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Monthly Archives: March 2013

I remember, as a young kid, seeing a newspaper, the neat columns with densely packed print, and being awed.  This was how people received news about the word, this was how people knew what was happening around them, this was key to how people made decisions.  I envisioned people sitting around keyboards, pecking away, agonizing over every word, lest something remotely inaccurate be placed into print and consumed by the public.  I knew that I could never do anything like that, would never want to, what if one keystroke was out of place?  People could get the wrong impression about the world and chaos could ensue.  I knew I could never handle that kind of pressure.

Skip forward a number of years, and as a regular consumer of news I’ve been fully disabused of that childlike conception of news writing.  But I’ve thought of it again, and its sadly comical distance from reality, with the recent ten year anniversary of the Irag war and the attendant mea culpas issued by the various journalists and commentators who bought the line on WMDs and supported the war.

Andrew Sullivan, David Ignatius, and Jonathan Chait are but a few of those explaining/apologizing for their past misdeeds.  They are all gainfully employed as far as I know, Andrew Sullivan has recently started an independent blog venture that looks so far to be a success.  It appears that journalists have something in common with bankers, as Keynes notes:

A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him.

So too with journalism it seems, being wrong about matters of the utmost consequence isn’t a problem, as long as you are wrong in the same way your colleagues are.

There is no formula to detect true repentance, but no one has resigned due to their failures or inadequacies leading up to the Iraq war as far as I know.  I could be wrong but I doubt that many are donating significant portions of their salaries to charities that are helping the millions of displaced Iraqis, or Iraqi orphans, or wounded US soldiers, or the families of dead US soldiers.

If I were a cynic, I might think that the public, ostentatious self flagellation were more indicative of a bout of moral preening than true, deep, and humble regret for a serious transgression.  The red marks from the lash displayed with the pride of someone taking the moral high ground, not the shame of a sinner.

Even young Ezra Klein got in on the act, publicly mortifying his flesh.  He begins and ends the piece with: “I supported the Iraq War, and I’m sorry.”  That’s certainly awfully big of him.  But, at the time of the Iraq war Klein was a college freshman, without any means to affect public opinion as far as I can tell.  So it’s hard to see what he has to be so sorry for.  But he is, and is eager to expound upon his analytical failure:

But at the core of my support for the war was an analytical failure I think about often: Rather than looking at the war that was actually being sold, I’d invented my own Iraq war to support — an Iraq war with different aims, promoted by different people, conceptualized in a different way and bearing little resemblance to the project proposed by the Bush administration. In particular, I supported Kenneth Pollack’s Iraq war.

So, really, Klein supported the war he had made up in his head, not Bush’s war:

We got our war. More to the point, we got Bush’s war, which was, in the end, the only war on offer.

Yes, we did, and yes, it was.  We got Bush’s war, which was the only one on offer.  In hindsight that kinda makes sense, considering he was commander-in-chief at the time.  Klein was a college freshman…so his war didn’t have much of a chance of getting past the planning stage.  But anyway, he’s really sorry for his failure of analysis when he was a college freshman.  He’s very publicly sorry, just like his colleagues are.  Truly, following the herd can lead you to some very strange pastures.

Casus Belli

This presents a question:  How does a responsible citizen decide when it is appropriate to go to war?  You’d hope a citizen could take the evidence presented at face value and then make a determination, but that isn’t the case.  The bill of goods sold on WMD before Iraq turned out to be either inaccurate or simply manufactured.  You might have been able to find some skepticism regarding the claims if you looked hard enough, but how do you assess who is right, particularly when many aspects of the information provided is classified or otherwise opaque?

Perhaps a deeper question is: Does it matter?  Ultimately, does it matter what responsible citizens think about matters of war and peace?  I’d certainly like to believe so.  But in looking back at American history, I can’t think of a case that when a sufficient number of political and business elites wanted war, that they didn’t get war.  I’d be curious if there is any counter example, of a drive for war being completely stymied by popular sentiment.

It’s just too easy to stoke fear and make emotional appeals to patriotism and xenophobia, and to marginalize dissent.  And it’s not like these are new tools, the sinking of the USS Maine, the cause of which is still unknown, was blamed on Spain in the press, leading to the Spanish American War.  World War I was widely supported by the US press with embellished accounts of German atrocities and with anti war sentiment being viciously suppressed.

Is there an effective way to counter this?  You could point to the Internet as a medium for dissent, but all sorts of voices can be amplified, not just reasonable ones.  In the end, I think people have to change, and I don’t see that happening.

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The Friday before last, the Senate Permanent Subcommittee on Investigations convened a hearing to take testimony on huge trading losses taken by JPMorgan’s Chief Investment Office.  The CIO was trading in complex derivatives and taking huge positions, the losses from the speculation may hit $7 billion.

Why does this matter?  JPMorgan is a too big to fail bank, and if it implodes taxpayers (that’s us, unless you have an account in the Caymans) are on the hook because of the systemic risk involved.  And not many people want a repeat of 2008, with a TBTF bank blowing itself up.  So in theory, there are regulations written to prevent banks from taking outsized risks and regulators in place (some of them physically at the banks) to make sure that the banks are following the regulations.  But somehow that didn’t stop a unit at JPMorgan from sidling up to the green felt at the casino that is the derivatives market and burning through say about 7 billion dollars.  Hence the investigation, hence the hearing.

Matt Taibbi has a good half-live and half-after the fact blog post about the hearings here.  The second half is particularly worth reading, a darkly funny peek inside what goes on in these banks.  As the Permanent Subcommittee on Investigations chairman Carl Levin put it:

It exposes a derivatives trading culture at JPMorgan that piles on risk, hid losses, disregarded risk limits, manipulated risk models, dodges oversight, and misinformed the public.

With testimony like this, and figures like $16 billion in legal fees and $8 billion in settlements paid between 2009 and 2012, you can’t escape the impression that these large banks are simply manufacturers of regulatory and cognitive capture.  They create a labyrinth walled with funhouse mirrors and filled with smoke, hiding behind complexity, distortions, and opacity while they siphon up money.

I think part of the solution is to pull away the curtain as much as possible and expose Oz.  These hearings I think help, particularly when paired with the entertaining commentary of someone like Matt Taibbi.  The kind of commentary that doesn’t help much is this bit from Shiela Blair, former FDIC official discussing these matters with Bill Moyers.  This is from the transcript and occurs early on in the conversation:

BILL MOYERS: So for the layman, what is the capital ratio? And why is it so important?

SHEILA BAIR: A capital ratio is simply the percentage of your assets, what’s on your balance sheet, the percentage of that that is funded with common equity.

So when banks have a low capital level, that means that they’re borrowing a lot to support themselves. Whether it’s a household or a big bank, you borrow too much and you don’t have enough common equity to absorb losses you– that’s what it means to fail. You start having losses. You don’t expect them. You have a very thin capital base. You can’t make good on your debt obligations. You fail.

What are the chances that a layman is going to be able to make heads or tails of that “common equity” jargon?  I think I have a pretty good basic understanding of the concept of capital ratios but this description just confuses me.  At some level this stuff does get murderously complicated, but at heart the concepts involved are easily comprehensible but we desperately need people who can explain them without resorting to obfuscating jargon.  They are out there, such as Yves Smith at Naked Capitalism, but we need more.

Another interesting aspect of this episode is the possibility (probability? certainty?) that the trading losses JPMorgan took were at least exaggerated by other market participants, such as hedge funds, getting wind of JPMorgan’s large (and hence hard to get out of quickly) trading positions and  taking advantage of them.  This makes me think of a line the title character in Babbit has, when he is becoming increasingly dissatisfied with his upper middle class life and increasingly comtemptuous of his upper middle class friends:

All we do is cut each others’ throats and make the public pay for it.

Anyway, we’ll see if these investigations lead to any real consequences for anyone with real power.  I won’t be holding my breath.

The Ruling RaceJames Oakes

The Ruling Race
James Oakes

Slavery, particularly as practiced in America, has been intriguing to me as it is a moral question that’s been decided one way throughout the bulk of human history, then, especially in the West, been conclusively decided in the other direction.  So conclusively that if one were to argue for the reinstatement of chattel slavery as a system of labor, they wouldn’t be considered misguided so much as clinically insane.  ( Though I’m not sure if the goings on at the CPAC Panel on Race supports or undermines my point )

But I realized that I didn’t know a whole lot about slaveholders in America, beyond the popular conception of large, sleepy plantations, lorded over by paternalistic, foppish aristocrats.  Was that the way most slaveholders were?  Rich, aristocratic, paternalistic, chivalrous, harkening back to say the English landed gentry.  A book, The Ruling Race: A History of the American Slaveholders by James Oakes was recommended reading by the History of the United States Great Course, so I decided to give it a read.

The book makes a strong case to throw out that popular conception of slavery in the south as being the aristocratic, paternalistic pursuit of a tiny class of aristocrats, in favor of one where the majority of slaveholders owned relatively few slaves and had conceptions that were far more democratic, egalitarian (for whites of course), and free enterprise than the planter aristocracy.  In fact, if there is a single thread running through the many personal journal and letter excerpts it’s a grasping materialism, an intense desire to acquire, to expand, above all to succeed in the sense of material wealth.  If you take away the deeply racist assumptions that permeate everything, it can feel quite modern.

In fact the book argues that the primary, first line defense of slavery, while undergirded by racism, was one of property rights and the right to make a profit:

For his argument to hold, his assumptions had to be racist, but his defense of slavery was primarily one of economics and property rights: he had bought his slaves and paid for them.  A South Carolina master agreed.  The slave’s earnings “belong to me, because I bought him; and in return for this I give him maintenance, and make a handsome profit besides.”  That was the way most slaveholders preferred to look at it.

Thus, the slaveholder’ chief defense of bondage focused upon the profitability of slavery and the white man’s right to make money and accumulate property.  “As an owner of slaves (and one whose income is derived almost entirely from their labor),” one master wrote, “I assert an unquestionable right to my property, and protest against every attempt to deprive me of it without my consent.”

Again, taking the racism out of it, this has a modern ring to it.  There is no static class system here, there is an egalitarianism of opportunity (for white males) and a dynamism you don’t see with the large aristocratically owned plantation.  I’m not sure that it’s ironic that it’s this modern striving for advancement, for profit that may have made slavery all the more brutal:

These central features of slavery, punishment and profit, destroyed for most slaveholders whatever remained of the elemental principle of the paternalist ethos: that masters were obliged to look to the needs of the slaves in return for the diligence and fidelity of the bondsmen.

Strikingly, the very concept of freedom was deeply associated with the ownership of black slaves:

The racist subjugation of blacks helped open the way to universal while manhood suffrage by silencing a potentially rebellious underclass of black workers.  “In this country alone does perfect equality of civil and social privilege exist among the white population, and it exists solely because we have black slaves.” the Richmond Enquirer declared.  “Freedom is not possible without slavery.”

That last sentence is enough to set one’s teeth on edge.  Could they possibly have meant it?  Reading through the book one thing you notice is how much heavy lifting the underlying racist assumptions perform, philosophically, economically, and theologically.  Conveniently reconciling and synchronizing these with their immediate pecuniary interests.

Another thing I did come away with is that words, concepts, especially those that are nebulous and that carry a strong emotional charge, like “freedom”, shouldn’t be taken at face value.  When they are used you need to ask questions.  What are the underlying assumptions?  What is left unsaid?  Freedom for who to do what?

 

As I’m interested in issues of economics and morality, I found this TED talk by Dan Pallotta a pretty compelling watch.

Dan Pallotta is an activist and fundraiser, and the main premise of the talk, which is embedded below, is to criticize the double standard that is placed upon the non-profit sector, a double standard that he feels is undermining the causes that non-profits are created to champion.  He breaks the double standards down into five areas of discrimination, and it’s the first of these that raise questions for me: Compensation.

Leaders of non-profits are not expected to make very much money.  “We have a visceral reaction to (non-profit CEOs) making a lot of money helping people, but we don’t have a visceral reaction to people making money NOT helping people.”  Pallotta says.  He’s probably right that there is a double standard, that people are more sensitive in regards to non-profits, but clearly people DO have a visceral reaction to the money made by folks who are decidedly not helping people, as the furor over the bonuses given to bankers during the economic crisis can attest.

A chart is produced, showing the median income of a Stanford MBA at age 38 (with bonuses) to be $400,000.  This is compared to the average salary of the CEO of a hunger charity: $84,028.  This puts the non-profits at a decided disadvantage is attracting “$400,000 talent” as it’s put.  I find that phrase interesting.  It shows how deeply we’re conditioned to confuse dollar signs for value.  Does someone who earns $400,000 possess $400,000 worth of talent?  In a narrow tautological sense, sure, they possess the talent of getting someone to pay them $400,000 (a talent I wish I had), but in a broader sense it’s no guarantee of any real “talent” at all.

And do we want people with mercenary motives heading up charities?  People of the type who are looking for a huge pay day?  Is the same skill set needed in the non-profit sector as in the for-profit sector?  I have almost total ignorance in this realm, but it seems far from certain to me that an Ivy League MBA type motivated by the big score would be the best choice to helm a non-profit.  But maybe it’s precisely those $400,000 talents from Stanford that non-profits need to take their efforts to the next level…I don’t know, but I am skeptical.

Towards the end a compelling case is made for less concern about non-profit “overhead”, about what percentage of a donation goes to the cause and what percentage goes to other things.  I’ll admit I was guilty of assuming anything but a tiny overhead was a bad thing and should be criticized, but if you started out like me, you’ll probably come away with a less strict view on the matter.

One day a frog is sunning himself by a stream when a scorpion approaches him.  The scorpion wants to cross the stream but cannot swim so he asks the frog if he can climb on his back for a ride across.

“Do you think I am crazy?” The frog says. “If I let you on my back, you’ll certainly sting me and I’ll sink in the water and die.”

The scorpion replies, “Think about it, I can’t swim. If I sting you, then you’ll die and I’ll sink and die too.”

The frog considers this and decides that the scorpion’s argument makes sense.  He lets the scorpion crawl onto his back and proceeds to cross the stream.

About half way across the stream, the frog feels a sharp sting in his back.  As the frog goes numb and begins to sink, he screams “Why did you sting me?! Now I am going to drown and die and you are going to sink and die too.”

The scorpion says “Because I am a scorpion, it is my nature.”

When I’ve thought about the recent financial crisis, the trillions in lost wealth, the millions of lost jobs, the storied financial corporations like Lehman Brothers destroyed, and the incalculable human misery caused, at some point my mind inevitably turns to the fable of the frog and the scorpion.  As it has when I’ve thought about the economic trajectory of the last 30 years, growing inequality, stagnating wages, and record corporate profits.  I see the frog, scared and uncomprehending, sinking beneath the water.

But why does this particular fable come to mind?  Why don’t I see something else, something simpler, something like the business and financial elite being made up of a cadre of shortsighted fools?  Why don’t I see it like this piece does?

But the stupidity of having such an obviously unbalanced economy is the more important discussion we should be having right now. The corporations are every bit as vulnerable to the disappearance of the middle class as the middle class is itself.

offshoring of profits and the export of goods and services won’t sustain these corporations forever. At a certain point, native companies within the developing world will nudge our adventuring multinationals aside (China’s already building its own version of Wall Street).  And when that happens, Corporate America is going to turn around and be horrified by the devastation in its own backyard.

“Where did all our customers go?”

Well, you enormous fucking idiots, you fired all your customers. You’ve spent the last decade or so suppressing wage growth in the name of “creating shareholder value” and now even your shareholder base is disappearing.

You allowed wages to stagnate for a decade and made every decision you could in the service of nudging the quarterly profit higher, thinking less of the yearly profit and virtually nothing of the long-term viability of your business.

The author contrasts this stupidity, what he called “short-term greed, long-term nihilism” with Henry Ford:

One hundred years ago, Henry Ford gave his employees an unasked for wage increase and, when asked why, he replied “How else will they be able to buy my cars?”

Now Henry Ford was no sweetheart (when he wasn’t publicly browbeating his son, Edsel, he was busy giving handjobs to Hitler) but he also wasn’t an idiot.  He knew that good living wages meant more customers for his product, and they also made for a better workforce and a stronger company.

Surely it is stupidity not to see that the very foundation of an economy is interconnectedness, interdependence.  If the public can’t buy your product you’ll go out of business.  If Henry Ford saw it a century ago, our current business leaders could see it too…if they weren’t morons.  But is it really simply a lack of synapses that prevents today’s elite from following the wisdom of the past?  Are they stupid, or is it their nature not to see, or care about, the long term consequences of their actions?

I think it’s the latter.  For while it’s doubtful that many of the business and financial elite are exactly intelligent in the traditional sense of possessing a deeply curious, wide ranging intellect and a keen self awareness, what they clearly have is a highly specialized skill set.  They can use and manipulate key people, obscure regulations, and complex formulas to amass huge amounts of wealth and power.  A doddering, mouth breathing, inbred aristocracy they are not.

Fabrice “Fabulous Fab” Tourre, a French employee of Goldman Sachs is scheduled to go on trial this summer.  The SEC is accusing him of misleading investors on a disastrous complex derivative deal, allegations that Goldman Sachs paid $500 to settle.  At the time Tourre wrote his girlfriend about these deals, these complex derivatives that would play a role in ushering in the global financial crisis:

Only potential survivor, the fabulus Fab standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!

He may not have fully understand the implications of the complex financial instruments he was dealing with, but he did understand they were making him rich.  Just like traders at financial firms understood how to use accounting tricks to book large profits (and hence bonuses) on complex financial deals…some of which actually ended up going very poorly for the firms they worked for.  But they had a plan, it was called IBGYBG – I’ll be gone, you’ll be gone.  This was the plan that Hans Gruber had for for Nakatomi Plaza: “When they touch down, we’ll blow the roof, they’ll spend a month sifting through rubble, and by the time they figure out what went wrong, we’ll be sitting on a beach, earning twenty percent.”  And say what you will about Hans, but he wasn’t stupid.

And so I think of the scorpion.  He’s not stupid.  He’s cunning in his way, he talks the frog into letting him on his back so he can proceed to do what it is his fundamental nature to do: sting.  It’s how the nature of the scorpion is developed that is important.  And as the scorpion is a product of its genes, a creature that knows to sting above all else, our financial and business elites are incubated in a culture of radical individualism, boundless greed, and limitless self regard, and like the scorpion they do what’s in their nature.  And their nature is to acquire, to identify opportunities and exploit them, to find marks and take them down.  How much is enough?  As much as they deserve.  How much do they deserve?  Everything.  Or as Tony Montana put it: “The world, chico, and everything in it.”

Because, even if they haven’t cracked the spine of one of Rand’s books, they are steeped in an objectivist ideology that tells them that they are the producers, the makers.  They are atlases, gods among men, carrying the world on their broad shoulders.  Their successes are theirs and theirs alone, while their rare failures are nothing but the ugly marks left by the fetters of rules and regulations that are placed upon them by the unproductive, the jealous, the parasitic.  They are the market makers, the job creators, the grease that allows the machine of capitalism operate.  They are doing “God’s work”, or so Lloyd Blankfein thinks.  Or as Mozilo, former CEO of Countrywide Financial describes his company as “one of the greatest companies in the history of this country and probably made more difference to society, to the integrity of our society, than any company in the history of America.”   You can see how things like humility, restraint, and long term strategic thinking may not find an entry point here.

I wish that our situation was as simple as idiots being promoted beyond their means.  If that were so, maybe we’d be in a similar spot, who knows, but the solution would be clearer and we would not be looking at a problem with roots that point to a source so deep, ugly, and rotten.  It’s our society, our culture that is creating the scorpions.  As this fascianting aritcle discusses, culture may have a tremendous impact on fundamental aspects of cognition:

The growing body of cross-cultural research that the three researchers were compiling suggested that the mind’s capacity to mold itself to cultural and environmental settings was far greater than had been assumed. The most interesting thing about cultures may not be in the observable things they do—the rituals, eating preferences, codes of behavior, and the like—but in the way they mold our most fundamental conscious and unconscious thinking and perception.

So unlike the frog in the fable, we shouldn’t be surprised when we feel the sting, after incubating the scorpion and then lifting it onto our back.  We should question the circumstances that left us in the middle of the stream at the mercy of a stinging arachnid.

In his book Extreme Money, Satajit Das prints an Email that was being sent around the large financial institutions in 2010, reacting to the criticisms that had been heaped on Wall Street.  It has that curious admixture self-aggrandizement and self-pity you see with modern libertarians.  The Email threatens that the Masters of the Universe will take our jobs if they can’t get jobs on the Street: “What’s going to happen when we can’t find jobs on the Streeet anymore?  Guess what: We’re going to take yours.  We get up at 5 a.m. & work till 10 p.m. or later.”  After some sneering at cushy unionized teaching jobs there is the amusing line: “No more free rides on our backs.”  Which probably encapsulates the psychology at play as well as anything.  The Email ends:

…We aren’t dinosaurs.  We are smarter and more vicious than that, and we are going to survive.

If things don’t fundamentally change, that last bit very well may not be true.  But how much consolation can the frog take from seeing the scorpion down along with him?