The Wrongologist

What’s
Wrong Today:

At the risk of boring all readers of this blog, the Wrongologist wants to
make a few more points on the regulators of our banking system. Today, we place
the Securities
and Exchange Commission’s  (SEC) in our
sights.

Although
the SEC has stepped up its investigations of Wall Street in the last decade, it
has repeatedly granted exemptions to
laws and regulations that act as a deterrent to securities fraud.

Who benefited? JPMorgan Chase, Goldman
Sachs and Bank of America continued to receive advantages reserved for the most
dependable companies, making it easier for them to raise money from investors
and to avoid liability from lawsuits if their financial forecasts turn out to
be wrong.

An
analysis by New
York Times of S.E.C. investigations over the last decade found 350
instances where the agency has given big Wall Street institutions and other
financial companies a pass on those or other sanctions. Those instances also
include waivers permitting firms to underwrite certain stock and bond sales and
manage mutual fund portfolios.

•              JPMorgan
  Chase has settled six fraud cases in
  the last 13 years, including one with a $228 million settlement last
  summer, but it has obtained at least 22 waivers, in part by arguing that it has
  “a strong record of compliance with
  securities laws.”

•              Bank
  of America and Merrill Lynch, which merged in 2009, have settled 15 fraud cases and received at least 39 waivers. Bank
  of America settled by agreeing to a $150 million payment. The S.E.C.,
  however, did not to charge the bank with fraud, which could have endangered the
  bank’s special status.

• Citigroup
  is one of the rare Wall Street giants that lost significant privileges
  recently. In October 2010, the
  bank paid $75 million to settle charges that it misled investors in 2007
  about the size of its holdings of assets backed by subprime mortgages. The company told investors that it had
  about $13 billion of those risky investments on its balance sheet, when it
  really had more than $50 billion, according to the S.E.C.

The Times analysis found 11 instances
where non-financial companies that had settled fraud cases had actually lost
the special privilege for fast-track stock or bond offerings, versus 49 times
that the S.E.C. granted waivers from the punishment to Wall Street firms since
2005. Overall, the analysis counted 91 waivers since 2000 granting immunity
from lawsuits, and 204 waivers related to raising money for small companies and
managing mutual funds.

Only
about a dozen companies, Dell, General Electric and United Rentals among them, have
felt the full force of the law after issuing misleading information about their
businesses.

By
granting those waivers, the S.E.C. allowed Wall Street firms to have powerful
advantages, securities experts and former regulators say. The institutions
remained protected under the Private Securities Litigation Reform Act of 1995,
which makes it easier to avoid class-action shareholder lawsuits.

S.E.C. officials say
that they grant the waivers to keep stock and bond markets open to companies
with legitimate capital-raising needs. Ensuring such access is as important to
its mission as protecting investors, regulators said.

Others however, argue
that this may be a pattern in which the
government is too soft on Wall Street, as it has become a much larger
part of the economy in recent decades.

So, What’s Wrong?

Of
course there is a pattern here.
It looks like the SEC is in the business of “Selling Indulgences” to
the Wall Street financial crowd. Selling Indulgences for sins committed was one
of the symptoms of an ossified, corrupt Church. It was one reason for Martin
Luther nailing his tract on a church door at the beginning of the Protestant
Reformation.

So it is in
Washington, which could certainly use a Reformation. Now.

Fining these firms is a
tax on all of us (depositors, shareholders, citizens) by other means. The
fines, although they seem large, are not large enough to have corrected the
behavior of Wall Street, as the record shows.

The SEC and the rest of the
financial regulatory apparatus are failing in their mission. There is no power in government
that feels strong enough to face down the rampant illegal conduct in the
banking, insurance and securities industries.

 

The
reason for this is, of course, money and jobs. Government regulators and legislators move at will between jobs in
the private sector as lobbyists, lawyers and employees of the regulated.

 

Here
is what we need to do:

•         
  End
  the revolving door by instituting a three-year window between working in a
  regulated industry by former “public” officials.
  

• Institute public financing of elections.

A final thought:

There
may finally be some evidence of backbones among the regulators.

According
to Reuters, (published last night) U.S. prosecutors and European regulators
are close to arresting individual traders and charging them with colluding to
manipulate global benchmark interest rates, according to people familiar with
the investigation into the Libor rate rigging scandal.

Reuters reports that Federal prosecutors in
Washington, D.C., have recently contacted lawyers representing some of the
suspects to notify them that criminal charges and arrests could be imminent.  

Defense lawyers, some of whom represent suspects, said
prosecutors have indicated they plan to begin making arrests and filing
criminal charges in the next few weeks. In long-running financial
investigations it is not uncommon for prosecutors to contact defense lawyers
before filing charges to offer suspects a chance to cooperate or take a plea,
these lawyers said.

What’s Wrong Today:

Now that Barclays Bank has paid its big fine for rigging Libor rates, everybody else on Wall Street is trying to avoid the spotlight by teaming up to pay a gigantic joint settlement, while hoping that no one pays too much attention to the individual banks who are walking the plank. More than a dozen banks are being investigated in the scandal, including Citigroup, HSBC, Deutsche Bank and JPMorgan Chase, but it is unclear which banks are involved in the potential settlement talks.

Apparently, no bank now wants to be second in line for fear that they will get similarly hostile treatment from politicians and the public. Bank discussions about a group settlement initially took place before the Barclays agreement, and have picked back up in the aftermath.

The specter of severe penalties from regulators and the possibility of multi-billion dollar class action suits has hung over these and other banks being investigated worldwide since the extent of attempts to rig Libor became clear in US Commodity Futures Trading Commission (CFTC) and the UK Financial Services Authority (FSA) documents released with the Barclays settlement.

A group agreement would appeal to the financial regulators because they would be able to announce a headline-grabbing settlement, showing that they were dealing firmly with the banking industry’s crimes and misdemeanors. They are politicians after all.

For example, earlier this year, five top U.S. banks negotiated a $25 billion settlement with the U.S. Justice Department and other federal and state agencies to resolve allegations of mortgage services abuses; it got lots of press, but really was not much more than a slap on the wrist for the banks involved.

So, What’s Wrong?

Does money paid equal justice? That is the way the global banks do business. Steal possibly billions. Settle with the government authorities, neither admit nor deny any wrong doing. Rinse, repeat…

If you are one of the unindicted banks, settling with the regulators is smart business. The banks know they’re guilty, and they all know they’re going to pay up eventually. The document dumps are likely to be hugely damaging. So why not just avoid all that, fess up (sort of), and avoid the public disclosure of damning emails? It’s only money, after all. Sounds like a no-brainer.

But, is it smart for the rest of us? As Rep. Peter Welch, (D-VT) member of the Sub-Committee on Investigations, told James Stewart of the NYT:

“The Justice Department has to decide: Is the day of consent decrees and settlements, where you pay a fine, one passed on to shareholders, are those days over? Are the days of jail time here?”

He is speaking here about capture of the regulators by the industry that they are supposed to regulate.

Gretchen Morgenstern reports that Neil Barofsky, the man hired to police the $700 billion Troubled Asset Relief Program says in his book, “Bailout”, that he had assumed that his assignment to oversee TARP meant that he should be independent from the Treasury Department, but in asking other Inspectors General in the government, he found they thought otherwise:

“There are three different types of I.G.’s. You can be a lap dog, a watchdog or a junkyard dog.” A lap dog is seen as too timid, and being a junkyard dog was also ill-advised. “What you want to be is a watchdog,” he continues. “The agency should perceive you as a constructive but independent partner, helping to make things better for the agency, so everyone is better off.”

(Emphasis by the Wrongologist)

Barofsky goes on to speak about the system that has led to capture of the regulators:

“We need to re-educate our regulators that it’s O.K. to be adversarial, that it’s not going to hurt your career advancement to be more skeptical and more challenging,” he said. “It’s implicit in so much of the regulatory structure that if you don’t make too many waves there will be a job for you elsewhere. So we have to limit those job opportunities and develop a more professional path for regulators as a career. That way, they won’t always have that siren call of Wall Street.”

(Emphasis by the Wrongologist)

 

Common sense tells us that a crime that has no punishment is a crime that will be committed over and over and over. Regulators collect a fine that goes into the US Treasury and the company signs a letter saying it will obey the law in the future.

But, they all sin again. So unless the regulators file criminal complaints and perpetrators are charged, tried and convicted, there will be no end to the crime.

Here is yet another egregious example of regulator capture: Union Bank of Switzerland (UBS). UBS, with dual headquarters in Zurich and Basel, traces its roots to 1854. Last year, it had more than $26 billion in revenue and ne
arly 65,000 employees worldwide. It was deemed too big to fail during the financial crisis, and was bailed out by the Swiss government after a $50 billion write-down on mortgage-backed securities.

The bank has signed MANY letters with US regulators saying it will sin no more, but it is unrivaled in its ability to escape prosecution:

• In 2008 in what at the time was the largest settlement in SEC history, UBS agreed to reimburse clients $22.7 billion to resolve charges that it defrauded customers who purchased auction-rate securities.

• UBS also paid a $150 million fine to settle consumer and securities fraud charges filed by New York and other states on the same matter.

• In 2009, UBS agreed to pay $780 million in fines for conspiring to defraud the United States of tax revenue by creating more than 17,000 secret Swiss accounts for United States taxpayers who failed to declare income and committed tax fraud.  

• At the same time it settled Securities and Exchange Commission charges that it acted as an unregistered broker-dealer and investment adviser to American clients and paid a $200 million fine.  

• In 2011, UBS admitted that its employees had repeatedly conspired to rig bids in the municipal bond derivatives market over a five-year period, defrauding more than 100 municipalities and nonprofit organizations, and agreed to pay $160 million in fines and restitution.

Yet, in 2012, UBS revealed that it had received conditional immunity from the Justice Department and other authorities in the Libor investigation. How bad a record of violating our laws does it take before a regulator files criminal charges? It was shown this leniency even though the Justice Department has pointedly said that Barclays, not UBS, was the first bank to cooperate.

Is it any wonder that despite repeated apologies and promises to change, UBS and other banks keep violating our laws?

Bank regulator capture doesn’t only exist in the US: The Wall Street Journal reported that in 2008, US Treasury Secretary Geithner sent a note to the Bank of England (BOE), the UK Central Bank, indicating concern about how the Libor rate was being determined. The BOE sent the note on to The British Banker’s Association (BBA) a private industry group which sets Libor. Upon seeing the note, the BBA asked the BOE to take on a formal role in overseeing Libor to help address questions of governance. But the BOE declined.

According to Bloomberg, the way the Bank of England handled Mr. Geithner’s concerns was to hand his letter to the British banking lobby and ask them to look into it. That was it. No wonder British love football, they are very good at kicking it around.

You tell the guy who is in charge of the hen house that there appear to be foxes doing shifty things with the hens, and he says OK I will handle it. So then he asks the foxes’ paid employees to look into it for him, with no follow up.

And here we are four years later.

Here is what has to change:

• Stop the revolving door between the regulatory authorities and industry by requiring a 3 year “cooling off” period before a regulator can take a job in the industry he/she regulates.

• Make an example of a corporation that is a bad actor by giving it the business equivalent of a prison term in the line of business where it misbehaved.

• Start prosecuting Banksters under RICO, the Racketeer Influenced and Corrupt Organizations Act.  Under RICO, a person who is a member of an enterprise that has committed any two of 35 crimes—27 federal crimes and 8 state crimes—within a 10-year period can be charged with racketeering. Those found guilty of racketeering can be fined up to $25,000 and sentenced to 20 years in prison per racketeering count. In addition, the racketeer must forfeit all ill-gotten gains and interest in any business gained through a pattern of “racketeering activity.”

• Put. Some. Banksters. In. Jail.

What’s Wrong Today?

HSBC, the largest financial institution in Europe, has revealed major money laundering problems. A 335-page report released Monday by a Senate sub-committee also says that executives at HSBC and regulators at the Office of the Comptroller of the Currency ignored warning signs and failed to stop illegal behavior at many points between 2001 and 2010.

The money laundering, which the subcommittee indicates was linked to terrorism and drug deals, could result in HSBC paying fines of up to $1 billion, according to analysts.

In one case, an HSBC executive successfully argued that the bank should resume business with a Saudi Arabian bank, Al Rajhi Bank, despite the fact that Al Rajhi’s founder had been an early benefactor of Al Qaeda. HSBC’s American branch ended up transferring a billion dollars to the bank.

HSBC, originally the Hong Kong Shanghai Banking Corporation, is one of the largest financial institutions in the world, with over $2.5 trillion in assets, 89 million customers, 300,000 employees, and 2011 profits of nearly $22 billion. It has operations in over 80 countries, its key U.S. affiliate, HBUS, operates more than 470 bank branches throughout the United States. HBUS manages assets totaling about $200 billion, and serves around 3.8 million customers. Its primary US regulator is the Comptroller of the Currency (OCC), which is part of the U.S. Treasury Department.

• The Senate Report shows a 3-year failure by HBUS from mid-2006 to mid-2009, to conduct ANY Anti Money Laundering (AML) monitoring of $15 billion in bulk cash transactions with HSBC affiliates, despite the risks associated with large cash transactions; poor procedures for assigning country and client risk ratings; and a failure to monitor $60 trillion in annual wire transfer activity by customers.

• The Report indicates that an outside auditor hired by HBUS identified from 2001 to 2007, more than 28,000 undisclosed, Office of Foreign Assets Control (OFAC) transactions that were sent through HBUS involving $19.7 billion. Of those 28,000 transactions, nearly 25,000 involved Iran, while 3,000 involved other prohibited countries or persons.

“Banks that ignore money laundering rules are a big problem for our country,” said Senator Carl Levin, a Michigan Democrat who leads the subcommittee. “Also troubling is a bank regulator that does not adequately do its job.” He called HSBC’s compliance culture “pervasively polluted for a long time.”

So, What’s Wrong?

The report on HSBC is the latest scandal to rock global banks. It highlights the inability of regulators to catch what is claimed to be widespread wrongdoing in the financial industry. You know about Barclays bank. You may remember that JPMorgan Chase disclosed that its employees tried to hide trades that cost the bank billions of dollars.

The Treasury Department announced last month that ING Bank had agreed to pay $619 million to settle charges that it moved money into the United States from Cuba and Iran for nearly two decades, despite sanctions against those countries.

Since 2009, there have been five similar settlements between American regulators and other banks, including Barclays and Credit Suisse, over illicit transactions.

Catching HSBC with their hand in the cookie jar is nothing new. In 2003, HSBC entered into an agreement with the State of New York Banking Department and The Federal Reserve Bank of New York to improve its counter-money laundering systems. Even with the likely increased scrutiny following this agreement, HSBC still gamed the system.

A possible billion dollar fine is simply a cost of doing business for HSBC. It may sound large, but in context of the bank’s money laundering profit, it is chump change.

So, What Should We Do?

1)  Fine them an amount equal to a recapture of all profits made from these illegal acts.

2)  Prohibit HSBC or any of their subsidiaries from doing business with the US government for ten years. 

3)  Bar any individual HSBC officer (Lok, Bagley and others) who facilitated these violations from serving as an officer of any publicly traded company in the US.

4)  Remove FDIC deposit guarantees from their US subsidiaries for a 10 year period.

These penalties should ensure compliance with our laws in the future.

Enough is enough. Our legislators and thereby, our regulators, have been captured by the financial industry. Electing new representatives will not be enough, in their never ending search for re-election funds they will be captured by pay-to-play too. We need to end the financing of political campaigns by Corporations, industry associations and PACs.

Republicans say they are uncompromising on National Security. They also argue that deregulation and a business tolerant atmosphere will trickle prosperity down to the rest of us.

Will they now join in the call for more banking deregulation?

• After the Subprime Market Collapse?
• After the Libor Manipulation?
• After money laundering for terrorist organizations?

Banks are absolutely and shamelessly out of control. They appear to think (perhaps correctly) that they can operate outside the law with impunity.

If corporations are people in the eyes of the law, then it is time to deal with them as such. Give them equivalent of prison time. And if their bankers have been laundering money for al Qaeda or the Iranian mullahs, charge them with treason.

House, Senate, Mr. President, its time to do the right thing!

Call me the bus driver because today, I’m taking you to school:

Last week, Barclays was busted for manipulating Libor, that is, the London Interbank Offered Rate. Libor is
the interest rate banks charge to lend to each other. It is the globally
recognized reference rate for most banking transactions and it is used to set
rates for some $400 trillion
in global financial transactions from consumer lending to  derivatives. 

Libor is based on a daily survey of banks like
Barclays.  Those banks are known
as “reference banks”. The information they provide in that
survey sets the Libor rate, which is then used to set the rate for those nearly
$400 trillion transactions. 

So, Barclay’s rate manipulation is not some victimless
crime.  It’s almost certain that
millions if not tens of millions of individuals and companies worldwide could
have been ripped off because of this conspiracy. 

By the way, Barclay’s made money when they understated
the rate AND when they overstated it.

The importance of the global interest rate rigging
scandal goes far beyond Barclays and its $453 million fine. There are 20 global banks currently under
investigation for the same offense that caused Barclays to
settle.  Barclays and the other banks are being investigated for intentionally providing information that
they knew would result in setting a false Libor rate.  This means
that these 20 or so of the biggest banks in the world conspired to manipulate
one of the most important rates in the world.

So, What’s Wrong?

This isn’t about Libor – this is about Lie-More

It is
clear that banks as presently constituted and managed, cannot be trusted to
perform any publicly important function if it is against the personal economic
interests of their management. Today’s banks are steeped in a culture that is
the result of profit-seeking behavior taken to its logical limits, where the
only questions asked by senior staff are not what is their duty or their
responsibility, but how much can we
get away with? It is about scoring the highest total compensation at
whatever the cost.

Consider
this: In a recent survey of 500 senior banking executives in the United States
and the UK;

• 
26 % of respondents said they
had observed or had firsthand knowledge of wrongdoing in the workplace

• 
24 % said they believed
financial services professionals may need to engage in unethical or illegal
conduct to be successful

• 
16 % of respondents said they
would commit insider trading if they could get away with it

• 
30 % said their compensation
plans created pressure to compromise ethical standards or violate the law

This survey was conducted by the
law firm Labaton Sucharow. Jordan Thomas, partner and chair of their
whistleblower practice, stated: “When
misconduct is common and accepted by financial services professionals, the
integrity of our entire financial system is at risk.”

The current culture and behavior of bankers is incompatible with the survival of a
sophisticated market economy. Trust is not an optional extra in
banking, it is essential.

When you read the survey above, you have to conclude
that bankers simply cannot be trusted in the current system where the pressure
to make the most profit possible out of the banking license at the expense of
clients and/or competitors is so prevalent.

Banks should not be allowed to play around with our
money solely to create profits for management in good times, while in bad
times, as we have seen over and over again, create losses that have to be
underwritten by the taxpayers.

As Eduardo Porter said in the NYT, bigger markets allow bigger frauds. Bigger
companies, with more complex balance sheets, have more places to hide them. And
banks, when they get big enough that no government will let them fail, have the
biggest incentive of all.

A 20-year-old study by the economists Paul Romer and George Akerloff
pointed out that the most lucrative strategy for executives at too-big-to-fail
banks would be to loot them to pay themselves vast rewards — knowing full well
that the government would save them from bankruptcy.

What will Work?

An important driver of the risks that a bank will take
is the bank’s senior management’s risk tolerance, which is based on how it will affect their
compensation. One change made since the downturn is to have executives take
more of their compensation in the stock of their bank and hold it for longer
periods of time. This won’t work:

Dick
Fuld, CEO of Lehman Brothers held several hundred million dollars of Lehman
stock, but was that enough to rein in Lehman’s risk taking? Clearly, no.

In addition, as the Wrongologist has
argued, equity investors’ goals of “stock price performance now”
arguably flies in the face of our broader economic need for banking safety and
soundness.

We also
know that fixed income investors are risk-averse. For them, upside on their
investment is limited, since the most they receive back at maturity of the
investment is 100 cents on the dollar, plus interest. Thus they are laser-focused on avoiding risks that will cause
losses, because they don’t get any more than that 100 cents if the bets win.

An idea outlined by Sallie Krawcheck in the June issue of the Harvard Business Review, uses a
combination of the equity and fixed income instruments of the institution to
compensate the deal makers.

Here is
how it could work: If a bank is funded with $1 in debt for every $1 in equity
(a very under-leveraged position for a bank), executive compensation would
mirror that; if the bonus component of an executive’s compensation is $2
million, then he/she would be paid in $1 million in debt and $1 million in
equity. The executive would maintain a healthy risk appetite, giving some good
amount of his focus to increasing the value of his $1 million of stock.

If the
capital structure of the bank shifted to, say, $40 in debt for every $1 in
equity (similar to the equity allocated to derivatives trading), then the same
executive’s $2 million would be paid $1.95 million in fixed income instruments
and $50,000 in equity. As the bank’s capital structure becomes riskier, the
executive would likely become much more risk averse, focusing more on
maintaining the value of the $1.95 million in bonds, rather than increasing the
value of the $50,000. This provides a natural hedge.

The value
of this compensation system is not that it will immediately make bank CEOs
behave differently (though it should), but, as it spreads down through the deal
making ranks, it will impact the risk tolerance of the executives actually
managing businesses, the trading desks and the trading positions themselves.

The
entire organization will shift naturally from one of looking to take on more
risk to one of looking to reduce risk as financial leverage increases. In doing
so, the interests of the bond holders, deposit holders and the public at large
will be more aligned with that of the management team.

So
bankers, if you want to gamble, be our guest. But do so on your own time and on
your own dime. We’re going to let you continue to exercise your significant
skills and (generally) good judgment, but in a way that doesn’t threaten our
savings, jobs, families and economy.

Part of
the answer must be a true separation of the trading businesses of today’s
investment banking from the lending/service culture of old-fashioned commercial
banking. Make the traders buy the
equity in these new Merchant Banks from their Bank Holding Companies with the
bonuses they have already received.

From here
on out you’ll have to work within a new financial system, let’s call it Limited
Purpose Banking that makes you stick to your legitimate purposes and not have
500+ subsidiaries like JP Morgan Chase to help move assets around with little
transparency. This would include your
newly spun off derivatives businesses. 

All banks
will be subject to the same regulation and regulator, regardless of their
particular line of business, with the regulators having the ability and
jurisdiction to reach across borders if it is a US bank. A single federal
regulator will verify, disclose, and supervise the custody and independent
rating of all securities held by all financial institutions.

This will
require some government agencies to be merged and new budget money to be
allocated to the job of increased oversight, much like we did with Homeland Security.

CPA
firms: No more treating zombie banking assets as alive and well. You must mark
all assets to market every quarter.

 

We must seize the initiative and force Congress, the regulators and
the auditors to take charge of this asylum.

The crooks and liars have had their turn.

What’s Wrong Today:

For seven months, Pakistan blocked ground
convoys from resupplying NATO troops based in Afghanistan, wanting an apology
for the deaths of 24 Pakistani soldiers killed in a U.S. strike last
November. They also wanted a new $5000 per container fee for every shipping
container transiting the country.

On July 3rd
Secretary of State Hillary Clinton apologized and Pakistan reopened the border
and even dropped the request for the new shipping fee.

 “I offered our sincere condolences to the
families of the Pakistani soldiers who lost their lives,” Secretary of State
Hillary Clinton said in a statement Tuesday, following a telephone call with
Pakistan’s Foreign Minister, Hina Rabbani Khar. “Foreign Minister Khar and I
acknowledged the mistakes that resulted in the loss of Pakistani military
lives. We are sorry for the losses suffered by the Pakistani
military. We are committed
to working closely with Pakistan and Afghanistan to prevent this from ever
happening again.”

Until Pakistan got
its apology, the border remained closed, forcing NATO to transit all supplies
through a costly aerial route in Kyrgyzstan, which is exorbitantly
costly, averaging a shipping cost of $15,800 per container. (That’s
significantly more than the $6,200 a Pakistan-routed container costs, even after
tacking on the $5,000 fee Pakistan wanted.)

In total, shifting supply routes back to Pakistan
could save $100
million per month.

 So, What’s Wrong?

It was reported in
the Pakistan Express Tribune that resumption of
supply lines in Pakistan appears to be good news for the Afghan Taliban, as
well as local militants, as the
closure had deprived them of
millions of dollars they used to indirectly receive as protection money.

A
prominent militant leader, known for his close ties with the infamous Afghan
Taliban leader, Mullah Omar, told The
Express Tribune that the Afghan Taliban and local militants who are
active along the Pak-Afghan border were “seriously annoyed” by the ban.

The
leader, who is also one of the key leaders of the Difa-e-Pakistan Council, said
that the Afghan Taliban had even protested when his council was holding
nationwide demonstrations pressing Pakistan against the lifting of the ban.

“The Taliban had
frankly told me that the ban had caused them huge financial losses during the
last eight months,” the militant leader said.

“We are offended
over the resumption of the NATO supply lines from Pakistan to Afghanistan but
at the same time we are glad that at least our Taliban brothers in Afghanistan would be happy over this
decision,” he said, adding: “Believe me it is good news for Taliban and
militants.”

The
Express Tribune also reported that:

“it is an admitted
fact that US and NATO pay a handsome amount of money to the militants in return
for safety and security of their supplies to Afghanistan via two land routes in
Pakistan.”

The Express Tribune is a respected source of news in Pakistan.  The Wrongologist was able to find a 2nd
source for this surprising story in the Tierney Report,
prepared for Rep. John Tierney (D-MA) in June, 2010.

 The report, entitled: “Warlord Inc.: Extortion and Corruption along the U.S. Supply Chain” 
indicated that the contractors employed by the
DoD to truck supplies of food, fuel and ammunition from Pakistan to Afghanistan
are responsible for their own security while enroute to Afghanistan. To do
this, the Report says that these contractors subcontract their private security
to various:

“warlords,
strongmen, commanders and militia leaders who compete with the Afghan central
government for power and authority.”

So, the US Government
is indirectly paying protection money to the Warlords who control the truck
routes, some of whom are undoubtedly Taliban.  

Here is the
Wrong writ large: The US pays militants in Afghanistan to prevent them from
attacking convoys containing our military supplies that will be used to fight militants
in Afghanistan.

The DoD is full of smart guys, so it must
occur to them that the funds they are indirectly paying to the Afghan militants
also fund attacks on NATO personnel by the Taliban.  

So imagine you are in the meeting at the
Pentagon in big conference room when this dilemma is discussed:

Our smart guys say that paying protection
money is the “cheapest” and “lowest risk” strategy to use in order to get
critical supplies to our troops in Afghanistan. Fewer drivers die, fewer
shipments are lost, our troops are better equipped. Nobody makes the argument that
this strategy violates long standing Pentagon rules about oversight
of vendors, nobody makes the case that indirectly arming our enemy can make
us a laughingstock, much less prolong our enemy’s ability to fight.

In this Catch 22 of military logic,
the Taliban probably can increase the frequency and severity of their attacks
on NATO, now that their indirect US funding is restored.

If Taliban attacks
increase, then NATO will need more supplies to put down the new Taliban attacks,
which will mean paying more “protection” money, which means they can fund even
more attacks.

Will we ever kiss this conflict goodbye?

Welcome back my friends to the show that never ends,
We're so glad you could attend,
Come inside! Come inside!

Emerson, Lake & Palmer, 1974

What’s Wrong Today:

In his last post, the Wrongologist said he
would offer solutions to the “Best
Government Money Can Buy” problem described over the last two posts. We
will do that today, but first, Lee Fang at Republic Report published a story
of wretched excess in corporatism
that you have to read to believe:

In 2011, after Republicans took the
majority in the House of Representatives, the House Armed Services Committee,
which oversees the military, gained a new chairman, Rep Buck McKeon(R-CA). As with
most leadership changes, McKeon and his committee hired new professional staff.

Thomas
MacKenzie, a vice president at Northrop Grumman, was hired to work for the
committee beginning in March, 2011.

But darn the luck, in order to do move to
the Hill, you’re going to have to take a serious pay cut. Hard to do the people’s
business without a big pay cut.

How do you keep your standard of living while working for the public good? How
about a two-year bonus from your ex-employer — say, $250,000 per year — to tide
you over? (Remember, two years is a congressman’s term of office.) Would a half
million dollars keep your mind on your once-and-future job?

So, What’s Wrong?

As a congressional staffer, MacKenzie now
makes about $120,000 a year, taking a
$400k pay cut to work for us. However, not to worry: in MacKenzie’s case,
Northrop Grumman made sure he had extra cash before he went to work writing
policy on the defense budget. They paid MacKenzie a $498,334 bonus in 2011, just before he went to work under McKeon
as a committee staffer.

Coincidence?
Follow the bread crumbs: Representative McKeon, by far the biggest recipient of Northrop
Grumman campaign contributions in Congress. He has defended billions of
dollars in projects for MacKenzie’s former employer.

McKeon fought
to prevent the retirement of the Northrop’s RQ-4 Global Hawk, a drone the
Pentagon said it could save $2.5 billion by cutting. He’s
pressed to secure funding for a range of different aircraft developed by
Northrop Grumman, from a new nuclear-capable long-range bomber to the F-35, which
is slated to be the most expensive weapon ever developed. Earlier this year,
McKeon visited a Northrop plant and rallied employees to help him stave off
nearly $500 billion in sequestration
cuts to the defense budget as part of the deficit-reduction deal.

Luckily for Northrop Grumman, which made $2.12 billion in profits last
year, the firm now has a man on the inside of Congress with wide sway over how
the government spends money on national defense.

If you have no conscience about how you earn
your keep (since you are clearly kept) you can say: “I’ll watch out for
you, Boss”.

This
is simply today’s example of the corporatism at work.

So, What’s to be
Done?

We have to act now to avoid the disintegration of our great
republic into a corporatist
haven controlled by
bankers, mega-corporations and the
mega rich. We have to reform both our political
process and key elements of our economic system.

To
break the unholy alliance between bankers, corporate interests and politicians,
let’s start by trying these:

Political Process

• Scrap the current election process. Replace it with publicly
  financed elections. No money from
  corporations, unions, or individuals would be allowed. A fixed amount
  of TV time would be free to candidates, financed by taxpayers. The domination
  by money in our political process must be broken.

• Establish term limits of 12 years for both Congressmen and Senators.
  Serving in Congress has a learning curve, but it can’t be a career. The purpose
  of Congress is to represent the existing generations of citizens and ensure
  that future generations have a better country than the one we occupy.

• Since
  politicians cannot be trusted to exhibit courage or intelligence when it comes
  to public policy, an independent lobbying
  oversight mechanism must be established to ensure that the pernicious
  impact of corporate dollars do not have a backdoor way to in effect, bribe our
  politicians.

• Despite
  the Roberts Court opinion in Citizens
  United, corporations are not people. Extreme wealth does not give
  someone the right to buy elections. Rich oligarchs operating in the shadows and
  spending billions on negative advertising is not how a republic should elect
  their representatives. Money from
  special interest corporations and PACs
  must be eliminated from the political process.

• Put every proposed bill in Congress
  online.
  The constituents of every Representative and Senator would be allowed to voice
  their opinion in a poll by district, online. We would then have an idea of who
  does or does not vote their conscience. We have the technical ability to
  provide secure logons for citizens.
  

• A suggested funding mechanism must
  accompany each bill
  proposed by a Congress critter. Include a vote on the funding in the online
  poll.

• Commit no American troops to “war” in a foreign country without a vote of
  Congress as required by the U.S. Constitution

Economic System
 
Reinstitute the Glass-Stegall
Act. The Wrongologist
worked under it successfully, so must the current crop of bankers, since Wall
Street cannot manage risk properly. This
would separate commercial banking activities from the risks of “House Money” gambling
that brought the economic system to its knees in 2008. Privatizing the profits
and socializing the losses must be forever unacceptable.

• The economic system must be purged of
  zombie bad debt.
  The Federal Accounting Standards Board (FASB) must make all banks and financial services corporations mark their assets
  to market (true market value) on a quarterly basis. This would reveal
  many Wall Street banks to be very short of capital, with some being technically
  insolvent. Bondholders and stockholders should be forced to realize their
  losses on bad investment decisions.

• Downsize the US Military budget from $1
  trillion to $500 billion annually.
   Withdraw troops from Afghanistan, Iraq,
  Germany, Japan and other bases throughout the world. Policing the world will
  bankrupt us. Reinvest a portion of the savings in education and infrastructure.

• Eliminate all corporate and farm subsidies. While we are at it, federal health
  benefits and pension benefits would be set at usual and customary private
  industry levels.

• Overhaul Social Security. Increase the age for collecting
  Social Security to 70 over the next 15 years. Eliminate the wage cap for the Social
  Security tax. 
  

• The Medicare system is unsustainable. Health care costs for the elderly
  must be controlled by any means necessary. This should not include denying
  coverage, so we need to mandate deep cuts in the costs of health care delivery.
  Make insurance companies compete for business in all states. Double (or more if
  necessary) the budget that The GAO has to audit Medicare fraud & Medicaid
  fraud and prosecute the criminals.

• States should force doctors to post
  their costs for services.
  Tort reform should be implemented to fix the size of permissible awards against
  individual doctors, but no caps should be in place for hospitals, drug
  companies and other corporate actors.

• Stabilize the housing market. 
  As part of the FASB suggestion above, the FED and Fannie Mae/Freddie Mac
  should force banks to reduce the mortgage balances of underwater homeowners in
  exchange for an equity interest in any property appreciation. The homeowner
  would have to pay off the mortgage and the equity gain out of any future sale
  of the home. The homeowner would be prohibited from taking out any home equity
  loans or executing any “cash out” refinancing until the equity interest claim was
  satisfied.

Spread the
word. Grab your pitchforks and torches, it’s gonna be a long night.

What’s Wrong Today

The Wrongologist woke up this morning
thinking that all politicians are useless.

That is, if you expect them to lead
the country out of the mess we are in today.

Are politicians the problem? Or is it
a problem with the political system(s) in which they have evolved? Or, are both
inextricably linked in one steaming pile of super-problem?

And
political paralysis exists throughout the globe:

US – Legislative Gridlock. Complete inability to
see the real problems, much less implement solutions. Last year’s debt ceiling
debate exposed real cracks in the US system and drove us near to a breaking
point. It will not be long before we fight over the same issue again.

Euro Zone – There is apparent paralysis in crafting
a response to a problem that the rest
of the world can see. Yet, while the Euro politicians recognize it, they
won’t take responsibility for it, nor do they offer something dispositive to
solve it. Here goes Greece, there goes Spain, more to come while the dithering
goes on.

Greece – The home of democracy. But the current
state of Greek politics makes the Monty Python’s “Life of Brian’s”
political revolutionary parties look organized.

Middle East – The recently liberated Arab
nations are fighting hard to move towards differing forms of consensus
democracy, having shed their dictatorships, but little is happening that is expressly
designed to improve the lot of the people.

You could argue that there is bound
to be paralysis when there are limited solutions. But the bickering between
parties in all of these countries points to the ascendancy of self-serving
political priorities over those of the nation as a whole.

Let’s focus on the US, where our present political
system has failed. We have nominal leaders: Obama, Romney, Boehner, Pelosi,
McConnell and Reed. But, we have leadership paralysis. Of course there was
rarely a demand for this crew to do much or to bring about change when times
were good, so their uselessness was obscured.

It is when things go wrong that the ability and mettle of our politicians
is tested.

Until the 1980’s, politicians worked
together. But easy growth (funded by both profligate spending and profligate lending)
caused our parties to begin to act and look like Jabba the Hutt, who
you remember was a crime lord in the Star Wars franchise, an enormously
fat, blob-like creature who could barely
move around in an environment of humanoids.

Bloated, self important, living in bubble
created at the expense of its subjects (that means us, folks).

These Huttsters have proven to be completely useless in these times
of crisis.

Given the political landscape, all we
can do is hope. Hope that the parties can work together, or that a true leader
can move us to a consensus around policy and from there to a workable political
coalition, and from there to programs that make a difference.

This requires a leader, not just someone who can win an
election.

Sadly, it is not ignorance
that causes our politicians to ignore solutions to lead us out of the current
economic mess.

They
like the mess.

You know the truth. Their economic interests are not aligned with ours. Getting
elected to national office is like becoming a partner in a law firm or
investment bank. It is an opportunity
to make serious money.

That’s why incumbents
fight so hard to stay in office; it is a ticket to wealth, where the you don’t even have to pay the costs of keeping
the job, those are paid for by your big donors. You return the favor by
giving them leverage in legislation.

“Leverage” is the
incremental profit they make on the loopholes and carve outs politicians write into
the legislation that the donors want. They make back hundreds of times their
investment in the pols.

This is why the politician doesn’t stick his/her neck out. Their real constituency
is very small and they work hard to keep them satisfied. So, when a position needs
to be taken on a controversial issue when public opinion is inflamed, there is
no reason to do something that might cause the nominal constituency (actual
voters) to be pissed off or disappointed with them, keeping the constituents
complacent is primary, regardless of the pol’s true beliefs about the issue.

Politicians live to
raise money. The more money they raise, the more money they can make. Their
backers, the large corporations, banks and the wealthiest Americans are sitting
on mountains of cash, cash that will become all the more valuable if the world
undergoes another bout of crisis and/or deflation. Maybe they think that we can
even undergo a little bit more recession and then recover.

The
important thing is that today, politicians don’t seem to want growth.

The only impact that unemployment has on the personal lives of our politicians is
that it provides their overlords with an ever cheaper source of labor.

Don’t believe it? The alternative is to believe that the best and brightest
politicians really doubt that
they know how to fix the economy in our lifetime.

Want a more believable
idea? The economic royalists
have virtual control of our government and there is pure cynicism at the heart
of politics.

If they succeed this
fall in putting more of their surrogates and servants in office, they may
achieve actual control.

Thanks to the Roberts
Court we have Citizens United
and a clique of mega millionaires, who are not accountable to the public, but ARE
in charge of most of our politicians and the results (or non-results) our political
agenda.

Power
without accountability is tyranny. Power without a democratic transfer is a coup.

In 2005, long before the rest of us saw what was
going on, George Carlin said it best:

“Politicians
are put there to give you that idea that you have freedom of choice. You don’t.
You have no choice. You have owners. They own you. They own everything. They
own all the important land, they own and control the corporations, and they’ve
long since bought and paid for the Senate, the Congress, the State Houses, and
the City Halls. They’ve got the judges in their back pockets. And they own all
the big media companies so they control just about all the news and information
you get to hear… They want obedient workers. People who are just smart enough
to run the machines and do the paperwork and just dumb enough to passively
accept all these increasingly shittier jobs with the lower pay, the longer
hours, the reduced benefits, the end of overtime and the vanishing pension that
disappears the minute you go to collect it….”

(See the whole rant here– it’s worth it)

This
unholy alliance between bankers, corporate interests and politicians must be
broken.

Doing
that will require leadership and revolutionary change to the political process.

More about this next
time.

What’s Wrong Today:

Everyone wants to understand why we have both a Great Recession and a jobless recovery at the same time.

Since the start of the Great Recession at the end of 2007, America’s potential labor force (working-age people who want jobs) has grown by over 7 million. But since then, the number of Americans who actually have jobs has shrunk by more than 300,000, while the S&P 500 index has largely recovered and corporate profits are at all-time highs.

But our candidates for President seemingly have no idea how to fix this problem. 

They continue to sing from their parties’ choir books while showing zero ability to address these issues as a coherent whole:

• Romney speaks about how our best years are ahead of us while on his “Believe in America” bus tour
• Obama speaks about how we should stay the course and not go back to the failed economic strategies of the Bush era

Hoover never said it, but both candidates tell us “Prosperity is just around the corner”.

But the economy has not escaped the gravitational pull of the Great Recession. The standard tools have not worked: near-zero short-term interest rates from the Fed, record-low borrowing costs in the bond market, the combination of a too-small stimulus package and tax credits for small businesses have failed to do enough.

That’s because the real problem is not simply a downturn in the business cycle.

We will not have sustained GDP growth unless consumers, (whose spending makes up 70% of GDP) are again spending on a sustained basis. And there is little reason for hope on that score, largely because of the current jobs depression.

So, What’s Wrong?

Too few consumers have the money they need to help drive growth in our economy. There are two reasons for this:

First, persistent unemployment.  According to the BLS, we have approximately the same number of people employed in the US today as we had in 2005. The Labor Participation Rate (this is the ratio of employed people over 16 years old to the total over 16 population) has fallen. It was 63.8% in May 2012, while it averaged about 66% from 2002-2008. So, fewer people are working.

Second, limited wage growth. Hourly wages have flattened. The average hourly wage today adds up to $352.39 per week, just $2.22 more in constant dollars per week (that’s less than a 1% increase, folks) than the average wage from 2006-2010. Worse, the median male worker earns less today, adjusted for inflation, than he did 30 years ago.

So, fewer people are working and they make less money.

The seeds of these trends were sown years ago when new technologies, like satellite communications, low cost sea transportation, computers and the Internet made it cheaper for American companies to use low-wage labor abroad or software-driven tools and robots here at home rather than continuing to pay the typical worker. Now, our largest firms create more jobs offshore than in the US.

Our political classes have to deal with the underlying problem that we’ve avoided for decades: the ever widening income gap.

But technology is making it likely that a Keynesian solution will not be sustainable by consumers, although we should still employ the tools for our crumbling infrastructure. The Wrongologist has argued recently that we also need to redefine American capitalism as part of the solution.

One reason to redefine capitalism is that we are heading to a land where no stimulus magic will return us to the economy we have enjoyed in the past.

Here are two trends driving this conclusion:

Trend 1: Diminishing role of Consumer Consumption
Someone with an income of hundreds of millions a year does not spend more than a small fraction of it on consumption. For those who have money to burn, demand is moving increasingly toward things that are not mass produced: Land, art, rare wines and Super Bowl tickets are being bid up to unthinkable levels. And that only leads to a transfer of income from one well-to-do pocket to another without generating much if any need to make things. Sadly for those in the middle class, income inequality also means more of these things are moving out of reach.

Popular technologies may cause some spending by the middle class to fall. With our increased focus on consumer technologies – we spend more and more of our time on our cell phones, reading emails, watching videos and surfing the web – there is less of a difference between how the super rich and the middle class spend blocks of their time during a typical day. < /p>

The point is that orders of magnitude in income may not make all that much difference in what people spend on the tools they use to communicate and entertain themselves.

If this trend continues, we may see declining technology spending by the middle class. When coupled with low growth in wages and employment, this is surely not the way put of a jobless recession.

Trend 2: Diminishing Labor Component in Production
The production that feeds our demand for most engineered products is being developed with less labor input. This is happening not only because of improvements in production efficiency, but also because the sorts of things we want are particularly well suited to capital-intensive production.
Much of what we want to buy is produced in factories increasingly run with robots, and maintained and operated by a small cadre of engineers. Increased sales of iPhones only add a few sales jobs at less than $12/hour in the US and not many factory jobs in China. Also, keep in mind that some 3 Billion people are looking for work globally and most are willing to work for less than the average American.

So, demand for domestic labor may not rise even if we manage to push consumption up.

There has been a lot written about the liquidity trap, where monetary policy can no longer function as a spur to economic recovery. I believe that to be true.

However, the consumption trap described above is creating similar limits on the ability of the President to employ fiscal policy to push up employment and production.

Trickle down will not bring jobs back. Lower tax rates for multinational corporations will not bring jobs back. Whatever job growth there will be over the next few years will be fueled by very skilled labor getting good-paying jobs. The trickle down will create some low wage jobs to support demand for services by this group of new high wage earners.

So, What Will Work?

This secular decline in jobs is pretty dire for a lot of occupations. Jobs where you can collect a steady and consistent rent for doing the same thing are collapsing all around us. Life has become a zero-sum game between highly-skilled vs. skilled workers, superstars vs. everyone else and capital vs. labor.

The Wrongologist is not sure if Rifkin’s idea of a new class of mid-sized companies comprised of craftspeople involved in niche production makes complete sense, but jobs will have to come from somewhere

The next wave of job creation must focus on local (not easily outsourceable), niche manufacturing and service functions. We can’t just settle for low skilled service job creation.

Most have heard about the need for STEM (Science, Technology, Engineering, and Mathematics) education as a basis for job growth. This leaves skills like creative writing, arts instruction, and other “soft skills” which are not always amenable to rule-based software or to distance learning, on the sideline. The Wrongologist concurs with Rhode Island School of Design President John Maeda’s vision that a move from STEM to STEAM (adding Arts to the mix) is the right vision for boosting innovation.

Technology and systems used in education have to be compatible with this vision. Softer skills like leadership, team building, and creativity will be increasingly important. They are the areas least likely to be automated and most in demand in a dynamic, entrepreneurial economy. This needs to be a NASA style project for the 21st century.

Can we get the money? We may have to kill a few sacred cows to fund it: 

1. Decouple benefits from jobs to increase flexibility and dynamism. Tying health care and other mandated benefits to jobs makes it harder for people to move to new jobs or to quit and start new businesses.
2. Eliminate the home mortgage subsidy. This costs over $130 billion per year, which would do much more for GDP growth if allocated to research or STEAM program education.

Getting it done won’t be easy and in the interim, people will fall through cracks. It also runs counter to the life experience of everyone except itinerant bloggers, investors, hackers or engineers who can work out of a messenger bag with a laptop.

So, after the revolution, bloggers will still be employable. Unless we act, the rest of us, maybe not.

What’s
Wrong Today:

The
presidential campaign is shaping up as a contest between a Democrat who says we
had a free market from
2001 through 2008 and
it nearly ruined us, and a Republican who says “[w]e are only
inches away from ceasing to be a free market economy.” And that will
ruin us.

Barack
Obama and Mitt Romney apparently agree that the free market caused the
housing and financial debacle, our massive unemployment and the low growth
economy we all enjoy today.

How will
voters choose among them? Those who abhor “socialism” (however they define it)
will rally round the Republican because of his rhetoric, while those who abhor
“crony capitalism” will support the Democrat because of his rhetoric.

And the
winner will be: Corporatism, just like
last time.

So, What’s Wrong?

Every four years, some segment of
the vast American Corporatocracy backs a guy who captures the U.S. presidency
and government. In the case of the Bush administration it was the energy
industry. In the case of Obama, it was the financial services industry.

The Bush
administration prosecuted Enron and put Skilling and other executives in
prison. Since the Obama administration came to power backed by the financial
industry, it has neither prosecuted nor convicted anyone from that industry.

In fact,
there has not been much change in Washington’s approach to the financial
services industry from Clinton to Bush to Obama. The same is true regarding the
Energy and Defense sectors, Enron and BP excepted.

 

The Free Dictionary defines Corporatism as follows:

 

Noun1.corporatism – control of a
state or organization by large interest groups; “individualism is in
danger of being swamped by a kind of corporatism”

 

It defines control as: power to direct or determine;
“under control”

 

So, corporations run politics and policy in
our country. But, a corporation is a societal
construct codified in law to further the mutual interests of individuals. A
corporation is “an artificial being, invisible, intangible, and existing
only in contemplation of the law,” according to Chief
Justice Marshall
in the case Trustees of
Dartmouth College v. Woodward in 1819.

A corporation has no inalienable or natural
rights as described in the US Declaration of
Independence.
Nevertheless, since corporations represent a group of individuals,
“corporatists” have claimed that these fictional legal entities should enjoy
the same natural and legal liberties and rights with which individuals are
born.

And so we
get Citizens United.

Granting corporations the same rights as
natural persons may well prove to be a turning point in the viability of our
democracy,
not to mention the vibrant small/local capitalism that was a feature from the
birth of our nation to the present.

That is not to say that businesses should
not have rights. They should; and we should grant them as much freedom to act
as is reasonable and warranted.

But,
corporations are not individuals; they are collections of individuals. Often,
individuals hide behind the collective using the corporate veil to shield
themselves from sanctions for behavior, including the kind that abuses
individual liberties.

The
rights of businesses and individuals often come into conflict and a corporatist
would always favor the corporation in that conflict.

Economic conservatives defend the primacy
of markets over all else, when in reality common sense tells us that those with the greatest influence and
money will always be at an advantage without some check on that
influence and power.

Corporations
only “die” if the corporation becomes insolvent or their charter is
revoked (something that rarely happens in the large corporate world). All
natural persons die even when they’re doing well, financially. This difference is a compelling reason
to limit the rights of corporations versus people.

Virtual
immortality is a huge advantage which, combined with superior wealth and
influence, creates an extreme imbalance of power.

So far, corporations cannot vote. However,
increasing freedom to use their money and power to influence elections may
increasingly trump the votes of natural persons. Does one hundred dollars equal
one vote now? Two hundred? Three?

It
is axiomatic that those with the means and access will always have greater
influence over government than those without. So, in a very real sense, the
socioeconomic elite of any advanced, stratified society will always have disproportionate
control of the economic and political system.

We are passing
a tipping point. The Citizen’s United
decision handed our electoral system to the multinational corporate
kleptocracy. Unchanged, it’s a downhill road from here to serfdom.

And we don’t just have
Corporatists in one sector of the economy: There
is an oligopoly in finance and in derivatives speculation. We have an oligopoly
in health care, in defense, in energy. There is an oligopoly in the media. What
makes it worse is that all of these oligarchs are transnational corporations with little loyalty to anyone or to
any country.

This means
that they have no need to support the economic health of our nation.

Why so? US
corporations work from a market premise: there are 1.3 billion Chinese, 1
billion Indians, plus 1 billion East European and Middle Eastern consumers to
sell to. There are only 300 million American consumers; they’ve made most of what
profits they can make in the US. In order to grow, they have to find
incremental volume elsewhere.

 Since growth in demand
is too low or too uncertain in the US, there is little need to hire. It is not
because taxes are too high or there is too much regulation; there are simply 10 times more consumers
outside this country than in it.

Despite their PR
to the contrary, U.S corporations are mostly satisfied with the US economy, particularly
since, when they need the services that a large relatively affluent taxpaying
population can provide, like a bailout, they have organized Washington so they can
get it.

Absent a rapidly growing US
market, the Kleptocrats favor siphoning tax revenues to their “privatized” subsidiaries.
They push to privatize tax revenues for schools, universities, prisons,
highways, military functions and anything else they can convince their political
puppets to sell in Congress. The corporatist uses free market rhetoric as cover
for the real end which is unchecked power. It is similar to the way neo-cons
talk up democracy in pursuit of US hegemony and oil security.

Capitalism needs to be
refined and redefined for the Twenty-first Century. Unfortunately, the great political
minds needed to address the task are not apparent at the moment.

 Who
are these thought leaders and where are they?

What’s Wrong Today:

Today’s New
York Times reports that The recent economic crisis left the median American
family in 2010 with no more wealth than in the early 1990s, erasing almost two
decades of accumulated prosperity, the Federal Reserve said Monday.

A hypothetical family richer than half the
nation’s families and poorer than the other half had a net worth of $77,300 in
2010, compared with $126,400 in 2007, the Fed said. The crash of housing prices
directly accounted for three-quarters of the loss.

The 2008 Great Recession and its now-prolonged
aftermath requires us to re-examine
some particularly bad ideas that have become the dominant free-market
paradigm.

So, What’s Wrong?

The Wrongologist contends today’s version of
business’ big ideas no longer function
in a manner that makes all stakeholders better off. Let’s remember that
the stakeholders include the shareholders, employees, customers, suppliers and
the communities in which the firm operates.

Here
are three Big and Wrong ideas that need to be modified or else just go away, if
we are to get back on a track to balanced growth:

#1) “Markets must be free “
– free-marketers contend that regulation should be avoided because it restricts
economic growth and market freedom.

The Talking Heads tell us that markets
produce the most efficient and just outcomes if they are free from regulation.
That makes them “efficient” because businesses and the individuals
who run them know best how to utilize their resources. Unfettered markets are
“just” because they reward individuals according to their
productivity.

Following this advice, the US deregulated
businesses, reduced taxes and welfare, and adopted freer trade. The result has largely been the opposite
of what was promised: We
have experienced rising income inequality and slower growth, both of which were
masked until recently by increasing credit expansion and increased
productivity.

With a few exceptions, all of today’s rich
countries, including Britain and the U.S., reached that status through
protectionism, subsidies, and other policies that they and their IMF, WTO, and
World Bank now advise developing nations not to adopt.

Free-market proponents usually respond that
the U.S. succeeded despite, not because of, protectionism. The problem with
that is the number of other nations paralleling the early growth strategy of
the U.S. and Britain (Austria, Finland, France, Germany, Japan, Korea, Singapore,
Sweden, Taiwan), and the fact that apparent exceptions (Hong Kong, Switzerland,
The Netherlands) did so by ignoring foreign patents (oops, that’s a free-market
‘no-no’).

Regulatory oversight of our substantially
free market hasn’t materially affected our economic development and confusion
about the regulatory environment is not stopping corporations from investing. Lack
of consistent demand is holding them back.

#2) “Companies must maximize return
to shareholders”. Today,
shareholders are the most mobile of corporate stakeholders. For
example, high frequency trading represents 70+% of trading by volume. They
often hold ownership for fractions of a second. These high frequency
shareholders ONLY want corporate strategies that maximize short-term profits
and dividends. They are in bed with professional managers who now own large
chunks of equity in public firms. Coupled with the growing trend of lesser, or
no, voting rights for stock ownership by the public, professional managers have
a free hand to get wealthy without responsibility for the longer term corporate
performance. Here are some of the wrong tools they use:

 •  Increased share
buybacks. Buybacks accounted for less than 5% of
corporate profits until the early 1980s. They were 90% in 2007, and 280% in
2008. One economist estimated that had
GM not spent $20.4 billion on buybacks between 1986 and 2002, it could
have prevented bankruptcy in 2009.

 •  Offshoring and
Outsourcing are also driven by short-term profit
perspectives in many cases. These have also brought large-scale layoffs. Over
the past five years, our top multinationals have created 5 million more jobs
off shore than they have in the US. Clearly, we see our interest in
full-employment undermined by corporate outsourcing goals.  

We
know that US Managers are overpriced – They make
substantially more today relative to their predecessors (about 10X what
managers made in the mid-1960s; (inflation would
have accounted for less than 7X).

Compared to counterparts in other rich
countries, US managers today make up
to 20X more.

We
should be asking: If American CEOs are worth so much, why are their companies losing
out to foreign competitors? Why aren’t they investing like their foreign
counterparts, instead of sitting on some $2 trillion in mostly cash assets? There are so many investment opportunities that could make them even more money; for example, investing in oil stocks could be a hugely successful move, as detailed on https://www.energyfunders.com/blog/whats-the-best-way-to-invest-in-oil/.

#3)”Making rich people richer makes
the rest of us richer.” Really? “Trickle-down” economics is
based on the belief that the poor maximize current consumption, while the rich
mostly invest and investment creates GDP growth.

However,
the highest-ever growth rates in personal income in the US occurred during the
years 1950-1973, despite increased taxation of the rich. This was also the case in Canada, Australia, and New Zealand.

During this period, per capita income grew
at 2-3%. Prior to that, it grew at 1-1.5%/year.

Since then, tax cuts for the rich and
financial deregulation have allowed greater paychecks for top managers and
financiers. Between 1979 and 2006, the top 0.1% increased their share of
national income from 3.5% to 11.6%.

The result? Investment as a ratio of
national output has fallen in all rich economies and the rate at which the
total economic pie expands, has decreased.

So, Trickle Down has to be deleted from our
“economic fix-it” tool bag.

Bottom-Line:
We
need different ideas to inform our effort to steer the ship of state to higher GDP growth and full employment. How about ending our love affair with unrestrained, free-market
capitalism and installing a better-regulated variety? 

• Let’s make financial risk taking less attractive. U.S. financial assets/GDP had exceeded 900% by the early
  2000’s.  They have averaged 4-12% return
  since deregulation, higher than most non-financial firms, which range between
  2-5%. This focus diverts attention from manufacturing and its potentially much
  larger employment. Methods of doing so are being discussed in business and
  political circles. They include taxing market transactions, indexing bankers’
  bonuses to the leverage used to produce profits, banning short-selling and
  derivatives, and limiting bank leverage

• How about tying executive performance to adequate returns for all STAKEHOLDERS
  rather than to maximum return to shareholders?

• How about recognizing that trickle down doesn’t work?

What would be wrong with trying a few different ideas?