The Failing TARP

The more one reads about basic problems in the handling of $700 billion in emergency economic stabilization funds--and the Treasury's stonewalling response to even the most basic questions about their disbursement--the more worries pile up. Congressional Oversight Panel chair Elizabeth Warren suggests that some basic tools designed to prevent corruption in the administration of the program are not yet apparent. That's particularly shocking given Michael Lewis & David Einhorn's smart commentary on the problems that sunk us into this crisis:

At every turn we keep coming back to an enormous barrier to reform: Wall Street’s political influence. [Even the Securities and Exchange Commission is] compromised by [Wall Street's] ability to enrich the people who work for it. Realistically, there is only so much that can be done to fix the problem, but one measure is obvious: forbid regulators, for some meaningful amount of time after they have left the S.E.C., from accepting high-paying jobs with Wall Street firms.

Lewis & Einhorn suggest several other solutions that I'll quote below:

End the official status of the rating agencies. . . . There should be a rule against issuers paying for ratings. Either investors should pay for them privately or, if public ratings are deemed essential, they should be publicly provided.

Regulate credit-default swaps. . . . Until very recently, companies haven’t had to provide even cursory disclosure of credit-default swaps in their financial statements. . . . The most critical role for regulation is to make sure that the sellers of risk have the capital to support their bets.

Impose new capital requirements on banks. The new international standard now being adopted by American banks is known in the trade as Basel II. Basel II is premised on the belief that banks do a better job than regulators of measuring their own risks — because the banks have the greater interest in not failing. . . . We know how that turned out. A better idea would be to require banks to hold less capital in bad times and more capital in good times. Now that we have seen how too-big-to-fail financial institutions behave, it is clear that relieving them of stringent requirements is not the way to go. Another good solution to the too-big-to-fail problem is to break up any institution that becomes too big to fail.

[T]here’s nothing all that radical about most of these changes. A disinterested person would probably wonder why many of them had not been made long ago. A committee of people whose financial interests are somehow bound up with Wall Street is a different matter.

Reflecting on Joe Nocera's article on failures of risk management on Wall Street, I just want to comment on the extraordinary naivete of believing that "banks do a better job than regulators of measuring their own risks — because the banks have the greater interest in not failing." Isn't it apparent to any self-interest maximizing, homo economicus that the game is not the bank's success, but one's own? Nocera marvels at how many Wall Street grandees miscalculated the acceptable levels of risk for their bank, but really, once one has a few tens of millions of dollars in the bank, what's the downside for these guys of losing a huge bet? They are legally insulated from absorbing the losses they impose on their institution. Once they have a certain safety cushion in the bank, why should they even care if the bank continues as a going concern? Even if the they fail miserably, the atmosphere is so clubby that many still are in line for plum jobs.

Perhaps a tough Congressional investigation could counterbalance the extraordinary political influence of Wall Street. The Pecora Hearings led to confrontations like these:

As Pecora relentlessly grilled the most famous names in finance, the nation relived the 1920s boom in a collective act of national remembrance. . . . As it gained momentum, the inquiry expanded until it shined a searchlight into every murky corner of Wall Street. Pecora exposed a stock market manipulated by speculators to the detriment of small investors who could suddenly attach names and faces to their losses.

Bankers had been demigods in the 1920s, their doings followed avidly, their market commentary quoted with reverence. They had inhabited a clubby world of chauffeured limousines and wood-paneled rooms, insulated from ordinary Americans. Now Pecora defrocked these high priests, making them seem small and shabby.

Bob Kuttner called for a Pecora redux long ago. If a Senate with 59 Democrats and Chuck Grassley can't get the job done, it may be time to resign ourselves to plutocracy.

Posted by Frank_Pasquale at 08:15 AM | Comments (1) | TrackBack

Vanity on Hold? Or More Important than Ever?

Not all the spending deferred during the Great Recession will be missed. Cosmetic surgery sets up a rat race of positional competition for better appearance, with dubious objective benefits. Natasha Singer suggests that many may now be "putting vanity on hold:"

“In Orange County, where plastic surgery is a part of their culture, doctors told me business is down 30 to 40 percent,” said Thomas Seery, the president of realself.com, a site devoted to reviewing vanity-medicine procedures. “That tells me something is fundamentally changing there.”

Even a few celebrities, those early adopters of appearance technology, have started to deride the plasticized look that sometimes accompanies cosmetic interventions, a harbinger perhaps of a new climate of restraint in which overt augmentation seems like bad taste.

However, Rhonda Rundle (on the Wall Street Journal's cosmetic surgery beat) suggests that those hooked on appearance enhancement may merely be scaling down, rather than breaking, the habit. Appearance competition can be vital to getting ahead--or merely staying in place:

Increasingly, many aesthetic patients view their treatments as professional self-preservation rather than as a personal indulgence. Appearances make a difference, says . . . a 57-year-old marketing consultant in Falls Church, Va. "If you're in the business world and you want to be competitive with the younger people, you need to stay on top of your game," she says.

[A] plastic surgeon in New York City, says that even people with good jobs and robust savings are worried about the future and are afraid to miss work for surgery. They come in, he says, knowing that they need a facelift but asking if there's "something I can do to tide them over." Botox and fillers, he responds.

Botox may turn out to be the methadone of cosmetic surgery addiction.

Photo Credit: Mart & Gree,

Posted by Frank_Pasquale at 02:30 PM | Comments (0) | TrackBack

Heroes of Heterodoxy in Economics (Left and Right)

Back in early 2006, the prescient Dean Baker wrote about "The Menace of an Unchecked Housing Bubble." He's recently observed why so many economists failed to criticize the bubble:

Just apply economics to economists. The honchos in the profession (Paul Krugman excepted) said everything was fine. Agreeing with the honchos will never get you in trouble. You will never lose your job or even miss a promotion because you made the same mistake as all the leading lights in the profession.*

On the other hand, if you go against the honchos and end up being wrong, well you should be prepared to be sent to oblivion. You are obviously a raving lunatic who has no business being taken seriously as an economist. Even when you end being right against the honchos you can't count on any great reward, since the honchos so control the profession and the media that "nobody could have seen" will be repeated at least frequently as the fact that some people did see.

Baker is often seen as a man of the left, but the libertarian right offered its own predictions of collapse. Peter Schiff, an avowed adherent to the Austrian school of economics, battled with various hype-mongers on television. I heard a great interview with him where he basically asked: what is the real economic foundation of American prosperity? what are we producing that other people want? Like Kevin Phillips, he mocked the dreams of Rubinomics, helpfully summarized by Madison Powers here:

Rubin’s widely expressed view before things fell apart was that as long as the U.S. dollar remains strong, often by depressing real wages both domestically and abroad, then the U.S. economy would grow in wealth primarily through the machinations of the financial sector. Indeed, U.S. household wealth grew at a stunning rate, vastly outstripping its traditional proportional relationship to the medium household wage. In nine years, household wealth grew to 9.7 times the mean annual family income. That compares to 6.4 times income just a few years before and 2.4 in 1982.

Economists concerned with rising income inequality in the U.S., as well as developmental economists who focused on similar patterns of declining wages globally became suspicious. Americans were not saving, and wages were not keeping apace of what would be necessary to finance the homes that increasingly constitute the bulk of this brand new “wealth effect.” Moreover, there were good reasons to believe that this new American wealth was not only illusory but causally related to the global trends toward greater income inequality, primarily through the policies that propped up the U.S. dollar, outsourced American jobs to countries who competed for increasingly lower wages, while simultaneously being hit by the deflation of their own currency under pressure of the U.S. dollar.

All this leads me to the uncomfortable conclusion that the main currents of economic thought may be unable to guide us out of the current crisis. Back when Baker's article came out, I commented that the housing bubble ought to be viewed through Robert Frank's lens of positional competition. Housing prices often appear to reflect little about the actual utility of the underlying asset; rather, they’re driven by interest rates, financing options, social norms about the proper percentage of income to spend on housing, and panics (both to buy and to sell). Laws designed to stop risky financing are not mere paternalism; rather, they properly undermine both “arms races” and ensuing busts.

The question now is to what degree can the two groups work together to stop misguided policies like the artificial propping up of housing prices. Some on the right will oppose the new fad of a 4.5% mortgage rate because it's one more governmental distortion of the market; others on the left might note that the 66% or so of Americans who own houses are by-and-large better-off than the third or so who don't. I find some hope in the fact that one of the premier heterodox economists, Robert H. Frank, was featured in George Mason's Econ Journal Watch, and in turn "takes libertarian concerns seriously." Cato Unbound has also featured an excellent article by Roderick Long on possible points of convergence among heterodox economists:

[C]orporations have been frequent beneficiaries of U.S. military interventions abroad, from the United Fruit Company in 1950s Guatemala to Halliburton in Iraq today.

Vast corporate empires like Wal-Mart are often either hailed or condemned (depending on the speaker’s perspective) as products of the free market. But not only is Wal-Mart a direct beneficiary of (usually local) government intervention in the form of such measures as eminent domain and tax breaks, but it also reaps less obvious benefits from policies of wider application. The funding of public highways through tax revenues, for example, constitutes a de facto transportation subsidy, allowing Wal-Mart and similar chains to socialize the costs of shipping and so enabling them to compete more successfully against local businesses; the low prices we enjoy at Wal-Mart in our capacity as consumers are thus made possible in part by our having already indirectly subsidized Wal-Mart’s operating costs in our capacity as taxpayers.

Wal-Mart also keeps its costs low by paying low salaries; but what makes those low salaries possible is the absence of more lucrative alternatives for its employees—and that fact in turn owes much to government intervention. The existence of regulations, fees, licensure requirements, et cetera does not affect all market participants equally; it’s much easier for wealthy, well-established companies to jump through these hoops than it is for new firms just starting up. Hence such regulations both decrease the number of employers bidding for employees’ services (thus keeping salaries low) and make it harder for the less affluent to start enterprises of their own. Legal restrictions on labor organizing also make it harder for such workers to organize collectively on their own behalf.

Like David Cay Johnston, Long realizes that state and market are so intertwined that it is often deeply misleading to talk about either entity as separate from the other. Of course, this is old news to anyone schooled in the works of the American legal realists:

Morris Cohen's Property and Sovereignty, and Jaffe's and Hale's articles on the law of contract all seemed to show that rules of private law could be seen as regulatory, that contract law could be seen as the delegation of public power to private actors and that even the most "private" activities could be described so as to invoke the public interest. On the level of practical politics, most of the agencies of the New Deal could not neatly be classified in terms of the classical liberal dichotomy of public and private. What for example, was the Tennesee Valley Authority? At the high point of this movement, in the case of Shelley v Kraemer, the Supreme Court actually accepted the argument that the mere enforcement of private contracts by the state courts counted as state action--a ruling that implicitly subjected every private law relationship to constitutional scrutiny.

Such a viewpoint might seem antithetical to the libertarian ideal of pure private ordering. But it also stands as a fruitfully cautious corrective--just as libertarian warnings about capture and governmental favoritism have to be part of left-heterodox reasoning. Smart challengers of the economic status quo realize this, and argue for the right kind of government favoritism rather than eschewing it altogether (as Robert Kuttner does here:)

As part of his plan to restructure the auto industry, rebuild infrastructure, and create new green industries and jobs, he will be committing industrial policy. And this will create a head-on collision with one of the cherished dogmas of market fundamentalism -- "free trade."

This clash is long overdue. For several decades, American elites of both parties have been preaching the same gospel of free trade. Supposedly, if we just leave markets alone, different countries will produce and export what they naturally do best, and import products at which their partners excel. In the tidy and oversimplified textbook world, there is no room for questions about pollution, labor standards, product safety, financial engineering, or industrial policy.

But the real world doesn't work like the Econ. 101 fable. In much of the rest of the world, governments help their industries develop. However, in the hierarchy of America's diplomatic priorities, countries like China that subsidize industries (and violate human rights) get a free pass.

Any suggestion of an industrial policy is probably going to outrage many on the heterodox right. But what both left and right heterodox economists ought to agree on is the centrality of values to economic choices. Neither the Austrian School nor fans of industrial policy will get its program through a political process where truth is so often bent to existing concentrations of power. But each urge us to make considered choices about the true value an economy produces, and to suspect the types of artificial "wealth creation" that modern seignoriage relies on.

*Given how much I enjoyed reading C. Wright Mills's The Power Elite, I was wondering---how many honchos are there? Fortuitously, David Colander's new book (The Making of an Economist) provides something like an answer:

[E]lite [graduate schools of economics] compete vigorously for top students. They invite accepted candidates to campus, wine and dine them, have them meet with faculty members, and work hard to sell their school to them. . . . Once they graduate, these students tend to dominate the profession: they are the majority of members on American Economic Association (AEA) boards, and they are the economists called upon when a reporter is seeking economists’ view on an issue.

Of course, not all of these graduates manage to remain in the elite, but it is from this group that the majority of the elite come. How large is this elite? There are probably around 100 to 150 of the definitely elite, 700 to 800 of the elite, and another 1,500 economists might be seen as peripheral elite. All have Ph.D.’s, and most have academic appointments, although some move back and both between academia and government. [emphasis added]

Colander might also challenge any effort to portray economists as a whole as a monolith; he notes that:

What were taken as requirements of research in the 1980s are no longer requirements in the 2000s; the holy trinity of greed, equilibrium, and rationality has been replaced by a looser trilogy of purposeful behavior, sustainability, and enlightened self-interest. I could extend the list enormously, but there is no need to do that here. My point is simply that economics has changed and will continue to change, making it impossible to call the existing profession neoclassical any longer.

Posted by Frank_Pasquale at 01:14 PM | Comments (3) | TrackBack

Levitt’s Honesty About Economics

Should we, or can we, stop pretending we know what lies ahead or should we see what we can do when we know that predictability is an illusion? Steven Levitt of Freakonmics fame did a recent interview on NPR about the current economy that points to this question. The part that jumped out at me was his statement about macroeconomics at around 3:40 into the interview. Levitt compares macroeconomics to the weather in that both are complex systems that may be predicted in the near term but are “terrible” for long term predictions. Levitt is quite honest when he states that “economists are really stabbing in the dark a lot when we try and say what will happen. I think you wouldn’t want to believe any economist’s, individual economist’s, forecast about what will happen in the future but what we are better at is thinking about the past and what’s happened in the past and how we’ve got to where we are.” That idea reminds me of Nassim Taleb’s work such as Black Swans (although there is a small paradox about the prediction that predictions will fail).

John Cassidy of Portfolio.com has a recent article with some chilling thoughts about the future of the economy. The most stark point for me was the comparison to Japan:

Yet it isn’t entirely clear what [Bernanke] should do. During Japan’s “lost decade” of the 1990s, it discovered that navigating a deflationary real estate and credit bust is far from easy, no matter what you do. To be sure, the Japanese government made some initial mistakes in following an inflexible monetary policy and allowing banks to hide losses. Eventually, though, it did most of the things that outsiders such as Bernanke had recommended, like recapitalizing the banks at the taxpayers’ expense and experimenting with new monetary rules. Even then, prices kept falling, and the economy barely managed to expand.

As for the Japanese stock market, I can hardly bear to talk of it. In 1989, when I first visited Tokyo, the Nikkei was approaching 39,000. Ten years later, when I returned, it was languishing at about 14,000. Today, it is below 10,000. Before shifting what remains of your retirement fund into an S&P 500 index fund to take advantage of a coming rebound, you might want to take a look at the Nikkei chart. It is quite a sight.

Nate Oman’s post on and the comments about the bailout have some thoughts on the specific comparison, but here I am suggesting that a larger issue may be in play. As Levitt offers we may have to change the perspective that the future will be rosy because this is a cyclical matter. Levitt then posits that the question returns to whether we make goods and services for which others will pay. (see also Nate’s post on CDS and the comments for more on this idea). Levitt notes that the idea is to think of long term ways to make America more productive and not focus on the short term boosts that may become entitlements. He notes that infrastructure investment that impacts long term productivity is a good way to proceed. Now that sounds like a prediction. But I think the idea is not a prediction. It is a prescription or guideline that may embrace unpredictability. More on that idea soon.

Posted by Deven_Desai at 02:23 PM | Comments (2) | TrackBack

Dystopia is to Apocalypse as Deflation is to Hyperinflation

Our Battlestar Galactica fans may care to take issue with Benjamin Kunkel's article Dystopia and the End of Politics. Kunkel's zeitgeist-capturing piece decries the percolation of sci-fi themes into high literature of our time:

[W]hen the contemporary novelist contemplates the future . . . he or she often forfeits the ability to imagine unique and irreplaceable characters, can no longer depict love credibly, and responds to political problems by rejecting politics for personal life, albeit one made meaningless by interchangeable characters and a zoological conception of family and love. The result is political novels without politics, social novels without society, and romances free of love, amounting, in the end, to “literature” that isn’t.

Henry Farrell derides this as "slightly-fusty-personal-taste-masquerading-as-generalized-principle criticism." (I welcome our German readers to provide the ideal noun for that mouthful.)

I have no competence to comment on the literary argument joined here. But I valued Kunkel's piece because of the distinction he makes between apocalyptic and dystopian themes in fiction. By showing their political irrelevance, he illuminates the impotence of bogeymen like deflation and hyperinflation in current debates over the size and shape of future government spending.

My starting point is the now familiar debate over "Helicopter Ben" Bernanke's pledge to make monetary policy as loose as possible in order to jumpstart the economy. Some of the economists I most respect think this is a necessary step for any recovery. Yet don't we get a sickening feeling that this "solution" is precisely what got us into this mess? The "giant pool of money" unleashed after 9/11, when Alan Greenspan lowered interest rates over and over again, was the driving force behind the securitization boom that made subprime mortgages so attractive. Wall Street banks were paying Countrywide two to three times normal fees for subprime loans because so much easy money needed to find some place to earn returns. Where will today's easy money go? Do we have any faith that the same entities who made an easy buck investing it in subprime won't find some new bubble to invest in?

As authorities find they "can't push a string," fiscal policy now appears to be displacing monetary policy as a way to "save the economy." In this case, hundreds of billions of dollars of federal deficit spending are to be marshalled to fund everything from highways to broadband. Skeptics like Amity Shlaes claim that such spending failed to lift us out of the Great Depression; their opponents argue that FDR's effort to stimulate the economy was not strong enough.

I think these debates could go on forever without resolution. What really matters is a) what bad macroeconomic outcome you fear most and b) what substantive steps you want to see government take to improve our common life. While these criteria pull in opposite directions for me, I ultimately think a) has to start ceding to b).

When it comes to government spending on stimulus, I'm all for it--not because I think it will jump start the economy, but because on balance we have enough crying public needs that the spending is unlikely to be any more wasted than the hundreds of billions of dollars our investment banks have effectively flushed down the toilet (or absconded with) over the past 6 years. If you drive the pockmarked highways of northern New Jersey, fight your way onto the crowded 4, 5, or 6 line in New York City, or struggle to get a decent internet connection, you know what I'm talking about. If you've worked to find home care for an elderly relative, or have been shocked by wait-times at a local ER, you get it too. Of course, those rich enough to live at the very top of the income distribution probably have found ways around these problems, but the rest of us deal with them all the time. They're the real reason to have a stimulus.

The real worry all this government spending (and associated loose monetary policy) creates is fear of galloping inflation--some dramatic decline in the value of the dollar that utterly upsets the planning of savers and spenders. At that point, money starts to become unreal, to lose its function as a store or measure of value. Hyperinflation becomes a real possibility, and no one wants to become a 1923 German or 2008 Zimbabwe (where the "Z$100 billion agro cheque . . . shares the record for depicted zeroes (11) with the 500 billion Yugoslav dinar banknote.").

That's where I start thinking of Kunkel again. In discussing the novels of Ishiguro, McCarthy, and Houllebecq (among others), he distinguishes between "dystopian and the apocalyptic, because these categories refer to different and even opposed futuristic scenarios:"

The end of the world or apocalypse typically brings about the collapse of order; dystopia, on the other hand, envisions a sinister perfection of order. In the most basic political terms, dystopia is a nightmare of authoritarian or totalitarian rule, while the end of the world is a nightmare of anarchy. (There is also the currently less fashionable kind of political dream known as utopia.) What the dystopian and the apocalyptic modes have in common is simply that they imagine our world changed, for the worse, almost beyond recognition.

I have a suspicion that in our popular imagination, a deflation would be "merely" dystopian for the US, while a dramatic rise in inflation would be apocalyptic. The deflation portends too many goods being rejected by hoarders, while a great inflation suggests too few goods chased by too many dollars. In the former scenario, we learn to live on as little as we can; in the latter we battle for even the basics. But as Kunkel suggests, these types of distinctions are ultimately not very useful to pragmatic choices we make now because the world they presuppose is so unrecognizable:

[I]f lately we find ourselves fearing that the complexity of our civilization is nothing so much as an index of its fragility, the strange character of the neoliberal apocalypse is to placate the very dread that it evokes. There are grounds for fearing that this civilization devoted to private happiness and private gain will end by intruding pain and loss horribly upon our own households and personal relationships. In the meantime the likelihood of disaster is only abetted by our sense of the hopeless corruption of public life and the need to defend our wealth, our conveniences, and the small happiness of our homes against the sacrifices our governments or our consciences might otherwise exact.

In other words, if it's all going to hell anyway, why try to stop it? Given the role of expectations in economics, even the imagination of these scenarios does us a disservice; the more fear we feel, the less confidence there will be to support investment.

On the other hand, baseless optimism can be as much an enemy of reason as baseless pessimism. As the consistently sharp Rob Horning observes:

At some point, capitalism compels us, by its own integral logic, to adopt unsustainable approaches that can’t be generalized to include everyone—we all can’t be at the top of the pyramid. Instead we become committed to a desperate effort to keep the machine moving, to bringing in more and more into the system so it won’t collapse under its own weight, and the pile of grievances it generates through its merciless functioning. The more merciless the system becomes, the more merciless, we, its agents, have to become to perpetuate it.

Subprime loans were made with no real faith that they will be repaid, but with some hope that new, even more desperate and exploitative techniques would be contrived to bring in a new influx of profit and prevent their insolvency from mattering. What has happened now is that for the time being, we have lost faith in the schemes, and we can’t persuade ourselves to naively believe anymore, or alternatively, we have lost the will or ability to recruit new naifs.

As I read about schemes to keep the 30 year mortgage rate artificially low, I have to suspect the ultimate objectives of the program. What exactly are the demographics of homeowners? If the 65% or so of the US that owns homes is substantially richer than the 35% or so that does not, why should the latter effectively pay to keep the value of the former's investment up? And if the money is just coming from China, at what point does that gravy train end? The tech stock bubble and the housing bubble had the character of a game of musical chairs--and if you read a book like Louis Uchitelle's The Disposable American, you'll see how many other areas of economic life adopted just such a model, downsizing the bottom 10% yearly till many companies became a shadow of their former selves.

There are many ways to increase confidence necessary to get consumers spending and employers hiring. We've tried the illusory "wealth effect" created by rising home prices, and it hasn't worked. Nor has "black box" derivatives alchemy. Why not create a society where people can quit their jobs without the terror of being thrown into the maws of an arbitrary and overpriced individual health insurance system? Why not improve bad school districts so families don't have to fear that a slide down the economic ladder consigns their kids to insuperable educational disadvantage?

I have no idea if steps like these (or decent infrastructure provision) will or won't "jump-start the economy." I worry they might spark a hyperinflation. But inaction can lead to disaster, too, and I have no idea what the relative probabilities of the rival disasters of deflation and hyperinflation are. All I can conclude is that after years of increasing income shares at the very top, and a government turning its back on basic needs of its citizens, it's time to start meeting human needs sustainably. If the current economic crisis shocks us out of the complacent fantasy that an unfettered market can do that, it's done us a great service.

Photo Credit: Me (taken along 14th St., between 8th and 9th Aves., in Manhattan yesterday). Creative Commons-Licensed to all, for any purpose, share-alike.

Posted by Frank_Pasquale at 12:18 AM | Comments (3) | TrackBack

The Economics was Fake, but the Bonuses Were Real

Gar Alperovitz and Lew Daly's book Unjust Deserts: How the Rich are Taking our Common Inheritance and Why We Should Take it Back is at the top of my reading list this Christmas season. That's not just because, as Patrick S. O'Donnell reminds us, social justice is at the core of Christian identity.* It's also because I fear that if we don't start seriously rethinking our entire approach to finance, the foundation of trust necessary for even basic economic order will erode.

Anyone trying to understand the current financial crisis should take a look at the NY Times series The Reckoning, a blow-by-blow account of a deep rot at the core of American finance and politics. An article on Wall Street bonuses clinically describes the outrageous incentives at the heart of it:

In 2006 . . . Merrill handed out $5 billion to $6 billion in bonuses . . . . A 30-something trader with a $180,000 salary got $5 million. But Merrill’s record earnings in 2006 — $7.5 billion — turned out to be a mirage. The company has since lost three times that amount, largely because the mortgage investments that supposedly had powered some of those profits plunged in value. Unlike the earnings, however, the bonuses have not been reversed.

Lucian Bebchuk of Harvard Law School said investment banks like Merrill were brought to their knees because their employees chased after the rich rewards that executives promised them. . . . “They were trying to get as much of this or that paper, they were doing it with excitement and vigor, and that was because they knew they would be making huge amounts of money by the end of the year,” he said. “What happened to their investments was of no interest to them, because they would already be paid,” said Paul Hodgson, senior research associate at the Corporate Library, a shareholder activist group.

What's more, some of the principals are not merely enjoying their tens of millions of dollars in bonuses now, but are still being recruited to head other ventures--a quick profit being the expertise Wall Street apparently values most. Given this mentality at the banks we are now collectively bailing out, we need a fundamental rethinking of the anti-regulatory dogma that has informed policy for so long. As a shaken Richard Posner has recognized, “This is troublesome for economics. You can have rationality and you can have competition, and you can still have disasters.”

I've been following Robert Skidelsky's responses to this crisis, and found them compelling. This most recent article provides the broader perspective we need as we rush to respond to emergency after emergency:

[T]he crisis is global, and . . . [t]here were three kinds of failure. The first, discussed by John Kay, was institutional: banks mutated from utilities into casinos. However, they did so because they, their regulators and the policymakers sitting on top of the regulators all succumbed to something called the "efficient market hypothesis": the view that financial markets could not consistently mis-price assets and therefore needed little regulation. So the second failure was intellectual. The most astonishing admission was that of former Federal Reserve chairman Alan Greenspan in autumn 2008 that the Fed's regime of monetary management had been based on a "flaw." The "whole intellectual edifice," he said, "collapsed in the summer of last year." Behind the efficient market idea lay the intellectual failure of mainstream economics. It could neither predict nor explain the meltdown because nearly all economists believed that markets were self-correcting. As a consequence, economics itself was marginalised.

But the crisis also represents a moral failure: that of a system built on debt. At the heart of the moral failure is the worship of growth for its own sake, rather than as a way to achieve the "good life." As a result, economic efficiency—the means to growth—has been given absolute priority in our thinking and policy. The only moral compass we now have is the thin and degraded notion of economic welfare. This moral lacuna explains uncritical acceptance of globalisation and financial innovation. Leverage is a duty because it "levers" faster growth. The theological language which would have recognised the collapse of the credit bubble as the "wages of sin," the come-uppance for prodigious profligacy, has become unusable. But the come-uppance has come, nevertheless. [emphasis added]

The current crisis exposes the fragility of markets generally. They are built on mutual reciprocity, and as more opportunism from trusted intermediaries is exposed, the weaker our faith in other market actors becomes. Both Francis Fukuyama's work on trust and Robert Putnam's on the "social capital" it reflects bode ill for our economy. Putnam describes a southern Italy mired in corruption and fraud, and a northern Italy whose economic success is built on its long history of civic associations and mutual endeavor. Can anyone doubt that our economy is exposed (with each passing day) as more Sicilian in its "winners'" casual acceptance of fraud, more Russian in its oligarchic tendencies, more Brazilian in its inequality? After the Madoff scandal, what are investors to do--personally spot-check their broker's office and assure that trades are actually being made? As Joseph Grundfest noted in a recent NPR "Planet Money" segment, the SEC simply does not have the resources to do the kind of policing necessary when basic bonds of trust break down.

Fortunately, realist scholars of inequality have been ahead of the curve in recognizing the social bases of individual success, and we can look to their work as we begin to think about how to rebuild the trust necessary for a thriving economy. The first imperative is ending the pattern of skillful elites wielding exceptional power by leveraging economic into political capital, and vice versa. Next, we need to realize the social bases of our common wealth, and how important it is to tend to it. As Alperovitz and Daly argue, the worship of wealth that is the ultimate rationale for tax cuts for billionaires ignores the real bases of prosperity:

The problem we see is a society whose wealth is commonly created, by and large, but very unequally distributed and enjoyed. The largely collective way we produce our wealth is morally out of sync with the individualistic way we distribute the wealth and also justify the resulting vast inequalities. So we’re not saying to the Bill Gateses of the world: you don’t deserve anything and we’re going to tax it all away. What we’re saying is that our society should be more equal than it is if we truly believe, first, that people should be rewarded according to what they contribute, and second, that society should be repaid for the large contributions it makes, which enable everything else. These are common beliefs or, at least, reasonable ideas, so that is not the problem. The problem is a mistaken view of wealth-creation, which distorts how these common ideas are applied.

Alperovitz and Daly have a number of misconceptions to dispel. But we can all hope that the wisdom of former fund manager John Bogle will inform future policy on these matters:

At a party given by a billionaire on Shelter Island, the late Kurt Vonnegut informs his pal, the author Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch 22 over its whole history. Heller responds, “Yes, but I have something he will never have . . . Enough.” . . .

[T]he more that our financial system takes, the less our investors make. Yet the financial field is where the money is made in modern-day America, the breeding ground for the wealthiest of our citizens. (If you made less than $140 million dollars last year, you didn’t make enough to rank among the 25 highest-paid hedge fund managers.) When we add up all those hedge fund fees, all those mutual fund management fees and operating expenses; all those commissions to brokerage firms and fees to financial advisors; investment banking and legal fees for all those mergers and IPOs; and the enormous marketing and advertising expenses entailed in the distribution of financial products, we’re talking about some $500 billion dollars per year. That sum, extracted from whatever returns the stock and bond markets are generous enough to deliver to investors, is surely enough.

As Krugman stated, "In recent years the finance sector accounted for 8 percent of America’s G.D.P., up from less than 5 percent a generation earlier. If that extra 3 percent was money for nothing — and it probably was — we’re talking about $400 billion a year in waste, fraud and abuse." Enough.

*O'Donnell paraphrases and quotes major points of Catholic Social teaching, and I will take the liberty of reposting relevant parts here:

Common Good and Community: The human person is both sacred and social. We realize our dignity and rights in relationship with others, in community. Human beings grow and achieve fulfillment in community. Human dignity can only be realized and protected in the context of relationships with the wider society.

How we organize our society -- in economics and politics, in law and policy -- directly affects human dignity and the capacity of individuals to grow in community. The obligation to "love our neighbor" has an individual dimension, but it also requires a broader social commitment. Everyone has a responsibility to contribute to the good of the whole society, to the common good.

Option for the Poor: The moral test of a society is how it treats its most vulnerable members. The poor have the most urgent moral claim on the conscience of the nation. We are called to look at public policy decisions in terms of how they affect the poor. The "option for the poor," is not an adversarial slogan that pits one group or class against another. Rather it states that the deprivation and powerlessness of the poor wounds the whole community.

The option for the poor is an essential part of society's effort to achieve the common good. A healthy community can be achieved only if its members give special attention to those with special needs, to those who are poor and on the margins of society.

Role of Government and Subsidiarity: The state has a positive moral function. It is an instrument to promote human dignity, protect human rights, and build the common good. All people have a right and a responsibility to participate in political institutions so that government can achieve its proper goals.

The principle of subsidiarity holds that the functions of government should be performed at the lowest level possible, as long as they can be performed adequately. When the needs in question cannot adequately be met at the lower level, then it is not only necessary, but imperative that higher levels of government intervene.

Economic Justice: The economy must serve people, not the other way around. All workers have a right to productive work, to decent and fair wages, and to safe working conditions. They also have a fundamental right to organize and join unions. People have a right to economic initiative and private property, but these rights have limits. No one is allowed to amass excessive wealth when others lack the basic necessities of life.

Catholic teaching opposes collectivist and statist economic approaches. But it also rejects the notion that a free market automatically produces justice. Distributive justice, for example, cannot be achieved by relying entirely on free market forces. Competition and free markets are useful elements of economic systems. However, markets must be kept within limits, because there are many needs and goods that cannot be satisfied by the market system. It is the task of the state and of all society to intervene and ensure that these needs are met.

Global Solidarity and Development: We are one human family. Our responsibilities to each other cross national, racial, economic and ideological differences. We are called to work globally for justice. Authentic development must be full human development. It must respect and promote personal, social, economic, and political rights, including the rights of nations and of peoples It must avoid the extremists of underdevelopment on the one hand, and "superdevelopment" on the other. Accumulating material goods, and technical resources will be unsatisfactory and debasing if there is no respect for the moral, cultural, and spiritual dimensions of the person.

Posted by Frank_Pasquale at 02:18 PM | Comments (2) | TrackBack

IBG: Foundation of American Finance Capitalism?

Thomas Friedman delivers today with a column that makes me proud he's a fellow Marshall Scholar. My favorite paragraphs:

I have no sympathy for Madoff. But the fact is, his alleged Ponzi scheme was only slightly more outrageous than the “legal” scheme that Wall Street was running, fueled by cheap credit, low standards and high greed. What do you call giving a worker who makes only $14,000 a year a nothing-down and nothing-to-pay-for-two-years mortgage to buy a $750,000 home, and then bundling that mortgage with 100 others into bonds — which Moody’s or Standard & Poors rate AAA — and then selling them to banks and pension funds the world over? That is what our financial industry was doing. If that isn’t a pyramid scheme, what is?

[T]his legal Ponzi scheme was built on the mortgage brokers, bond bundlers, rating agencies, bond sellers and homeowners all working on the I.B.G. principle: “I’ll be gone” when the payments come due or the mortgage has to be renegotiated. . . . The Madoff affair is the cherry on top of a national breakdown in financial propriety, regulations and common sense.

Thank you, Mr. Friedman. Finally, respectable opinion is coming around to a view that the "man on the street" has intuited for some time: the recklessness of contemporary finance capitalism is systemic, not merely the product of a few bad apples. A passion for deregulation and budget cuts left an administration unable to detect even the grossest frauds. In that culture, virtually anything went. And as the Bush years come to a close, I expect many inspector generals across the administrative state will be detecting ever more wrongdoing.

Friedman reported on Chinese dismay at the breakdown in the American system, and the growing international sense that US assets are being hollowed out by a craven superclass. James Fallows's interview with Gao Xiqing, "the man who oversees $200 billion of China’s $2 trillion in dollar holdings," gives another perspective on the Chinese view of America's descent toward kleptocracy:

If you look at every one of these [derivative] products, they make sense. But in aggregate, they are bullshit. They are crap. They serve to cheat people. I was predicting this many years ago. In 1999 or 2000, I gave a talk to the State Council [China’s main ruling body], with Premier Zhu Rongji. They wanted me to explain about capital markets and how they worked. These were all ministers and mostly not from a financial background. So I wondered, How do I explain derivatives?, and I used the model of mirrors.

First of all, you have this book to sell. [He picks up a leather-bound book.] This is worth something, because of all the labor and so on you put in it. But then someone says, “I don’t have to sell the book itself! I have a mirror, and I can sell the mirror image of the book!” Okay. That’s a stock certificate. And then someone else says, “I have another mirror—I can sell a mirror image of that mirror.” Derivatives. That’s fine too, for a while. Then you have 10,000 mirrors, and the image is almost perfect. People start to believe that these mirrors are almost the real thing. But at some point, the image is interrupted. And all the rest will go.

When I told the State Council about the mirrors, they all started laughing. “How can you sell a mirror image! Won’t there be distortion?” But this is what happened with the American economy, and it will be a long and painful process to come down. I think we should do an overhaul and say, “Let’s get rid of 90 percent of the derivatives.”

Fans of Fischer Black-inspired financial wizardry may blanch. But we need a fundamental reconsideration of the modern "science" of finance, as this essay shows, systematically deconstructing the myths that got us where we are today:

Neoclassical economics . . . is based on the following assumptions:

i. Most of the time markets are in or close to stable equilibrium, ii. Participants in markets act rationally to maximize fixed and known preferences described by definite and time independent utility functions., iii. Participants in markets have perfect knowledge of the information driving the markets as well as all other participants., iv. Prices are set by a deterministic process of joint maximization of the preferences of all involved in a trade, v. Fluctuations in prices are small, random and uncorrelated, vi. There is perfect liquidity so all prices are well defined, and all markets clear, vii. There is no important difference between markets comprising a few individuals and those comprising millions, so simple models suffice to elucidate the principles that govern markets.

The neoclassical paradigm based on these ideas has had some undisputed successes. At the same time, it appears to have led to the adoption of practices and recommendations, which are at least partly at the root of the present crisis. These included the ideas that,

i. Regulation is limited or unnecessary because markets find and stay close to stable equilibrium where they operate most efficiently, leading to maximally stable economic growth, whereas regulation only leads to slower growth. But we face a potentially precipitous decline in economic growth and prosperity in the wake of some deregulation.

ii. Everything has a value or price, at all times, that can be uniquely determined by some definite objective process. This includes contracts that refer to prices of fluctuating variables at future times. There is experience with futures contracts, which have prices which are set daily by their being actively traded. But we are now seeing these values evaporate.

iii. This trading experience may be generalized to a claim that complex financial instruments which oblige actions to be taken at future times based on conditions not known till then, still have definite values and prices even if they are never or rarely traded. But part of the crisis is due to the fact that the balance sheets of banks and companies holding these contracts cannot be computed because they include instruments whose prices have been revealed as simply hypothetical and are now proving to be indeterminate .

iv. Stability can be increased by inventing and trading abstract complex financial instruments rather than principal contracts like stocks and mortgages. Examples are derivatives. . . . The theory behind the possibility of combining fluctuating variables into variables that fluctuate less is critically dependent on the above assumptions, especially that the fluctuations are small, random and uncorrelated. But these assumptions have been shown to be false.

v. It has been argued that these innovative instruments should not be regulated even as much as stock trading because they function as insurance to increase stability. This was based on another false assumption that any mathematical function of the values of stocks at different times has a fixed and determinate value at any time.

vi. Because price determination is a definite process of maximization of known preferences in an environment of perfect knowledge, and because all values are definite, it can be in some instances automated and carried out by computers programmed to trade under specified conditions. But some markets thus operated have failed to function or clear trades.

I think the Edgesters behind the essay correctly diagnose the problems here, but may be making the same old mistakes they criticize when they try to address the crisis by reifying the economy as a physical system. If this crisis teaches us anything, it is that distributional questions are fundamentally moral. Our system has failed to recognize the inevitably value-laden nature of economic policy. As Linda Bilmes and Joseph Stiglitz lament, recent American economic policy has utterly failed to take this moral dimension of economic life into account:

The worst legacy of the past eight years is that despite colossal government spending, most Americans are worse off than they were in 2001. This is because money was squandered in Iraq and given as a tax windfall to America’s richest individuals and corporations, rather than spent on such projects as education, infrastructure, and energy independence, which would have made all of us better off in the long term.

President Bush did manage, by way of deficit spending, to grow the economy by 20 percent during his tenure. But who benefited from that growth? Between 2002 and 2006, the wealthiest 10 percent of households saw more than 95 percent of the gains in income. And even within those rarefied strata, the gains tended to be concentrated at the very top. According to one study, the nation’s 15,000 richest families doubled their annual income, from $15 million to $30 million. . . . .

Even as the wealthiest families have increased their holdings, the families at the center of the income spectrum saw their incomes shrink by 1 percent. In 2000, the average weekly earnings of production and nonsupervisory workers (70 percent of the workforce) amounted to $527 (in current dollars). Six years later, their wages had risen a mere $11, and those same workers have meanwhile seen their net worth (assets minus liabilities) wither as a result of falling home values, higher personal debt, and shrinking savings—factors now being exacerbated by the collapsing stock markets.

And let's not forget skyrocketing health insurance premiums. With benefit of hindsight, these windfalls for the wealthiest appear more and more pointless. Friedman and Gao are helping us see exactly the kind of conduct that was "incentivized" by tax cuts for the ultra-rich: feverish shuffling of representations of assets that ultimately metastasized the risk it was putatively managing.

Posted by Frank_Pasquale at 09:20 PM | Comments (6) | TrackBack

Plutocrat Putsch

The IMF's quarterly magazine Finance and Development has a number of good articles on the financial crisis, with Noel Sacasa's Preventing Future Crises leading the pack. He identifies "four sets of innovations and structural changes" that rendered the system unstable:

[P]rocyclical capital and accounting practices and regulations; excessive reliance on backward-looking, market-based risk management models and systems; and a more complex and opaque configuration of players; [and] the originate-to-distribute business model and reliance on wholesale funding markets.

Each of these is worth unpacking in a little more detail before discussing his solutions.

1. Procyclical capital requirements: "During upswings, the value of marked-to-market assets and collateral increases, while loan-loss allowances decrease because default rates are expected to decline in the short run. This raises the value of reported equity and lowers the typically shortsighted probability of default estimates for both borrowers and lenders."

2. Taking Market Values at Face Value: "Too much reliance on market prices and on oversimplified, backward-looking models to manage risks, while neglecting due diligence and analysis of fundamentals, appears to have resulted in grossly underestimating risks, inducing complacency, and decreasing monitoring."

3. The shadow banking system's shadowy ties: "Compared with 30 years ago, the current financial system shows more blurred distinctions between different types of players, greater consolidation, many new types of players, and tighter but more opaque interconnections between them."

4. The downside of securitization: "Securitization and the development of private-label complex structured credit . . . may . . . have contributed to greater aggregate risk-taking and, instead of resulting in an efficient dispersion of risks, have led to a destabilizing shift of risks toward institutions that could not adequately manage them, to the reversion of some of these risks to banks that had supposedly offloaded them, and to much more uncertainty about the actual distribution of risks among market participants. . . . [Investors] relied excessively on the reputation of the institutions involved and on the credit ratings of the instruments.

Sacasa mentions several "regulatory reform priorities" in the articles, most of which sounded quite plausible to me. Who can doubt the wisdom of "making both capital requirements and macroeconomic policy more countercyclical," improving the "quality of the credit rating process," and reducing conflicts of interest? My question is whether any of these goals can be achieved without fundamentally reassessing the culture of compensation in these financial institutions--where the upside for reckless risk-taking is enormous, and the downside trivial.

If Dick Fuld can pilot Lehman to destruction and walk away with half a billion dollars--the total life-product of roughly 10,000 workers at his disposal--why should any future finance industry CEO avoid doing what he did once "normalcy" returns? If John Thain can demand a $10 million bonus from the Merrill Lynch in this of all years, what is the limit on what these people think they are woth--and will try every imaginable form of maneuvering to get? And doesn't this maneuvering by its very nature depend on ever more volume or velocity of money chanelled into ever-riskier and more leveraged investments?

The Wall Street-Washington nexus of exchange (of campaign contributions for regulatory favors) has made the former party far stronger than the latter. One very important way of righting that balance is to tamp down the ability of people at the top of the investment world to accumulate so much money that they effectively control the terms of their regulation. Unsurprisingly, they managed to basically undo the very provision of the bailout meant to do just that:

Congress wanted to guarantee that the $700 billion financial bailout would limit the eye-popping pay of Wall Street executives, so lawmakers included a mechanism for reviewing executive compensation and penalizing firms that break the rules.

But at the last minute, the Bush administration insisted on a one-sentence change to the provision, congressional aides said. The change stipulated that the penalty would apply only to firms that received bailout funds by selling troubled assets to the government in an auction, which was the way the Treasury Department had said it planned to use the money.

Now, however, the small change looks more like a giant loophole, according to lawmakers and legal experts. In a reversal, the Bush administration has not used auctions for any of the $335 billion committed so far from the rescue package, nor does it plan to use them in the future. Lawmakers and legal experts say the change has effectively repealed the only enforcement mechanism in the law dealing with lavish pay for top executives. "The flimsy executive-compensation restrictions in the original bill are now all but gone," said Sen. Charles E. Grassley (Iowa), ranking Republican on of the Senate Finance Committee.

Of course, the bankrupt ideology of Bush deregulationism is a key player here. But the material forces behind this plutocratic putsch affect both parties:

[I]f all bubbles and panics are alike, this one, the worst since the Great Depression, also carried the DNA of our own time. Enron had been a Citigroup client. In a now-forgotten footnote to that scandal, [Democratic "wise man" Bob] Rubin was discovered to have made a phone call to a former colleague in the Treasury Department to float the idea of asking credit-rating agencies to delay downgrading Enron’s debt. This inappropriate lobbying never went anywhere, but Rubin neither apologized nor learned any lessons. “I can see why that call might be questioned,” he wrote in his 2003 memoir, “but I would make it again.” He would say the same this year about his performance at Citigroup during its collapse.

The Republican side of the same tarnished coin is Phil Gramm, the former senator from Texas. Like Rubin, he helped push through banking deregulation when in government in the 1990s, then cashed in on the relaxed rules by joining the banking industry once he left Washington. Gramm is at UBS, which also binged on credit-default swaps and is now receiving a $60 billion bailout from the Swiss government.

It’s a sad snapshot of our century’s establishment that Rubin has been an economic adviser to Barack Obama and Gramm to John McCain. And that both captains of finance remain unapologetic, unaccountable and still at their banks, which have each lost more than 70 percent of their shareholders’ value this year and have collectively announced more than 90,000 layoffs so far.

Our nation's financial establishment has been extraordinarily skillful at insulating itself from the consequences of its recklessness. Only direct limits on the power they exercise--i.e., the money they have--can prevent (or at least alleviate) future crises.

Posted by Frank_Pasquale at 08:18 AM | Comments (0) | TrackBack

A Total Breakdown in Trust

The recent Madoff scandal, along with the ongoing Blagojevich farce, are almost too repulsive to blog about. The sheer chutzpah of the banker and stupidity of the politician are breathtaking. The Panglosses among us would like to believe that a "few good men" could have averted something like the banking crisis--a Bullworth-meets-Carlyle theory of history. But it's increasingly apparent that our Darwinianly structured markets and politics have made fitness synonymous with greed and self-dealing in far too many settings.

That's one reason why this Speaking of Faith interview with moralist Parker Palmer is so refreshing. It is rich with ideas and insights, and at the core are Palmer's ideas about the necessity of trust and community. Here is a brief glimpse of the ideas discussed:

Alexis de Tocqueville [essentially argued] that the French Revolution happened long before it happened. The eruption that shattered French society at the end of the eighteenth century was the result of small seismic shifts that had been accumulating for decades deep underground. If people had paid attention to the tectonic instabilities caused by greed and injustice, and had responded wisely to the nervous needles on their inner seismographs, the "Reign of Terror" might have been avoided.

A parallel point can be made about the economic terrors that now engulf America: at some level, most of us knew they were coming. Who doesn't know that a society in which the rich get richer while the poor get poorer is a society that will someday have to pay the piper? Who doesn't know that when a relatively small fraction of the world's population uses its power to command and consume a disproportionately large fraction of the world's resources, the chickens will come home to roost? Who doesn't know that an economic system that encourages us to live beyond our means and refuses to regulate greed is one in which our avarice will come back to bite us? Who doesn't know that at every level of life, from personal to global to cosmic, what goes around comes around?

[Unfortunately, while r]eclaiming identity and integrity in personal and public life may make you a person who evokes the better angels of our nature . . . it will not improve your "bottom line" — at least not in the understanding of that phrase that has landed us in so much trouble. Take, for example, the companies that banks hire to identify people on the verge of foreclosure, people so desperate to salvage their homes that they can be conned into signing up for yet another mortgage scam. Who cares about destroying these families' finances, along with the credit market itself, as long as the scammers' bottom lines improve?

Palmer has great wisdom to offer in the face of the terrible incentives we all face in a "devil take the hindmost" society. And his book The Courage to Teach is a great guide for educators as we try to take stock of the moral challenges of our own institutions and profession.

Posted by Frank_Pasquale at 03:40 PM | Comments (7) | TrackBack

The Last Shall be First

A heartwarming Christmas fashion story:

Even seasoned bargain hunters were startled to see Saks’s wood-paneled main sales floor mobbed with consumers nosing like truffle hounds through shelves of marked-down cashmere sweaters and racks of designer clothes with prices seemingly too good to be true.

Will shoppers ever again want to buy luxury goods at full price? The depth of the challenge was suggested by the incongruity this week of seeing Prada wallets, usually kept under glass at Saks, dumped into display stands that at Wal-Mart are known as “end-caps”; lizard handbags at Bergdorf Goodman jumbled on counters as if that Fifth Avenue landmark were an outlet of Loehmann’s; and Ralph Lauren dress shirts at Lord & Taylor thrown together and offered at prices roughly equivalent to the cost of two McDonald’s Happy Meals.

I've been skeptical of fashion's real contribution to the economy. These developments remind me a bit of Keynes on Economic Possibilities for our Grandchildren:

When the accumula­tion of wealth is no longer of high social im­portance, there will be great changes in the code of morals. We shall be able to rid our­selves of many of the pseudo‑moral principles which have hag‑ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues. We shall be able to afford to dare to assess the money‑motive at its true value.

The love of money as a possession ‑as distinguished from the love of money as a means to the enjoyments and realities of life ‑will be recognised for what it is, a some­what disgusting morbidity, one of those semi­criminal, semi‑pathological propensities which one hands over with a shudder to the specialists in mental disease. All kinds of social customs and economic practices, affecting the distribu­tion of wealth and of economic rewards and penalties, which we now maintain at all costs, however distasteful and unjust they may be in themselves, because they are tremendously useful in promoting the accumulation of capital, we shall then be free, at last, to discard.

The articles of fashion mentioned in the article are losing none of their beauty or design elegance--only their ability to signify their acquirer's wealth. This is one area where deflation is overdue.

Posted by Frank_Pasquale at 09:39 AM | Comments (1) | TrackBack

Bending Journalism

Thomas O. McGarity and Wendy Wagner's book Bending Science: How Special Interests Corrupt Public Health Research is an extraordinary contribution to the sociology of knowledge. The typology of tools for bending science mentioned on page 10 of the book (spinning, packaging, harassing, attacking, hiding, and shaping) are elaborated in great detail in cases ranging from popcorn lung to alar panics. I predict that typology will eventually inform research on "bent journalism"--the range of so-called objective reporting subtly shaped by stealth sponsors.

On the Media does a great job covering such situations. This week it reports on conflicts of interest at the show The Infinite Mind, whose host earned "at least $1.3 million from 2000 to 2007 giving marketing lectures for drugmakers, income not mentioned on the program." Gary Schwitzer, director of the University of Minnesota’s Health Journalism Program, identifies "five sins of health reporters:"

Gullibility and naiveté as number one; a failure to discuss costs as number two; as number three, the failure to tell both how small might be the potential benefit and how large might be the potential harms; number four, [failure] to get independent sources; and, number five, to always be looking for conflict of interest in those sources.

Schwitzer's Health News Review grades health stories on these and other bases. Like McGarity/Wagner's chapters on "Restoring Science" and "Reforming Science Oversight," the Health News Review is essential reading for those concerned about the real material bases of conventional wisdom.

Posted by Frank_Pasquale at 08:30 PM | Comments (0) | TrackBack

Subprime and the Commodification of Women's Bodies

Does the free market corrode moral character? We've already seen the role of sex in the wreck of royalty-collection at the Department of Interior. As Mara de Hovanesian reports, it turns out the mortgage business was almost as good at this toxic mix as big oil:

[M]any . . . young women during the boom found [their] way into an obscure banking job with the clunky title "mortgage wholesaler." [Their experiences offer] a glimpse into the recklessness and indulgence that drove the industry to ruin. . . . Wholesalers are paid on commission: the more loans they generate, the more money they make. . . . During the housing boom, lenders typically approved the loans and then packaged them into securities. That path—from mortgage brokers to wholesalers to lenders to securities—turned out to be a road to disaster.

Eventually the deal-making turned frenetic. Multiple wholesalers began inundating mortgage brokers with offers for the same applications. Some brokers chose to exercise their power by asking for something extra in exchange for their business: sex. Dozens of former brokers and wholesalers say the trading of sexual favors was so common that it came to be expected. [One who declined advances stated]: "I didn't want to be a mortgage slut."

At the heart of the subprime crisis was the growing cultural obsession with transforming homes from mere places of shelter to investments--their exchange value eclipsed their intrinsic value. I'm not surprised that this hypercommercial mentality would slip from individuals' views of their homes to their views of themselves. Add in sexism in the business world and an all-too-tempting road to riches appeared.

Hopefully advocates of the prosperity gospel will realize the all-consuming greed an "ownership society" can unleash. As Lipshaw notes, religion can help moralize market participants, but can itself be overwhelmed by a wild west atmosphere of easy money.

Posted by Frank_Pasquale at 12:27 PM | Comments (4) | TrackBack

"The market and the internet don't care if you make money."

Via Andrew Sullivan I came across this really angry comment about the future of book publishing. In it, Seth Godin (Tribes) argues that the book industry needs to adapt - quickly - from being a bunch of people who print and sell books to a group of "marketers and agents and managers and developers of content". Sounds like a cinch. I wonder why newspapers haven't thought of that.

Godin continues that maybe publishers should consider selling books for a dollar, because the audience will purchase them at that price, and let authors make money from "bespoke work and appearances and interactions". (That means, I think, personalized books written on demand for particular groups. I imagine Godin has read The Diamond Age more the once. If you haven't, you should, even though it retails at $10.20 new.)

I don't know enough about the economics of the book industry, and I'm trying to learn more. But I wanted to focus for a moment on Godin's argument (noted in the title to this post) that content providers shouldn't feel entitled to monetizing their talent, simply because they are creating a product that people want. Very true. That said, it is also worth pointing out that entrepreneurs probably won't create until they see a path to making a living from their work. The Grateful Dead model - appearances & interactions - appears to me to be an audacious hope, not a business model. Or to put it another way, if I were a budding author reading Godin's interview, I would put down my pen and go to law school. At least we've got a Guild to protect us from the forces of modernization.

(Image Source: Ezra Cornell's Book, Wikicommons)

Posted by hoffman at 08:00 PM | Comments (9) | TrackBack

Quick Links on the Google Book Search Deal

Having suggested some conditions for the coming digital library of Alexandria, I should have commented on this Google deal earlier. But I've been way too busy to read the details in the proposed settlement. No one can doubt its importance--as Mike Madison has said, we may be "seeing the early stages of the beginning of the end of copyright law as we know it." Google's side of the story can be found here, and I look forward to reading their and the Authors' Guild account of it. For now, I'm worried by Harvard's decision to criticize the deal and back out of Book Search:

“As we understand it, the settlement contains too many potential limitations on access to and use of the books by members of the higher-education community and by patrons of public libraries,” Harvard’s university-library director, Robert C. Darnton, wrote in a letter to the library staff. He noted that “the settlement provides no assurance that the prices charged for access will be reasonable, especially since the subscription services will have no real competitors [and] the scope of access to the digitized books is in various ways both limited and uncertain.” . . . . “For now,” the statement concluded, “the Harvard University Library will continue to explore other ways to open up its collections more broadly for the common good.”

I had thought that legislation would be an ideal way to assure that Google's aspirations here best served the public interest--and that there would be a long time to think about how to do that well (for example, the Copyright Act of 1976 evolved over at least 16 years). But it now appears that this settlement may govern the dominant means of digital access to and distribution of books for a very long time--and that those who care about these issues will have to organize quickly if they want any input.

Posted by Frank_Pasquale at 11:00 AM | Comments (2) | TrackBack