Category: Financial Institutions

Complexity, Opacity, and Permanent Crisis

Finance crises have baffled recently. Jon Corzine says he has no idea where hundreds of millions of dollars in MF Global money went. Judge Rakoff says the proposed SEC-Citi settlement would whitewash the megabank’s wrongdoing:

An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous . . . . In any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth.

And Sheila Bair suggests that we are still in the dark about critical aspects of the financial system:

Credit exposure reports are essential to make sure regulators understand crucial inter-relationships between distress at one institution and its potential to cause major losses at other institutions. This type of information was missing during the crisis. I know that many members of [Congress] heard the same arguments that I heard during the crisis — that bailouts were necessary or the “entire system” would come down.

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Resisting Elites’ Resistance to the Rule of Law (Review of Glenn Greenwald’s With Liberty and Justice for Some)

(Glenn Greenwald is having a fundraiser; link here.  I think his work is well worth supporting.)

There are few (if any) “free markets” in the largest sectors of the US economy. The health care industry is a labyrinth of public and private payers. Sectors known as “guard labor” are also larded with subsidies.  The Departments of Defense and Homeland security contract with thousands of companies.  The communications industry enjoys various government “givings.” And at this point, everyone knows that our largest financial institutions are taxpayer supported entities. Without the implicit backing of the federal government, they would collapse.

Government subsidy to large industries is not, in and of itself, a bad thing. When wages are stagnant and capital gains are mainly enjoyed by the top thousandth of the population, some entity has to spend for common provision. But the price of that spending should be higher standards for the propped-up industry. In health care, for instance, Medicare Conditions of Participation (and laws like the 1986 EMTALA) require many hospitals to provide care regardless of patients’ ability to pay. Tough fraud and abuse enforcement subjects providers’ bills to rigorous audits; privacy law will soon require audit-capability for digital medical records. Legislation passed in 2009 and 2010 creates many other requirements to channel private provision of health care toward more public ends. It’s certainly not a perfect system, but regulation is serious and purposeful. There are real consequences for many lawbreakers.

Glenn Greenwald tells a very different story about three other heavily subsidized industrial sectors.  He gives us serious reason to doubt that law has constrained banks, telcos, and the security sector when they posed critical threats to our economy, privacy, and liberty. His book With Liberty and Justice for Some is a passionate indictment of four distinct trends:

1) elites who violate laws with impunity,
2) retroactive immunity for acts unlawful at the time they were committed,
3) lobbyists’ power to influence legislators to render bad conduct lawful or even subsidized, and
4) a radical increase in punishment of those who fall outside the charmed circle of political and economic elites.

Greenwald has examined each area in his blog, as have other, lonely voices in corporate law (and a more robust chorus in communications & cyberlaw troubled by telecomms’ sweetheart deals). The vital contribution of With Liberty and Justice for Some is to show how the four trends mutually reinforce one another, contributing to a politics of wealth and privilege defense commonly known as oligarchy.
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Unconditional Bailouts: Capitalism’s Undoing

What are we to make of Bob Ivry, Bradley Keoun and Phil Kuntz’s blockbuster report on the Fed’s bailouts? The three journalists conclude that “taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger.” Yves Smith argues that “banks lied” and grabbed $13 billion in profit. She also notes that their favorite water carrier, Timothy Geithner, “told Congressmen they were too stupid to be able to shrink banks, and they should leave those questions to the Basel Committee (which has no interest in making big banks smaller).”

For another perspective on the corrupt relationship between megabanks and our central bank, consider John Kay’s recent description of the “martingale” strategy among bettors:

Each time you lose, you increase your stake: to the point at which a win on the next game would recoup all your losses and leave you ahead. Since you will win sooner or later, you are certain to come home with a small profit. Provided you are infinitely rich before you start. Otherwise, if you regularly engage in martingales, you will eventually go bankrupt – and the richer you are, the larger the scale of bankruptcy.

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The Conservatism of Occupy Wall Street

Occupy Wall Street has continued to hold Liberty Plaza, and has inspired hundreds of other protests. It’s usually interpreted as a leftish populist complement to the Tea Party, ala this diagram:

Some have praised OWS and the Tea Party for challenging ossified and corrupt institutions. Others dismiss the two groups as mere “primal screams,” uninformed by a realistic sense of policy.

I’d like to step beyond the rival narratives of “what does OWS do for the left” and “how does OWS relate to the Tea Party.” These are important questions, but I think they miss a deeper feature of the movement: its conservatism. Sure, Bill O’Reilly and Rush Limbaugh are portraying the protesters as druggies, socialists, and hippies. But millionaire media moguls do not define modern conservatism; principles do. Some of the most appealing ideals of modern conservatism have found a home in the OWS movement. Gregory Djerejian has put it well:

While I will readily confess I find it odd as something of a Burkean that I am sympathetic to these protesters, they are not looking to trot out the guillotines, in the main (although I did spot a “Behead the Fed” sign!), but rather, they have smelled the radicalism of the blows dealt the integrity of a representative democratic system poised by the almost unfettered oligarch-like behavior among too many elites wholly disconnected from, yes, the 99% they speak of. They are acting to secure conservative aims of re-balancing a society that is becoming dangerously unmoored and increasingly bent asunder.

In the rest of the post, I’ll explain the conservative values behind OWS and the larger wave of economic discontent it reflects.
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Restore Glass-Steagall

I’ve posted about this before, but I’m still wondering why the reenactment of Glass-Steagall is not a good (and pretty obvious) part of the solution to our financial woes.  The legislation worked quite well for more than sixty years and would be easy for banks to understand and apply.

So what are the counterarguments?  One might be that Glass-Steagall is dated, therefore you can’t just bring it back jot-for-jot.  I’m happy to concede that point, though you would think that some modest revisions could take care of that problem.  A second thought is that the repeal of Glass-Steagall did not cause the Panic of 2008, so a restoration won’t do much good.  Even if that is true, I don’t see what harm would come from bringing back the old regulatory framework.  (Can that approach really be worse than what we have now?)  The third possibility is that there was something wrong with Glass-Steagall that I don’t know about.  I’d be interested in hearing from people who know more about financial regulation than I do.

The Moral Authority of Occupy Wall Street

The Occupy Wall Street protests continue to grow, and to gain support from public intellectuals. Joe Stiglitz, Anne Marie Slaughter, and Paul Krugman are the latest luminaries to praise the cause. The movement has also provoked derision. Let’s consider the latest Norquist/Limbaugh memes as the protest nears the one-month mark:

1) “They’re just spoiled hippies who can’t get a job.” A quick glance at the “We are the 99%” tumblr could easily dispel this notion. The economic suffering in this country is deep and broad. As one news story put it, “one in three Americans would be unable to make their mortgage or rent payment beyond one month if they lost their job.” Even if the most down-and-out people are too poor or busy to get to Wall Street (or the hundreds of other actions now taking place), many of them think of the OWS crowd as speaking for them.

There is so much needless suffering going on now, and so much wealth accumulating at the very top. It is hard to understand how critics dismiss the protesters so cavalierly. I used to find the Biblical passage about God hardening Pharaoh’s heart one of the more mysterious parts of the Book of Exodus; now I feel like I’m witnessing it firsthand.
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Revolt of the Elites

Bernard Harcourt has analyzed new forms of radicalism adopted by the most and least privileged. Umair Haque at the Harvard Business Review has also identified dispositions shared by street looters and certain elites. As the chief political commentator at London’s Daily Telegraph has observed, “The moral decay of our society is as bad at the top as the bottom.” Yet there are very different consequences for each group’s transgressions.

The more disruptive the disenfranchised become, the more they provoke harsh responses from authorities, thus worsening their already marginal position. By contrast, finance and government elites have positioned themselves to gain from whatever risks they shift onto society at large, via bailouts, emergency powers, and the revolving door. As Ross Douthat observed, “The economic crisis is producing consolidation rather than revolution, the entrenchment of authority rather than its diffusion, and the concentration of power in the hands of the same elite that presided over the disasters in the first place.”
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Audit Trails: The Corporate Surveillance We Need

What do the following problems have in common?

1) food poisoning
2) systemic risk in the financial system
3) data breaches
4) violations of civil liberties
5) tax evasion
6) insider trading

In each case, we could do a lot more to stop the problem if we better tracked the actions that lead to it. An “audit trail” can enable that tracking. Decades ago, such tracking would be inordinately costly. Nowadays, it is increasingly embedded into any quality logistical system. The technologies of RFID chips, cheap imaging and data storage, and rapid search are ubiquitous. Corporations use them to track customers and products. Now public authorities need to use them to track corporations.

Consider, for instance, this recent story on food safety:
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“Wall Street is our Main Street”

Who could imagine that a board member of the New York Federal Reserve Bank would adopt radical political economy? Both Slavoj Zizek and Robert Brenner have questioned the Wall Street/Main Street dichotomy, claiming that the US economy is so deeply financialized that it’s hard to discern a real core beneath the monetary fluff. We’ve gone from “what is good for GM is good for American” to “what is good for GS is good for America.” And it appears that the “public’s representative” on the NYFRB agrees:

Mr. Schneiderman has . . . come under criticism for objecting to a settlement proposed by Bank of New York Mellon and Bank of America that would cover 530 mortgage-backed securities containing Countrywide Financial loans that investors say were mischaracterized when they were sold. . . . This month, Mr. Schneiderman sued to block that deal, which had been negotiated by Bank of New York Mellon as trustee for the holders of the securities. . . .

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Canova on a Public Option in Banking

Timothy Canova has a great new essay up at the New America Foundation on the need for a public option in banking. As he argues:

The dilemma facing governments today is how to pay for stimulus and jobs programs without incurring new debt. Public banking institutions should point the way, in part for their ability to expand lending on a revolving basis without raising taxes or even borrowing from bond markets. For instance, public infrastructure banks in continental Europe and East Asia have long recognized the role of public finance to fund long-term development projects – “projects that generate economic benefits to the wider economy in excess of their private returns.”

Various proposals for a national infrastructure bank by the Obama administration and members of Congress, while a step in the right direction, are far too modest in scale and scope. At the state level, North Dakota has enjoyed the benefits of a public bank since 1919. The Bank of North Dakota, the model of a state-owned bank, has operated continuously at a profit and according to conservative banking practices (including relatively modest compensation for the bank’s management). The state deposits its tax revenues in the Bank which in turn ensures that a high portion of state funds are invested in the state economy. In addition, the Bank is able to remit a portion of its earnings back to the state treasury – more than $300 million in the past decade.

Thanks in part to these institutional arrangements, North Dakota is the only state that has been in continuous budget surplus since before the financial crisis and it has the lowest unemployment rate in the country. In contrast, California is the largest state economy in the nation, yet without a state-owned bank, is unable to steer hundreds of billions of dollars in state revenues into productive investment within the state. Instead, California deposits its many billions in tax revenues in large private banks which often lend the funds out-of-state, invest them in speculative trading strategies (including derivative bets against the state’s own bonds), and do not remit any of their earnings back to the state treasury.

As private sector wealth concentrates into fewer hands, public options will become even more essential. As Louis Hyman quipped in a recent podcast, America’s private finance system is substituting loans for decent wages. It’s not sustainable.

Canova gave an inspiring talk at the Roosevelt Institute’s Future of the Fed event earlier this year. Canova has drawn on the history of the Fed, and particularly that of Utahan Marriner Eccles, Chairman of the Federal Reserve from 1934 to 1948. Eccles is an unsung hero of the New Deal era. I recently found this 1933 testimony from him, and it is a truly acute diagnosis not only of the economic situation of his time, but also that of our own. (His frustration with the deficit hawks of his day is particularly eloquent on p. 708.) Canova’s careful understanding of the past, and revival of the remarkable Eccles, is the solid foundation for a compelling proposal to develop a public option in banking.