and challenges.

One last thought for today: In starting the reading the half dozen books I am into now, I began with the presumption that the invisible hand of the market would be the best way to deal with the issues of globalization. As an example, I started with feeling exasperated that some Americans blame China for "stealing" their jobs," while failing to acknowledge they they shop at Walmart and save significant amounts of spending money by buying quality products made extraordinarily cheaply in China.

I still feel that way, but I do now see that there is much more to consider. There is another side to all of this. The interests of corporations are rightfully in their own betterment, and so are those of countries, and if we don't find better ways to resolve some of them, we'll have huge problems in our world. One example--our agricultural subsidies in the US are enormous, and those (as well as a variety of trade restrictions, tariffs, etc.) make it impossible for some poor nations to supply us with food at prices which would be (a) well below our cost for domestic production; and (b) lifesaving sources of income for certain poor countries which only have agriculture to offer to the world.