Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

27 September 2011

The New Royalists (and the New Guillotines)


In rough outline, the causes of the French Revolution were pretty simple. The King and his court, plus a bunch of obscenely rich aristocrats, ran the country and owned nearly all the wealth. They ran it badly and didn’t like sharing. They gave little thought to and had no sympathy for common folk. On hearing that peasants had no bread to eat, Marie Antoinette famously quipped, “Let them eat cake!”

They didn’t use their heads (or their hearts), so they lost them.

We in the Western World like to think we have democracy. We like to think we have capitalism. We like to think we know the principles by which both work.

But there is a class of people—very wealthy and powerful people—who have eluded these principles for most of our history. They’re bankers, or more generally, finance men. (I use the masculine gender because the overwhelming majority are men, and have been throughout our history.)

It is an odd thing, really. Today one of these men, Jamie Dimon, has made himself infamous as a one-man lobbying army, opposing effective regulation of the same financial system that three years ago almost destroyed the global economy and continually threatens a repeat performance. He happens to be the CEO of JP Morgan Chase, one of America’s top five banks by assets. He therefore carries the legacy of J. Pierpont Morgan, a private banker who virtually controlled our entire nation’s finance throughout the nineteenth century, and who could control financial panics—or not—at his whim.

Both were big men physically and metaphorically. Morgan had a veneer of culture but made himself look bigger and more imposing with a tall top hat. Dimon looks fitter, in accordance with modern culture. If you saw him in a dark alley without his business suit, you might take him for a Mafia hit man and walk quickly away. Both men no doubt grew up accustomed to obedience because of their size, intensity and cunning.

In the nineteenth century, Morgan operated almost entirely in secret. There were no antirust laws until 1890. There was no income tax (except briefly to pay for the Civil War) until after ratification of our Sixteenth Amendment in 1913. So the money Morgan made and how he made it were known only to the similarly-minded plutocrats with whom he met behind closed doors. He made and broke empires in electricity and steel. He advised and pressured presidents like the potentate of an invisible nation within a nation.

Dimon can’t act precisely like that today. We do have antitrust laws and the income tax. Our legal regulatory regime and our media are vastly more pervasive and intrusive than in the nineteenth century. But Dimon and his ilk have reacted by infiltrating and suborning our government, particularly in Treasury, Congress and the Fed. They still get their way, regardless of the supposed rules of democracy and capitalism. But today they have to do it more publicly.

The paradigmatic private meeting of our era came on October 13, 2008. Dubya’s Treasury Secretary, Hank Paulson, himself a former chairman of Goldman Sachs, called the CEOs of America’s leading banks together in Washington. Fed Chairman Ben Bernanke was present. In addition to Dimon from JP Morgan Chase, there were six others from major banks, representing Bank of America, Citigroup, Merrill Lynch, Morgan Stanley, and Wells Fargo.

Did Paulson call these men together to reprimand them for destroying American finance and (later) the American economy? Did he chide them for building businesses on liars’ loans palmed off to unsuspecting investors in the form of mortgage-backed securities? Did he urge them to take the necessary “haircuts” on their toxic investments? Did he ask them to help him find the best way out of the crisis? No, no, no and no.

Paulson called them together to give them money—our money, yours and mine. He handed out over $120 billion of the people’s money that day. Sure, it wasn’t a gift. In return Paulson got for the Treasury convertible preferred stock paying 9% interest, which Paulson promised never to vote.

Think about that. Now 9% wasn’t a bad interest rate, and it would actually go up with time, to give the banks an incentive to replace the government investment with private capital. But the investment firmly established two principles that, insofar as I know, were unprecedented in American history.

The first principle was “too big to fail.” When banks had failed in the Great Depression, the federal government came up with two answers. The first was depositors’ insurance. It made depositors whole. Not the banks, their investors, or their managers. The depositors.

The government, in the form of the Federal Deposit Insurance Corporation (or equivalent agencies for non-bank financial institutions) took the failed banks into receivership, dismissed management, sold off the parts or assets that other banks or private investors would buy, and liquidated the rest. Bank investors got nothing, or pennies on the dollar, and management largely ceased to function, except as consultants to the receivers.

That was capitalism. The guys who drove the banks into bankruptcy were out. The shareholders who had hired or tolerated them lost most or all of their investment. And innocent depositors and some other creditors were spared. There was no moral hazard, no bank runs, and no financial panic. The economy muddled on, with some duly chastened bankers and shareholders.

Paulson’s excuse for fundamentally changing the paradigm for government intervention was plausible. The banks were too incestuous, he argued. Their toxic assets were too intertwined. They all owned some of the sludge, so if you marked it all to market the whole house of cards would collapse. If you put the failed banks in receivership, no one would buy the toxic assets because no one knew what they were worth.

There was some sense in these arguments at the time. And they got accepted because everyone was in a panic.

But in the clear light of hindsight, we can see their obvious flaws. As it turns out, the federal government (through the Fed) did invest trillions in buying, quarantining and stabilizing toxic assets. It did so through direct capital infusions, like those of October 13, though TARP, through near-zero-interest loans at the Fed window, and by printing new money to do what had to be done.

But on October 13, 2008, Paulson had firmly established a new principle of federal intervention, never before used. (For Obama bashers, let us emphasize briefly that that was during the reign of George W. “Dubya” Bush.) Henceforth government would prop up the banks themselves, their managers and investors, not their depositors and creditors. Saving the banks and their incompetent managers was to be the price for saving the economy.

That principle could only have been laid down by a cabal of bankers, in the manner of J. Pierpoint Morgan in the nineteenth century, before the antitrust laws, the income tax, and federal regulation of banking and securities. Yet Paulson and his fellow thieves pulled it off in broad daylight, in the twenty-first century, under the noses of the public, the Department of Justice, and financial regulators, with active complicity of the Fed. The Wall Street Journal [subscription required] and the New York Times reported on the meeting that same week.

When you think of its consequences, it was probably the single greatest heist in human history, done in plain view.

The second unprecedented aspect of Paulson’s “innovation” was continuity of management. In the old days, when people screwed up, they got fired. When a bank went bankrupt, the court or federal receiver took over, and management was out. The screwups didn’t get a second chance, at least not at the same bank. But in Paulson’s new world, Treasury gave them new money, took stock in exchange, and promised not to vote it. Paulson left the foxes in charge of the hen house with a pledge that they would stay there.

Don’t get me wrong. I don’t think Paulson et al. had the minds of thieves, what lawyers call mens rea. Things just turned out that way. Paulson and his colleagues did what they did because banking was all they knew and all they cared about. Their universe was collapsing, and they wanted to save it. The economy was secondary. The abstract principles of capitalism and free markets, let alone FDR’s response to the Great Depression, if they mattered at all, came in a distant third.

These men just handled things like the new royalists they are, in a back room in their own interest, the same way J. Pierpont Morgan had done over a century before.

Once their little meeting had set the stage, the play went forward as written. By the end of the week, the federal government had committed $2.25 trillion to the philosophy of “too big to fail.” By the time President Obama took the oath of office on January 21, over three months later, additional trillions were committed or in the works. And the President, perhaps unbeknownst to him, had two fifth columnists on his team—Geithner and Summers—both committed, willing and predisposed by background and experience to play out the script.

The rest is history. For three years, the nation’s biggest banks have been exempt from the rules of market discipline, market valuation of assets, and capitalism itself, because they are “too big to fail.”

Not only that. This royalist exemption from the normal rules of free markets has spread to Europe and is instrumental in the ongoing panic there. For example, the latest proposal in the EU is for banks that invested in bad Greek bonds to take a 21% “haircut,” when the bonds’ market value is 60% below face. This approach would leaves the other 40% loss for various governments and the people of Europe to pick up.

It’s not a complete exemption, as here. The banks take one-third the loss they caused and the people two-thirds. But it’s good enough for greedy incompetents.

So there you have it. Democracy and the free press have failed miserably. The process is different, more public, and much more messy. But the outcome is the same as it was in J. Pierpont Morgan’s day. The money men call the shots in private meetings; they protect their interests well; and the rest of us pay the bill. The only difference is that, this time, we have badly damaged the very foundations of capitalism and free markets, at least in finance.

In the French Revolution, the people had a simple, rather mechanical response to royalists: the guillotine. We’re not quite there yet. The French peasants were literally starving. Few are starving today, although many are in poverty, malnourished and sleeping under culverts, in homeless shelters, or in their cars.

So we still have a way to go before we reach the guillotining stage. Anyway, we live in a more “civilized” era, when beheadings and other mass violence are generally just not done.

More to the point, there are guillotine substitutes that might get us back on track without bloodshed.

We can go back to the old ways any time we want. We can stop bailing out banks and liquidate them when they fail. We can continue protecting individual depositors and expand that protection to bigger accounts and to businesses. We can include selected other creditors, to take some of the risk out of a falling house of cards.

We can do all this through existing institutions, like the FDIC, FHLBB, the Fed, and bankruptcy courts. If we’re worried that things might collapse too fast, we can create special receivers with extraordinary powers to unwind failing financial institutions quickly and accurately. In doing so, we would have a signal advantage over liquidators and economic consultants in FDR’s day: computers and the Internet. We use the same technology that created the Flash Crash to restore the principles of capitalism, free markets, and democracy.

It is absolutely clear who is responsible for this brave, perverted world: Hank Paulson, his fellow bankers, George W. Bush, and (to a lesser extent) Ben Bernanke. But it’s far too late to worry about blame. The contagion has spread to Europe, and Japan cannot be far behind. China alone cannot stem the tide and in any event doesn’t care much about democracy.

So if we want to save democracy and capitalism from the latest powerful cabal of unchecked royalists, we have to act fast. There is nothing wrong with our global industries. Our A, B, C companies are the finest in human history.

But if we don’t get the royalist bankers off their and our backs and back under a regime of capitalism and free markets, the entire global economy will sour, perhaps irrevocably. Millions will suffer. Governments will fall. War may break out. Then real guillotines may come into play.

If those horrors come, they will come not because we stuck to the principles of free markets and capitalism. They will come because abandoned them for royalists.

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26 September 2011

Bankers’ Chutzpah


“Chutzpah” (with the “ch” pronounced as a hard “h”) is a word of Hebrew/Yiddish derivation meaning outrageous gall. An example of chutzpah, an old joke goes, is a young hoodlum who murders his parents and later begs mercy from the court because he is an orphan.

Bankers today are like that. The worst are here in the US. But the problem, like banking itself, is global.

Jamie Dimon is the CEO of JP Morgan Chase and one of the vilest scoundrels in the history of American business. He exemplifies the arrogant, clueless bankers who destroyed the global economy and expect their business and their exorbitant pay to continue as usual, with no accounting and minimal additional regulation. He wants American banks—including his, of course!—to be exempt from the more stringent capital reserve requirements that European regulators are proposing to stem the epidemic of gambling and swindling that has overtaken banking worldwide.

But Dimon is not alone. The crux of the European crisis that has caused the global panic du jour is quite simple. European bankers want nations and their populations, rather than them and their shareholders, to take the hit for their bad lending decisions.

As Bloomberg.com reports, the markets now rate Greek bonds at 40% on the dollar. But European bankers who hold those bonds insist on taking only a 21% “haircut.” And, with our own Treasury Secretary Tim Geithner leading the charge, they are likely to get away with foisting the rest of their losses on the EU’s public.

Who will take that hit? Ordinary people like you and me, just as in the US: government workers, those who rely on social safety nets, and taxpayers. And not just in Greece, but in Germany, France and Italy, too.

Why are the Dimon push and the EU bailout plan such outrageous examples of chutzpah? There are at least four reasons.

First, the two plans contravene the principle of personal responsibility. That principle is the bedrock of modern human civilization, not just for butchers and tyrants, but for financial malefactors, too. Ignore it or thwart it, and the foundations of civilization begin to erode, revealing the law of the jungle.

Second, the Dimon and EU plans contravene the basis of capitalism itself.

We know why labor merits pay. Labor is how people have made their living since the dawn of human civilization. But why does capital merit pay? Why pay someone just because they have money? Isn’t that just making the rich richer?

The classic answer—and the basis of our entire global capitalist system—is risk. Capital merits “pay,” i.e., a good return on investment, when invested money is at risk.

A person who puts money at risk to build a hotel, an airline, or computers—or to make a loan—advances commercial and often technological progress. That person employs others in gainful pursuits. In other words, the capitalist risks money to provide jobs and make social/economic progress. Taking a risk for good purposes deserves a return commensurate with the risk taken and the progress made.

But remove the risk, and there’s no justification for the reward. In rewarding capital that takes no risk, or in removing the risk ex post facto by bailouts, you simply steal from the poor to give to the rich. You become a reverse Robin Hood. That’s what bankers are asking us to do for them today, and that’s what we in the US have already done, big time.

The third reason to reject the Dimon and EU plans is moral hazard. To state the obvious, risk is risky. It can create loss, a dead loss of sunk investment. The Crash of 2008 taught us that. Trillions of dollars of value in stocks, mortgages and homes vanished because bankers took too much risk in funding liars’ loans and couldn’t pass that risk onto others (mostly other banks and governments).

Personal responsibility for one’s conduct and bad decisions is not just a moral imperative. It’s an economic one, too. Reduce personal responsibility for loss and people begin to take excessive risk, losing their money and ultimately yours and mine. That’s the meaning of the continuing bank bailouts over the last three years. And that’s the reason why people everywhere, including even the Tea Mob, have a right to be furious.

But the last straw is my last point: nationalism. Nationalism underlay all the last century’s bloodbaths. It’s a form of tribalism and a second cousin to racism. It’s something that— outside the soccer stadium—we must shed if we are to become fully civilized. Wherever it rears its ugly head, it makes trouble.

Nationalism was the primary impetus for our last Great War. That war could have extinguished our species if nuclear weapons had come a little earlier. Ever since, men and women of wisdom and good will have tried to reject nationalism and establish uniform, neutral and global rules of conduct.

That’s why we have Bretton Woods, the United Nations, the World Trade Organization, the International Monetary Fund and the World Bank. That’s why we have the EU itself. In slow but steady baby steps, were are tying to lay down transnational, global rules at least for commercial and economic conduct, so that nationalism and greed do not lead to war or economic collapse, as they did in the last century.

That effort is one of the most important features of modern civilization. It is essential is our species is to survive. Adapting to and fighting climate change will require the same sort of international cooperation that we now have in finance and trade.

So here we have this laudable, global trend toward international cooperation in many things. And up until recently, bankers have been part of it.

But now that they face responsibility for their gambling and swindling, now that their own exorbitant pay is on the line, they are eager to backslide.

Like the parricide who claims he’s an orphan, they tout the old human devil, nationalism. Banker Dimon wants American banks excepted from EU capital-reserve requirements because, well, they’re American and they’re therefore ours. Europe’s scoundrels rely on the national pride of Germans and the French to squeeze those freeloading Greeks with harsh austerity, while the bankers get off with only a fraction of the “haircut” they deserve.

You can already see the awful consequences of these scoundrels invoking the devil. Some are predicting the exit of Greece from the EU, the dissolution of the Eurozone, or even the breakup of the EU itself. The malefactors are willing to sacrifice the very EU they took so long to build—one of the crown jewels of human history and a bastion of human rights to rival our own—in order to protect bankers from their own bad decisions. That has got to be one of the worst-ever perversions of human values.

We are sliding into a global depression because of a massive, international failure of will. Bankers have gone rogue, not just here in the US, but globally. In refusing to accept the consequences of their bad behavior, they are flouting basic principles of human responsibility, economics and capitalism itself. And people who ought to know better—politicians, business people in the real economy, central bankers, and economists—are letting them get away with it.

We will not bring the global economy back into balance until we bring the errant bankers to heel. Even China, which has done a pretty good job of keeping its bankers under control, can’t help. It has, after all, less than a quarter of us. The global community has to step up and tell the parricide orphan “no, you don’t get mercy, excuses, bailouts or continuing bonuses for the problems that you caused.”

If anyone deserves a bailout, it’s the depositors and other innocent creditors of the errant banks. Make them whole, and you avoid runs on banks and financial panics. Make the bankers who caused the problem whole, and you penalize the innocent and undermine the global capitalist system.

FDR had the right idea eight decades ago with federal depositors’ insurance. Something like that, perhaps with wider sweep, is all we need to save our economic system, both here and in the EU. We don’t need to reward the parricide orphan.

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23 September 2011

Why an American Jew Supports Palestinian Statehood


Is the Palestinian-Israeli dispute about land or about religion? Isn’t that the question?

If it’s about religion, I don’t want any part of it. I may be a Jew, but I’m first an American. I am grateful to the point of tears that our Founders let anyone—including people a lot more religious than I—practice any religion, or even atheism, as long as it doesn’t involve human sacrifices or break other basic laws.

Religion is a personal thing. If the Crusades and the several hundred years of bloody wars between Catholics and Protestants have taught us anything, they should have taught us that. Try to force your religion on others, and you condemn yourself to perpetual, senseless war.

If we insist on everyone worshipping the same God we do in the same way, we can kill each other off until our species goes extinct. Now, with nuclear weapons, we have the means as well as the motive. No doubt other intelligent life in the Universe would be happy to be rid of us if we think that way.

But in my view, in reality, the dispute is about land. The crux of the matter is a bit of unfortunate history.

After we Jews dispersed, they persecuted us for centuries. Oddly enough, they hated us for precisely the same reasons that many Americans now hate Muslims. We dressed differently. We wore funny (to the majority) clothes, including the tefillin (fringes), kippah (yarmulke) and sideburns. We kept our own customs and traditions and our own way of life.

And for that the majority accused us of killing Christ, killing Christian babies, and other calumnies too horrible to tell. So the Nazis could easily demonize us and slaughter us in the Holocaust.

The Israelis are children of the Holocaust. They are its Darwinian survivors. They are tough as nails and self-righteous as priests because of what they or their ancestors endured. They believe only their God and their religion let them survive.

These tough, visionary people didn’t think that anyone in the world would accept them. So they dreamed up the idea of returning to “Zion,” a place their ancestors had lived in two millennia before.

That was a beautiful, compelling idea. Leon Uris captured it dramatically in the classic novel Exodus. When I read it as a kid, the sheer beauty of it brought me to tears. It was an historic coming home.

But there was only one problem: other people—Arabs—were living there, too. The Arabs living there were no match for the Jews who had survived the Holocaust. They were not as smart or as tough. There were not as worldly wise and politically sophisticated. They did not have behind them the guilt of a world that had acquiesced in the Holocaust.

So they lost in international politics. And when the UN and the US declared Israel a state, they lost in the battle that they started.

So they fled.

But does that mean they have no rights, no dignity? Does that mean they are not people, just like us? I don’t think so.

The Nazis, too, thought they were tougher, smarter, purer, better and more “efficient” than the rest of us. Maybe they were. But did their “superiority” give them the right to rape, kill, starve, imprison and burn us Jews or anyone else?

The Second World War, I thought, answered “no.” Fifty million people died to prove the point. Being “better” than others creates obligations, not rights to trample them. Isn’t that what World War II was all about? Might doesn’t make right; it makes responsibility.

Although I’m a Jew and a sometime Israeli partisan, one thing always stuck in my craw about Palestinians. Like African-Americans in our own country (before Dr. King and President Obama) they “didn’t get no respec’.”

Why not? Aren’t they people, like the rest of us? When you prick them, do they not bleed?

When I listen to people like Hanan Ashrawi or Mahmoud Abbas, I hear well-educated, reasonable people just like me. I like them. I respect them.

Do I want to marginalize them? Do I want to dispose of them? Do I want the same thing to happen to them as happened my own people in the Holocaust, or to the Armenians, to the Rwandans, to the Albanian Kosovars? Hell, no.

As I am Jewish and remember the Holocaust, I want no more genocides, no more ethnic cleansing, and no more oppression. Ever. Period. Not of us or anyone, including Palestinians.

So when Mahmoud Abbas stands up in the United Nations and requests statehood for his people, I ask, “Why not?”

He’s a reasonable man. He’s already proved his ability to provide some security for Israelis. His people have lived in their territory for as long as Israelis have lived in theirs, maybe longer. Does he not deserve to stand before the world as leader of his people? Does he not deserve a state?

Unlike his Hamas rivals, Abbas is no demagogue. He doesn’t talk about driving Israelis into the sea—when any attempt to do so would cause unthinkable suffering to both sides. He just wants recognition for his people, living on their land, so he can bargain as a sovereign and end this nightmare of conflict that has split the world into warring camps.

Let’s give it to him. Let’s acknowledge that his people, just like the Israelis, have a right to exist and to live and to bargain with the Israelis to settle this controversy.

All reasoning minds want and expect a two-state solution. So let’s set up the two states that can negotiate the end game.

Abbas may not be Nelson Mandela, but he seems genuinely interested in peace and security, which poll after poll shows 70% of both sides want. Isn’t it time to end Apartheid and bring that long-suffering region into the twenty-first century? After 63 years of endless conflict, what the hell do we have to lose?

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20 September 2011

Snap!


To the wolf, the sound of a trap slamming shut is a terrible thing. A shaft of pain accompanies the noise. To the sheep and the farmer, it is a comforting sound. It signifies one more predator off the field.

So it was yesterday when the President promised to veto any debt-reduction bill that does not raise taxes on the wealthy.

The henchmen of the middle class’ assassins—Messrs Boehner and McConnell—apparently didn’t feel the pain. After all, they are not the wolves; they are the wolves’ shills. So blithely and dumbly they stuck to their script. Boehner went so far as to decry “this administration’s insistence on raising taxes on job creators[.]”

But people who are unemployed or worried about becoming unemployed are tired of hearing that refrain. If the rich who shun taxes are “job creators,” what jobs do they offer? And when will they start?

Their taxes are nearly the lowest they’ve ever been. Corporations have the largest collective cash hoard in memory, variously estimated as between $1.5 and $2 trillion dollars. And their costs to borrow more are next to zero, thanks to the Fed printing money.

This situation has pertained for more than a year. So where are the jobs?

There are only two possible answers. Either the “job creators” are waiting to remove the President from office and make their kleptocracy complete. Or, whatever happens in politics, they won’t create jobs until demand picks up. In the second case, our economy has to pick itself up by its bootstraps without their help. Some “job creators”!

Everyone who can read and reason now knows there is no other realistic possibility. Cutting taxes on the rich won’t produce jobs—not even if we cut them to zero—because their goals have nothing directly to do with jobs. They want to make money by selling things, which requires demand. You can’t sell things if you have no customers. Or maybe they think they can “run the table” by clearing all progressive or even centrist opposition if they just keep the myths and lies alive a little longer. How even that will create demand they don’t say.

As always, the President’s timing was impeccable. He waited for the news to sink in about the Republican debate in which every single GOP candidate rejected a hypothetical debt-reduction deal with ten parts spending cuts and one part tax increases. Now everyone who follows the news knows that the GOP is the American Taliban, following bearded imam Grover Norquist to martyrdom regardless of the consequences—the same Norquist who would turn our students into indentured servants.

The President’s proposal of yesterday is not too far from the hypothetical case that all Republican candidates rejected. It consists of $800 billion in tax increases for $3 trillion in debt reduction, or a ratio of spending cuts to tax increases of a bit less than three to one. If the GOP’s presidential candidates are serious about not accepting a ten-to-one deal, the party surely won’t take three to one.

Thus, you might say all this is political theater. But more to the point, it’s all part of teaching the retarded. Informed people who follow the news know what the GOP’s real goals are. The so-called independents—people who don’t know or care enough to focus for more than a few minutes a year—need to be taught.

So we are in a nationwide course in experiential learning, and the President is our teacher-in-chief.

For people like me, who’ve followed the President closely for four years now, none of this is a surprise. He is a master of timing. And as a former professor he can assess his “students’” abysmal state of ignorance and indoctrination.

With so many biased against him based (consciously or unconsciously) on nothing more than his dual race, he could not risk seeming intransigent himself. So he had to let the GOP drive itself into an extremist corner. And now it has. There’s nothing it can do. Like the Taliban, it has tied itself up in knots of orthodoxy. Imam Norquist will have his due.

This is just the first of many traps the President will spring as the campaign season gets under way. When the series is done, the wolves’ shills will be boxed, caged and hog tied, and the President will win. The more vital question is whether he can bring the House with him and enough of the Senate to overcome the automatic filibuster and get something done.

Yet there is one other question. How long will it take his fair-weather supporters—the perpetual carpers, whiners and lamenters—to see the game and wise up? The answer is largely of sociological, not political, importance because at the end of the day, they will have to support him. The alternative will just be too horrible, even if it’s not Perry. Those who didn’t learn to vote for the lesser of two evils in 2000 should have by now.

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14 September 2011

Coming Out!


[For a brief comment on Elizabeth Warren’s Senate run, click here.]

This fall, I’m “coming out” from my anonymity.

My reasons for anonymity were well considered, and I’ve explained them in some detail. What has changed? Well, when your wife, sister and best friends all say the same thing, it would be impolitic not to listen. They all advise me to edit these essays, organize them and publish them electronically in book form on various topics. With well over 500 essays, there are at least two or three books here.

The same idea had occurred to me many times. Much gets lost in this huge blog, whose 500-plus index entries are repeated under various headings. And many a post could benefit from cogent, organized collection with others.

You can blog anonymously. You can tweet anonymously, if you like bumper stickers and the spirit moves you. But can you publish books anonymously?

I don’t think so. When people take the time and trouble to read a whole book of nonfiction, they want to know who you are. Authors like “George Eliot” and “Andre Norton” could get away with pseudonyms for fiction when the minds of the “fair sex” didn’t get the respect they deserved. But who in this age of beggared privacy wants to read a whole book of fact and analysis not knowing who the author is? My sitemeter’s many hits on my unrevealing personal profile suggest, “Not many.” So does a commenter.

One other thing has changed, too. I’ve retired from full-time teaching. I still dabble in short courses, and I may yet teach a full semester under conditions known only to my Dean. So my major reason for staying anonymous—that my blog might impair my professionalism before full-time students—just doesn’t apply any more.

There are other reasons for keeping anonymous, namely, avoiding the “flag” of ideology, trying to get readers to focus on my ideas and not me, and trying to do some good without grabbing credit.

All are good reasons. But as it turns out, all are a bit quixotic. Ideological readers will classify and dismiss you on the slightest pretext. Many would-be readers appear already to have done so, moving on to the next blog after spotting “Obama” in my blog description. Such is our partisan divide. You cannot persuade those who habitually think ad hominem to do otherwise in a single blog, especially if you can’t get them to read it.

As for taking credit, well, Sarah Palin taught me something. Here’s a woman who has little to offer but greed, ignorance and stupidity. Yet she’s gotten millions to pay serious attention to her, and she’s made millions doing it. Talk about exploiting your fifteen minutes of fame!

What’s her secret? Relentless and shameless self-promotion. In our time, and maybe in all times, that seems to matter even more than ideology and the merit of one’s ideas.

We all have our faults. When the shameless self-promotion genes were passed out, I wasn’t in the queue. I always thought that good ideas would prevail on their own merit, without special advertising. Was I naïve!

So, at the age of 66, I’m going to try to learn something new. I’ll be like a baby learning to walk. Probably I’ll be comical. But please laugh with me, not at me, as I try to learn a new skill that may get my ideas more exposure.

Blogs are free. I have nothing against free. I like free, especially when I otherwise would be the one paying. And with the reduced appetites of age, I’m comfortable enough not to need an income supplement. So I’ll keep this blog up and free, but not the books I derive from it.

Samuel Johnson (the author of the first English dictionary) wrote, “No man but a blockhead ever wrote except for money.” I’m not quite sure what he meant by that. In his time, landed gentry wrote without much care for money because they didn’t need it. Maybe Johnson was describing then-rare writers like him, who didn’t have titles or land.

But I think he was touching on something deeper: writer’s insecurity. How do you really know that people like what you write? Talk is cheap and blogs are even cheaper (let alone tweets). The only way you really know whether people like what you write is whether they are willing to shell out a few bucks for it. It’s a kind of applause that can’t be denied. I guess I want to test whether my non-academic writing can garner some of that.

Another reason why I want to come out is that I have more to tell. I’ve withheld much of my personal history because it would identify me. In doing so, I’ve lost some credibility that my education, multiple careers, and life experience might give me. Once I come out, I can describe the relevant facts of my life boldly.

The final reason for coming out is people. There aren’t that many commenters on this blog. But I feel I’ve come to know some of the repeaters. By holding myself aloof and anonymous, I can never really know them. I’d like to exchange e-mails (as much as I have time for) with some and maybe even meet some in the flesh. You can’t do that anonymously: masked balls are out of fashion.

So the only question left is when. As I learn the new (for me) skill of self-promotion, I’m going to create a little suspense. I like Thanksgiving. As I’ve mentioned in a previous post, it’s my favorite holiday.

Thanksgiving celebrates no military victory, no defeat, no religion, no saint or sinner, no political or social cataclysm. It venerates the simple beauty of native people, misnamed “Indians,” taking clueless white visitors under their wings and teaching them how to survive a first harsh winter in a new land. It’s a model for pure human and ethnic relations that could only have come from the Garden of Eden, which we of European ancestry left when we started to colonize.

So that’s the day I’ll come out. It’s a day of leisure when readers can reflect on what really matters in life. Then you’ll learn all you want to know about me (maybe more!), and I’ll be a real face, not a question mark.

Until Thanksgiving, then, when I come out!

P.S. I will keep blogging in the interim, but at a slower pace. I’ll also be working on those books.

Footnote

Just after I wrote a first draft of this post, I read a comment from a reader named Janet Camp. It’s so apropos that I publish it below verbatim:
Hello Jay,

Your writing is clear and concise, but unless you “come out” and use your real name, it’s just more words and cannot make much difference. Your NYT post today was excellent as well, but again, what does “Old Curmudgeon” tell us? It helps that you got the #1 slot, and I will visit this blog again, but I truly wish more bloggers would be more public about their backgrounds.

Elizabeth is Running!

This may be old news to many readers of this blog, but it’s now official. Elizabeth Warren is running for the U.S. Senate in Massachusetts. She’s running against Scott Brown, the not-too-crazy Republican who took Ted Kennedy’s old seat in a special election after his death.

Brown is smart and popular, and he’s got a big head start. And this is Warren’s first political campaign. So she will have a tough race. But I can’t think of anyone I would rather see in the US Senate, or anyone more worthy to sit in Ted’s old seat.

I’m sure Ted is pulling for her. I’ve just fulfilled my pledge to donate $500 to her campaign. If you want to take our country back to the side of reason and restore our middle class, I hope you’ll do your part, too.

This is a woman who’s fought courageously for a fair shake for ordinary people for decades, first as a law professor and then as an appointed Obama-Administration official. She’s fought for us despite the most vile chauvinism from the likes of Richard Shelby and others. Now she needs our support. If you’ve ever lamented the dearth of truly outstanding women in politics, now’s the time to dig deep.

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12 September 2011

The Lessons of 9/11, Ten Years Later


Now we can relax, think a bit and indulge our hindsight. There was no recurrence, despite reports of credible and specific threats.

Our defenses are working. So is our offense: our superb but secret counterintelligence, our ninjas, and our drones. If the best defense is a good offense, we have finally hit our stride, under a president who understands foreign cultures and how to deal with them [end of post].

As it turns out, an effective response didn’t require declaring war on Iraq or any of the sixty countries that, knowingly or not, harbor terrorists or their sympathizers. We didn’t have to take on the Taliban either. All we had to do was go after the tiny band of extremists who are threatening us.

That we are now doing, after ten years of flailing about with grossly disproportionate and therefore ineffective military responses.

Al Qaeda was once our worst enemy. But now it’s on the run. Bin Laden is dead, executed by our modern ninjas, of which we have a whole regiment. So are most of Al Qaeda Central’s leadership.

The terrorists can’t use modern telecommunications against us because we can hear them. They can’t use air power because we can see them and shoot them down. They can’t use plague bioterror weapons because they’d kill themselves and theirs first. They have trouble moving among us because they throw off clues the way a sneezing flu patient throws off viruses.

They can only use stealth, as they did on 9/11. But now we are ready. The element of surprise is gone. And now the whole civilized world is with us, sharing intelligence and cooperating to shut Al Qaeda down.

Most of all, the Arab Spring has made Al Qaeda irrelevant. Its self-professed goal was to free Muslims from the rule of Western-dominated tyrants, especially in Saudi Arabia and Egypt. That’s why Bin Laden and nearly all the 9/11 hijackers were Saudis, and Al-Zawahiri, Bin Laden’s second in command (still at large) was Egyptian.

But now the Arab Spring is doing that, with far less bloodshed and far more success than Al Qaeda ever enjoyed. The Saudi Princes likely will be the last tyrants to fall, but their days, too, are numbered.

And it won’t be explosions in Western democracies that defeat them, but ordinary Arabs and Muslims seeking the same opportunities that people elsewhere, including the BRIC nations, now have. As many already have done, Arabian and Muslim martyrs will risk their lives not to kill Americans and other Westerners, but to secure their freedom. They will do so just the same way every other people has throughout history: by struggling, fighting and, where necessary, dying for it.

So now, with the aid of hindsight and a growing degree of confidence, we can see more clearly the lessons of 9/11. Most of them are negative, as follows:

1. It’s not a good idea to threaten sixty foreign nations with war, simply because they may harbor inimical non-state actors.

2. It’s not a good idea to make war on an already war-ravaged nation (Afghanistan) just because its current leaders won’t turn over a terrorist. Even Teddy Roosevelt, when he famously said "Perdicaris alive or Raisuli dead!" had a specific country, person and location in mind and means to carry out his threat quickly and with minimal cost.

3. It’s equally not a good idea to start a war in an irrelevant third country (Iraq), using the pretext of a terrorist attack by people from and hiding elsewhere.

4. When first responders have to enter a hellish environment in the aftermath of a terrorist attack, it’s best not to do “photo ops” that encourage them to doff their protective gear, lest thoughtless bravado injure or kill them as terrorists could not. And it’s a good idea to give them radios that work, so they can hear orders to evacuate. Get it, Rudy?

5. It’s generally not a good idea to make war on a nation simply because small bands of terrorists are hiding there. Doing so incurs the enmity of that nation’s leaders (legitimate or not), its people, and its casualties and survivors from “collateral damage,” who otherwise might be on your side.

6. It’s best not to elect “deciders,” whether presidents or mayors, who are stupid enough not only to do the things noted in points 1 through 5, but to brag about their blunders and call them “patriotism.”

7. Dwelling morbidly on losses from an attack can promote fear and trembling, which nearly always leads to overreaction and poor decisions in the face of danger.

8. As FDR so well put it, the only thing we have to fear is fear itself. Our continual obsession with 9/11, including incessant replays of the Twin Towers falling, only aids and abets our native enemies within. Fear and overreaction have done us more harm than any terrorist attack we ever suffered, including 9/11.

Although these negative lessons are by far the most important, 9/11 also taught us some positive things, to wit:

1. A nation of 300 million people, with the strongest and most innovative economy in human history, can be incredibly resilient, as long as it retains confidence in itself and does not succumb to fear.

2. Responding effectively to attacks and the threat of encores requires both defense and offense. Cowering behind the TSA at home is not our best policy. But neither is making war on people who had nothing directly to do with the attacks, as we have done and are doing in Iraq and Afghanistan.

3. Innovation and imagination are the best responses to new threats. What better way to counter terrorists bent on killing innocent civilians than sending ninjas out to kill them [end of post]?

4. Use of force proportionate to a threat is not only right and moral. It’s also more effective because it creates less unnecessary opposition and fewer unintended consequences.

5. A nation that acts boldly, quickly, proportionately and cleverly need not fear, just as fear will not help a nation with stupid, unimaginative leaders.

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08 September 2011

Excising our Metastatic Cancer of Finance: Temporary Market-Based Nationalization


Over three weeks ago, I wrote about our metastasizing financial sector. If not removed, its all-consuming cancer will kill our national economic recovery.

I left that post up while on a trip abroad because I believe it to be one of the most of important I have written this year. We cannot restore our economy without first getting our rogue financial sector under control. Our markets seems to recognize this point; they have sent financial stocks into a tailspin. They know who is at fault.

The horse of financial reform must precede the cart of jobs. We cannot create new jobs, let alone in manufacturing, while we seduce the best minds of yet another generation into useless paper-shuffling with the promise of obscene, undeserved and early wealth.

However attractive getting rich quick from financial legerdemain may be to individuals, it creates no real wealth for society. On the contrary, the gambling and swindling that have become the hallmarks of our rotten financial sector, especially in derivatives and commodities, threaten to subvert our entire economy once again.

This time, their metastasis likely will be terminal. Nowhere in the world is there enough government money to bail the banks out again. Not in North America. Not in Europe. Not in Japan. And not even in China.

So when I said that reforming finance, not jobs, is job one, I meant it. There will be no employment recovery, and no relief from a lost decade for mature economies in North America, Europe and East Asia, unless those economies collectively hold their banks accountable and reform their financial systems. The cancer must be removed, or the patient will die.

But how to excise it? In my earlier post, I promised solutions. Here I propose one.

To be effective, the solution must be radical. Last year’s so-called financial reform, still under sustained attack by armies of lobbyists in the regulatory process, just won’t work. It’s too little, too late, too weak, and too vulnerable to subversion by the very powers it seeks to control.

The basic problem is concentration of economic power. Simply put, our big Manhattan banks have taken control of virtually every lever of power in our society. We must cut them down to size, by a least a factor of three. Otherwise, they will stay in control of our political process and remain “too big to fail.” The ultimate consequence, in the inevitable collapse resulting from unrestrained financial “innovation,” will be a financial flood to big to bail.

Regulation alone cannot do the job. The problem is the big banks’ size. That size carries with it enormous political and commercial power, plus an implicit government guarantee against loss and therefore immunity from market forces, which increases moral hazard.

Our big banks are in the market but not of the market. They subvert capitalism itself, while paying lip service to market principles for consumption by naïve voters and legislators.

The goal of financial reform should be to split up the big banks in three ways. First, we should separate their commercial banking operations from their investment banking and proprietary trading, including trading in derivatives and commodities. The split should be practical and real. Then we should back it up with legislative prohibitions against recombining and cross-ownership, along the lines of the old Glass-Steagall law but more nuanced and stronger for our modern age. Perhaps we should also separate retail (personal) banking from commercial banking, the better to protect consumers and stem the recent tide of high-handedness and swindling.

But how to reach these goals? Our antitrust laws are impotent. They only forbid anticompetitive mergers and acquisitions, and then only those that have not yet become stale or accomplished facts. Our laws give government no power to split up banks too big to fail. Furthermore, our Constitution forbids impairing the obligations of contracts or taking private property without just compensation. And longstanding political and judicial culture prohibits government from messing with the private economy in any significant respect.

In the last century, there was talk of nationalizing the banks and treating them like public utilities, monopolies over money, if you will. Many nations did just that, including our European trading partners. But, however temporary or interim it might be, “nationalization” has the ring of socialism and would evoke storms of protest and interminable litigation here. Nationalization by decree therefore would be impractical and likely politically impossible.

So are we stymied? I don’t think so. What about “market-based nationalization”? Why can’t the government, perhaps through the Fed, simply buy up the big banks at market prices, dismiss management and the boards of directors, hire teams of finance and economic experts to unscramble their eggs, and sell off the pieces to private investors, perhaps even at a profit?

The crux of the matter is leverage. The big banks have trillions of assets, which the government could never buy on its own. But, as a result of their gambling, swindling and general mismanagement, they also have trillions of liabilities and risks. The net result is a pittance by the standards of our recent bank bailouts.

For example, as of today (September 8, 2011) Morningstar reports Bank of America’s market capitalization as $ 74.9 billion. Buying control would take about half that, or about $37.5 billion. By recent standards of bank bailouts, that is pocket change.

A leak or announcement of the government’s intention might cause the market price to rise in anticipation of a government purchase. Or it might cause the market price to fall even further, in anticipation of a breakup, a loss of the implicit government guarantee, and/or further regulation. But in any event buying control would be orders of magnitude cheaper than bailing out another failure, even without accounting for the expected income from selling off the pieces later.

By buying, splitting up, and selling off the top five or six banks, the government could recreate a rational, competitive banking systems in two ways. First, it could sell off the retail banking, commercial banking, investment banking and trading (including derivatives) operations separately. Second, it could create regional diversity and restore community banking by selling off regional or local offices separately. In other words, the government could re-create a vibrant, highly competitive banking system like the one that existed before the most recent waves of mergers made our big banks “too big to fail.”

None of this would involve “nationalization” in the old twentieth-century sense. Government intervention would be through securities markets and temporary, only for the time necessary to analyze the banks’ operations, figure out the best way to unscramble the eggs, and sell off the pieces.

Private banking investors would have no choice but bid if they wanted a piece of the action, because, at the end of the process, none of the big banks would remain. Gone would be their implicit guarantees, their increased moral hazard, their entitlement to bailouts, and their political and economic dominance. Market forces would resurge and rationalize our finance sector in accordance with classical capitalist economics.

How would the downsized banks make big deals? The same way they did before the latest waves of mergers made them “too big to fail” and caused market failure. By syndication. Banks would have to collaborate on big deals, bringing the advantage of “more heads than one” to deals involving significant financial risk. Thus the downsizing would reduce systemic risk as well as moral hazard.

Competition would benefit. Local and regional control would benefit. The banks would no longer have enough money and clout to buy legislatures and corrupt the political process. And regulation of the separate sectors (retail, commercial, investment and trading) could be calibrated separately to avoid regulatory overkill. Once the government had downsized the biggest tumors, market forces would do the rest.

This would be a bold, radical plan. But it would work without damage to fundamental free-market principles. It would restore market forces to a sector that long has eluded them. And the end result would be a highly competitive, much smaller and more rational financial sector without the power to corrupt government, command bailouts and make the public pay for its mismanagement and mistakes.

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