PROTECT FINANCIAL CONSUMERS
By Elizabeth Warren and Amelia Warren Tyagi
Elizabeth Warren is the Leo Gottlieb Professor of Law at Harvard Law School. Amelia Warren Tyagi is COO and co-founder of Business Talent Group. They are authors together of The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke.
Go into any appliance store in America and look for a toaster with a one-in-five chance of exploding. You won’t find one. But at any mortgage brokerage in the country it has been possible to purchase a loan with a one-in-five foreclosure rate, and the broker doesn’t even have to tell you the odds. Why the difference? Toasters—like every product you touch or taste—are tested for safety. When a baby stroller or an eyeliner is discovered to be dangerous, it is removed from the shelves. Yet financial products go unmonitored for basic safety. When shopping in the complex and constantly evolving financial market, where actual costs and unfavorable terms are regularly concealed, consumers are on their own.
For most of the country’s history, state and local usury laws imposed modest consumer protections by setting caps on interest rates and fees. But in 1978, a federal statute was used to bypass these laws. Creditors quickly rewrote the rules, issuing unintelligible contracts that increased fees, penalties, and interest rates. The fragmented financial regulatory bodies that remain have operated as if their main goal were lender profitability. Real oversight has been left mostly to a handful of consumer advocates who struggle to examine and review hundreds of complicated financial products and publicize problems while financial institutions spend about $100 million each year lobbying Congress for less regulation and more privilege. The ever-widening information imbalance between consumers and creditors has only made borrowers easier marks. In a Federal Trade Commission study conducted last year, for instance, nine in ten mortgage customers examining relatively straightforward fixed-rate loan agreements could not figure out the up-front costs on the loan; half could not identify the loan amount. Of all the borrowers who were sold subprime mortgages in the past five years, nearly 60 percent would have qualified for prime mortgages if brokers had offered them; the subprime mortgages carried so many rate escalators, prepayment penalties, and other traps that even would-be prime borrowers defaulted.
It is time we created the equivalent of a Consumer Product Safety Commission for financial products, an agency whose purpose would be to protect homebuyers and investors from the finance industry’s most dangerous offerings. The Financial Product Safety Commission could model itself after the best from the consumer regulatory agencies. For instance, the head of the new agency would be appointed by the president, and its staff of professionals would have civil-service protection and thereby be immune to changing political winds. Although the FPSC would have no hand in setting prices, it would be able to require that companies reveal the true cost of credit. This seemingly small requirement would force into public view essential information about terms and risks that has long been masked and withheld. To achieve this end, the agency could do something as basic as reviewing product disclosures, making sure they were easily comprehensible to the average reader.
The FPSC would also “test” products for safety before they had a chance to reach consumers. When the commission found undisclosed fees or bait-and-switch credit modeling, it could allow the offender a period of time to fix the problem, giving lenders the opportunity to minimize government interference. But if a lender failed to act within, say, six months, the agency could impose its own regulations: eliminating confusing paperwork, requiring effective disclosures, and, when necessary, banning outright the most dangerous traps. Standards would evolve over time, with the agency employing financial experts capable of keeping pace with the industry’s ability to constantly create new and dauntingly exotic products.
Because risk is an intrinsic part of most financial transactions, a Financial Product Safety Commission would not—and should not—prevent every financial mistake. But the agency would allow consumers to make informed decisions about the amount of risk they want to take and would protect them from unscrupulous practices that disguise the dangers. The FPSC might evaluate loans and credit-card agreements using standards similar to ones employed by other agencies concerned with consumer safety: Is a reasonable consumer likely to get hurt by this product? Is the information provided complete and helpful, or is it designed to create a false sense of safety? Will this aspect of the product’s design provide a meaningful service to consumers, or will it confuse and mislead them? Is the malfunction rate—that is, the default rate—reasonable, or is it unacceptably high? Each year millions of credit-card offers go out with tiny print detailing "double-cycle billing" and "trailing interest," terms that have enormous financial implications but are meaningless to most people. Likewise, such products as mortgage prepayment penalties are slipped surreptitiously into agreements for the sole purpose of trapping people into loans that they otherwise would not likely take on.
Industry advocates claim that any safety regulation would constrict credit, particularly to the poor. But the FSPC would restrict only a financial company’s ability to profit from deception and obfuscation—practices that lenders more frequently employ on low-income borrowers. Unlike the hard cap on total charges set by usury laws, which if too low actually does squeeze off credit to those who really need it, these regulations would merely require honest risk-based pricing, with all the costs and terms made clear up front. Consumers who can see the total cost of a financial product before purchasing it are no doubt better able to determine whether it is something they can really afford. The ingenuity of the past thirty years has led to astonishing changes in our consumer goods. Frozen foods, televisions, and plain old toasters have been made not only more efficient, user-friendly, and varied than they were but also less expensive. And all of this was accomplished even as the products were held to increasingly higher standards of safety. But over the same period of time, innovation without sensible regulation in the financial sector has brought a subprime mortgage meltdown, credit-card contracts that have expanded from one page to more than thirty, and payday loans that charge annual percentage rates of over 900 percent. The world of physical products has become safer, while the world of financial products has become far more dangerous. That’s a problem that can be fixed.
22 November, 2008
21 November, 2008
How to Save Capitalism - Part 2
ABOLISH STOCK OPTIONS
by Barry C. Lynn
Barry C. Lynn is a senior fellow at the New America Foundation and author of End of the Line: The Rise and Coming Fall of the Global Corporation. His last article for Harper’s Magazine, “Breaking the Chain: The Antitrust Case Against Wal-Mart,” appeared in the July 2006 issue.
What is the purpose of a corporation? In America today we generally believe that corporations exist to generate profits for their shareholders, who “own” them. Indeed, we have structured much of our economy—and often staked our retirements—on this idea.
Not many years ago, though, most Americans would have found such thinking absurd. From the nation’s earliest days until the 1970s, Americans saw the business corporation mainly as a practical tool of development. The aim might be to build a bridge, or to manufacture steel, or to transport people from one city to another. The private corporation was simply the institution best suited—usually, but not always—to organize and govern such work. Profits were a part of the system. After all, the only way to attract capital is to pay for it. But the manufacture of cash was a distinctly secondary goal.
Our society lives with many fictions, and most do us little harm. But there is a big problem with viewing corporations as private sources of paper “wealth” rather than as public sources of goods and services. It’s not that the former idea is technically wrong, though American law is very clear that the business corporation is not a property and cannot be “owned.” The problem is that our efforts to extract cash from these corporations leads us increasingly to degrade—and in some cases to destroy—some of our most important production and service systems at the very moment we should be making them more robust and open to new ideas.
I thought of this problem recently when investors pushed General Electric CEO Jeffrey Immelt to put up for sale his firm’s Consumer & Industrial Division, the heart of GE’s business since 1892. I don’t own GE stock, but if I did I would wonder which best served my interests—for the company to sell its 125 years of expertise in electrical systems to some lesser firm, and thereby to direct a few dollars into my accounts; or for GE to retain that know-how, perhaps depressing its stock price in the near term but enriching us all through the improved efficiency of our refrigerators, transformers, and light bulbs.
In fact, I’ve been forced to think about the destructive powers of shareholder “activists” all too often over the past year or so, as fund managers claiming to be “owners” (or agents for “owners”) have busted into the decisionmaking processes at all sorts of firms on which we depend—Motorola, General Motors, Yahoo!, Boeing, The New York Times, Hertz, and Freescale Semiconductor, among others. The problem is not change: every enterprise must adapt to its day. The problem is who decides what to change, and what motivates them. Firms such as Google and Toyota and machine-tool maker Mazak still do a great job of delivering better products and services. But these enterprises are run by managers who figured out how to insulate their executive suites and R&D operations from rapacious fund-runners. In a growing number of industrial firms, the scientists and engineers and machinists we rely on to devise and build what we need tomorrow lack the power to do so. Those who have power—be it billionaire investor Carl Icahn or California’s pension fund—know little about the systems they control. So like any absentee landlord, they blithely demand more than soil or serf can yield.
There is one easy way to get the managers of our corporations to focus more on making nextgeneration products and less on piling up cash for themselves and the fund managers they serve. And that is to eliminate, or at the very least to alter radically, the stock options that since the early 1990s have become such a huge part of executive pay packages. Back then, options were promoted as a way to bring the selfinterest of managers more in line with that of shareholders. This is exactly the problem. The old antagonism between “professional” managers inside the firm and the masters of capital outside it helped ensure a balance between acts of creation and acts of destruction.
In America, the modern manager emerged during the late nineteenth century in tandem with the limited-liability corporation. As these private governments grew bigger, so too did fears that a largely self-selecting corporate elite would abuse their authority, economically and politically. The New Dealers’ aggressive use of the IRS, antitrust law, and other state powers seemed to solve this problem, and by the 1950s managers were wont to present themselves as “corporate stewards” whose job was to serve “stockholders, employees, customers, and the public at large.” These managers knew their companies intimately: in 1950 nearly 40 percent of CEOs had forty or more years of experience with their firms. And they had an incentive to ensure the long-term health of the activities entrusted to their care, because the best way to keep the plush office and perks was to invest in the people and ideas necessary for the company to grow.
This balance was upset by two actions. The Reagan Administration’s overthrow of antitrust law in 1981 freed investors and managers to create larger firms less regulated by horizontal competition and hence less compelled to refine their products and systems. The explosion of options and the linking of earnings to short-term stock-price fluctuations completed the transformation of the CEO from tribune of the industrial arts to Shareholder #1.
It would be wrong to view the old way as perfect. The New Dealers, like the progressive-era reformers before them, failed to resolve the huge constitutional questions posed by the often necessary concentration of immense power within industrial corporations. But the ad-hoc balances they achieved were far safer than the one-sided dictatorship we see today. We should not allow investors to scatter the people, machines, and ideas entrusted to our great industrial firms any more than we would allow them to shutter or sell off the physics departments at MIT and Caltech. The time is long past to shift control over these vital activities away from the massed mindless appetites of Wall Street and entrust them instead to teams of human beings freed to use their powers of reason, and rewarded for doing so.
by Barry C. Lynn
Barry C. Lynn is a senior fellow at the New America Foundation and author of End of the Line: The Rise and Coming Fall of the Global Corporation. His last article for Harper’s Magazine, “Breaking the Chain: The Antitrust Case Against Wal-Mart,” appeared in the July 2006 issue.
What is the purpose of a corporation? In America today we generally believe that corporations exist to generate profits for their shareholders, who “own” them. Indeed, we have structured much of our economy—and often staked our retirements—on this idea.
Not many years ago, though, most Americans would have found such thinking absurd. From the nation’s earliest days until the 1970s, Americans saw the business corporation mainly as a practical tool of development. The aim might be to build a bridge, or to manufacture steel, or to transport people from one city to another. The private corporation was simply the institution best suited—usually, but not always—to organize and govern such work. Profits were a part of the system. After all, the only way to attract capital is to pay for it. But the manufacture of cash was a distinctly secondary goal.
Our society lives with many fictions, and most do us little harm. But there is a big problem with viewing corporations as private sources of paper “wealth” rather than as public sources of goods and services. It’s not that the former idea is technically wrong, though American law is very clear that the business corporation is not a property and cannot be “owned.” The problem is that our efforts to extract cash from these corporations leads us increasingly to degrade—and in some cases to destroy—some of our most important production and service systems at the very moment we should be making them more robust and open to new ideas.
I thought of this problem recently when investors pushed General Electric CEO Jeffrey Immelt to put up for sale his firm’s Consumer & Industrial Division, the heart of GE’s business since 1892. I don’t own GE stock, but if I did I would wonder which best served my interests—for the company to sell its 125 years of expertise in electrical systems to some lesser firm, and thereby to direct a few dollars into my accounts; or for GE to retain that know-how, perhaps depressing its stock price in the near term but enriching us all through the improved efficiency of our refrigerators, transformers, and light bulbs.
In fact, I’ve been forced to think about the destructive powers of shareholder “activists” all too often over the past year or so, as fund managers claiming to be “owners” (or agents for “owners”) have busted into the decisionmaking processes at all sorts of firms on which we depend—Motorola, General Motors, Yahoo!, Boeing, The New York Times, Hertz, and Freescale Semiconductor, among others. The problem is not change: every enterprise must adapt to its day. The problem is who decides what to change, and what motivates them. Firms such as Google and Toyota and machine-tool maker Mazak still do a great job of delivering better products and services. But these enterprises are run by managers who figured out how to insulate their executive suites and R&D operations from rapacious fund-runners. In a growing number of industrial firms, the scientists and engineers and machinists we rely on to devise and build what we need tomorrow lack the power to do so. Those who have power—be it billionaire investor Carl Icahn or California’s pension fund—know little about the systems they control. So like any absentee landlord, they blithely demand more than soil or serf can yield.
There is one easy way to get the managers of our corporations to focus more on making nextgeneration products and less on piling up cash for themselves and the fund managers they serve. And that is to eliminate, or at the very least to alter radically, the stock options that since the early 1990s have become such a huge part of executive pay packages. Back then, options were promoted as a way to bring the selfinterest of managers more in line with that of shareholders. This is exactly the problem. The old antagonism between “professional” managers inside the firm and the masters of capital outside it helped ensure a balance between acts of creation and acts of destruction.
In America, the modern manager emerged during the late nineteenth century in tandem with the limited-liability corporation. As these private governments grew bigger, so too did fears that a largely self-selecting corporate elite would abuse their authority, economically and politically. The New Dealers’ aggressive use of the IRS, antitrust law, and other state powers seemed to solve this problem, and by the 1950s managers were wont to present themselves as “corporate stewards” whose job was to serve “stockholders, employees, customers, and the public at large.” These managers knew their companies intimately: in 1950 nearly 40 percent of CEOs had forty or more years of experience with their firms. And they had an incentive to ensure the long-term health of the activities entrusted to their care, because the best way to keep the plush office and perks was to invest in the people and ideas necessary for the company to grow.
This balance was upset by two actions. The Reagan Administration’s overthrow of antitrust law in 1981 freed investors and managers to create larger firms less regulated by horizontal competition and hence less compelled to refine their products and systems. The explosion of options and the linking of earnings to short-term stock-price fluctuations completed the transformation of the CEO from tribune of the industrial arts to Shareholder #1.
It would be wrong to view the old way as perfect. The New Dealers, like the progressive-era reformers before them, failed to resolve the huge constitutional questions posed by the often necessary concentration of immense power within industrial corporations. But the ad-hoc balances they achieved were far safer than the one-sided dictatorship we see today. We should not allow investors to scatter the people, machines, and ideas entrusted to our great industrial firms any more than we would allow them to shutter or sell off the physics departments at MIT and Caltech. The time is long past to shift control over these vital activities away from the massed mindless appetites of Wall Street and entrust them instead to teams of human beings freed to use their powers of reason, and rewarded for doing so.
20 November, 2008
"How to Save Capitalism" - Part 1
reprinted from Harper's Magazine
HOW TO SAVE CAPITALISM
Fundamental fixes for a collapsing system
If the financial debacles of the past decade—the enormous bubbles, the credit collapse and its trillion-dollar consequences—have taught us anything about the American economy, it is that capitalists have done a remarkably poor job of safeguarding the future of capitalism. Our system became so dominated by finance, insurance, and real estate, and by the complex derivative securities these industries engendered, that the most eminent financiers (and their unsleeping computers) were unable to protect us from economic shocks. For a number of years, farsighted commentators—including in this magazine—warned of the looming credit collapse, and yet the masters of our economy took no action until the crisis was already upon us. Now we must not only repair our tenuous financial system but shore it up to withstand two great, gathering storms: dwindling energy supplies and accelerating climate change. To this end, Harper’s Magazine asked a group of leading economic thinkers to offer sweeping but concrete proposals for the rescue of capitalism, and capitalists, from doom.
Realign the Interests of Wall Street
By Joseph E. Stiglitz
Joseph E. Stiglitz is University Professor of Economics at Columbia University and winner of the 2001 Nobel Prize in Economics. His most recent book, with Linda Bilmes, is The Three Trillion Dollar War: The True Cost of the Iraq Conflict.
From the seventeenth-century tulip mania to this century’s housing bubble, economies have been susceptible to the quest for the easy buck. Clever people will invariably circumvent regulations and accounting standards; they will seize opportunities to prey upon the poor and the illinformed, to profit by selling the notion of the free lunch. By now most people are aware that over the past five years the financial sector has made bad loans and extremely risky bets, that defaults on the loans and record losses on the bets have seriously damaged the nation’s (and the world’s) economy. The downturn is likely to be so severe partly because we have succumbed to the opinion that markets work best by themselves, unfettered by government regulations. But the people making this argument are the ones who have been served well by it. We can do far more to protect against self-interest. In particular, we need to improve the incentives that drive those in the finance industry, so that their interests align with those of the society and economy they are meant to serve.
The financial sector is supposed to allocate capital judiciously, making sure that it goes to areas where returns, when adjusted for risk, are highest. When capital is well distributed in this way, the economy is more likely to flourish in the short term and grow steadily over time. Capital markets are also supposed to manage risk, transferring it from those parties less able to bear it to those that are more able to do so; distributing risk in this manner encourages entrepreneurship and stabilizes the economy. In return for performing this public service, the financial markets are generously rewarded—in recent years they have garnered nearly a third of all corporate profits.The financial system is supposed to do these things. But it is clear that America’s financial institutions have not managed risk; they have created it. The industry allocated hundreds of billions in bad loans to an inflated housing market, resulting in the greatest number of foreclosures since the Great Depression. With economic growth currently at a dreary 1 percent, there is already an immense gap between what we are now producing and what we could be producing if this crisis had not occurred—a cumulative loss I estimate will be in excess of $2 trillion.
Too many bankers and other lenders have been focused on trying to beat the system by getting around accounting and banking regulations (through what is called accounting and regulatory arbitrage). Indeed, with bonuses based on shortterm profits, they had every incentive to gamble and connive. And now that there’s a bust, no one is being asked to pay back the hefty bonuses earned during the boom. On the contrary, even as they are dismissed, those who helped send their firms and the American economy into a tailspin are rewarded with generous severance packages. They are enriched regardless of what happens to investors, homeowners, and others who lost so much. Unless we reform incentives, the financial sector will only try to circumvent whatever new regulations are put in place. We will simply have a short respite before the next crisis.
One major problem with incentives involves securitization. The selling and reselling of mortgages, with payments chopped into thousands of pieces, creates a new set of information asymmetries, as buyers of securitized mortgages have less information than the originators of the mortgages. To be sure, both investors and regulators should have recognized the scam. But as mortgage originators realized that buyers of securitized mortgages paid little attention to who was taking out the loans and on what terms, they pushed through as many loans as they could, regardless of their risk, and they invented ever more complex and precarious financial products that no one—not even the originators themselves—fully understood. Loans requiring that less interest be paid than the rate at which it accrues, so that the level of debt increased over the course of a year, were sold on the premise that housing prices were only going to rise. A simple regulation requiring mortgage originators to put their own money at risk in each transaction — say, 20 percent of the loan amount — could curb these abusive practices.
Multiple conflicts of interest in our finance industry also have led to the rewarding of socially destructive behavior. The worst culprits have been the rating agencies, which are paid by the companies whose financial products they were supposed to be evaluating and which make money by consulting with their clients on how to get AAA designation. These financial alchemists announced that the lead of subprime mortgages had been transformed into golden products safe enough to be held by pension funds. Without this collusion, the whole system of deception would not have worked; there would not have been the flow of funds that sustained the subprime mortgage industry. Neither banks (including now investment banks) that can borrow from the Federal Reserve nor pension funds that are responsible for managing other people’s money should be allowed to buy or sell risky and non-transparent products.
Finally, we must change how financial executives are personally compensated. We should require that stock options be subject to “expensing” (a more transparent accounting that makes clear their full costs). The present stock-option payment structure encourages CEOs to take actions that bloat the short-term reported profits of the firm, thereby inflating the share price, and everyone (except the executives in the know) eventually loses as a result. Their pay must be based on long-term performance, and they should share the losses, not just the gains.
Certain masterminds of Wall Street exhibited great ingenuity in creating new, highly complex products capable of evading accounting rules and taking full advantage of the housing frenzy. But as they were getting rich off these innovations, they failed to design products that help reduce the risks faced by most people in the housing market. Mortgages that would make it easier for Americans to keep their homes as interest rates rise or the economy spirals downward can be developed. But those in the financial sector have been fixated on their own annual bonuses.
Adam Smith argued that in serving their own interests individuals were led “as if by an invisible hand” to serve the interests of society as a whole. But once again we see that only with the right rewards can these interests actually be joined.
HOW TO SAVE CAPITALISM
Fundamental fixes for a collapsing system
If the financial debacles of the past decade—the enormous bubbles, the credit collapse and its trillion-dollar consequences—have taught us anything about the American economy, it is that capitalists have done a remarkably poor job of safeguarding the future of capitalism. Our system became so dominated by finance, insurance, and real estate, and by the complex derivative securities these industries engendered, that the most eminent financiers (and their unsleeping computers) were unable to protect us from economic shocks. For a number of years, farsighted commentators—including in this magazine—warned of the looming credit collapse, and yet the masters of our economy took no action until the crisis was already upon us. Now we must not only repair our tenuous financial system but shore it up to withstand two great, gathering storms: dwindling energy supplies and accelerating climate change. To this end, Harper’s Magazine asked a group of leading economic thinkers to offer sweeping but concrete proposals for the rescue of capitalism, and capitalists, from doom.
Realign the Interests of Wall Street
By Joseph E. Stiglitz
Joseph E. Stiglitz is University Professor of Economics at Columbia University and winner of the 2001 Nobel Prize in Economics. His most recent book, with Linda Bilmes, is The Three Trillion Dollar War: The True Cost of the Iraq Conflict.
From the seventeenth-century tulip mania to this century’s housing bubble, economies have been susceptible to the quest for the easy buck. Clever people will invariably circumvent regulations and accounting standards; they will seize opportunities to prey upon the poor and the illinformed, to profit by selling the notion of the free lunch. By now most people are aware that over the past five years the financial sector has made bad loans and extremely risky bets, that defaults on the loans and record losses on the bets have seriously damaged the nation’s (and the world’s) economy. The downturn is likely to be so severe partly because we have succumbed to the opinion that markets work best by themselves, unfettered by government regulations. But the people making this argument are the ones who have been served well by it. We can do far more to protect against self-interest. In particular, we need to improve the incentives that drive those in the finance industry, so that their interests align with those of the society and economy they are meant to serve.
The financial sector is supposed to allocate capital judiciously, making sure that it goes to areas where returns, when adjusted for risk, are highest. When capital is well distributed in this way, the economy is more likely to flourish in the short term and grow steadily over time. Capital markets are also supposed to manage risk, transferring it from those parties less able to bear it to those that are more able to do so; distributing risk in this manner encourages entrepreneurship and stabilizes the economy. In return for performing this public service, the financial markets are generously rewarded—in recent years they have garnered nearly a third of all corporate profits.The financial system is supposed to do these things. But it is clear that America’s financial institutions have not managed risk; they have created it. The industry allocated hundreds of billions in bad loans to an inflated housing market, resulting in the greatest number of foreclosures since the Great Depression. With economic growth currently at a dreary 1 percent, there is already an immense gap between what we are now producing and what we could be producing if this crisis had not occurred—a cumulative loss I estimate will be in excess of $2 trillion.
Too many bankers and other lenders have been focused on trying to beat the system by getting around accounting and banking regulations (through what is called accounting and regulatory arbitrage). Indeed, with bonuses based on shortterm profits, they had every incentive to gamble and connive. And now that there’s a bust, no one is being asked to pay back the hefty bonuses earned during the boom. On the contrary, even as they are dismissed, those who helped send their firms and the American economy into a tailspin are rewarded with generous severance packages. They are enriched regardless of what happens to investors, homeowners, and others who lost so much. Unless we reform incentives, the financial sector will only try to circumvent whatever new regulations are put in place. We will simply have a short respite before the next crisis.
One major problem with incentives involves securitization. The selling and reselling of mortgages, with payments chopped into thousands of pieces, creates a new set of information asymmetries, as buyers of securitized mortgages have less information than the originators of the mortgages. To be sure, both investors and regulators should have recognized the scam. But as mortgage originators realized that buyers of securitized mortgages paid little attention to who was taking out the loans and on what terms, they pushed through as many loans as they could, regardless of their risk, and they invented ever more complex and precarious financial products that no one—not even the originators themselves—fully understood. Loans requiring that less interest be paid than the rate at which it accrues, so that the level of debt increased over the course of a year, were sold on the premise that housing prices were only going to rise. A simple regulation requiring mortgage originators to put their own money at risk in each transaction — say, 20 percent of the loan amount — could curb these abusive practices.
Multiple conflicts of interest in our finance industry also have led to the rewarding of socially destructive behavior. The worst culprits have been the rating agencies, which are paid by the companies whose financial products they were supposed to be evaluating and which make money by consulting with their clients on how to get AAA designation. These financial alchemists announced that the lead of subprime mortgages had been transformed into golden products safe enough to be held by pension funds. Without this collusion, the whole system of deception would not have worked; there would not have been the flow of funds that sustained the subprime mortgage industry. Neither banks (including now investment banks) that can borrow from the Federal Reserve nor pension funds that are responsible for managing other people’s money should be allowed to buy or sell risky and non-transparent products.
Finally, we must change how financial executives are personally compensated. We should require that stock options be subject to “expensing” (a more transparent accounting that makes clear their full costs). The present stock-option payment structure encourages CEOs to take actions that bloat the short-term reported profits of the firm, thereby inflating the share price, and everyone (except the executives in the know) eventually loses as a result. Their pay must be based on long-term performance, and they should share the losses, not just the gains.
Certain masterminds of Wall Street exhibited great ingenuity in creating new, highly complex products capable of evading accounting rules and taking full advantage of the housing frenzy. But as they were getting rich off these innovations, they failed to design products that help reduce the risks faced by most people in the housing market. Mortgages that would make it easier for Americans to keep their homes as interest rates rise or the economy spirals downward can be developed. But those in the financial sector have been fixated on their own annual bonuses.
Adam Smith argued that in serving their own interests individuals were led “as if by an invisible hand” to serve the interests of society as a whole. But once again we see that only with the right rewards can these interests actually be joined.
"How to Save Capitalism" - Introduction
If I were asked to provide a synopsis of the US Government's response to the global financial crisis to date, I would do so thusly:
President Bush is absolutely correct about one thing he said the other day:
We stand at a crossroads.
Fortunately, Henry Paulson's ideas are not the only ones we have from which to draw. There actually are good ideas out there, including the seven published in the November issue of Harper's, which I am going to share with you in this special RadicalHead series.
Note that while the title of the series is "How to Save Capitalism", I readily acknowledge the fact that our economic system is not a capitalist one. I'm simply using the term for convenience, much in the way that we call our political system a "democracy", even though it's actually a broken Representative Republic sitting atop a two-legged stool. Also, the title was taken from the Harper's piece I am reproducing here.
I do not have permission to reprint the content from Harper's that I'm sharing here, but given the importance of the topic and the value of these ideas, I don't think they should be available only to subscribers (though I encourage you to subscribe--it really is the best magazine around).
Note too that even if we implemented, with all due urgency, every one of the seven suggestions that follow, it will still not be enough to keep the US from a drastic downward spiral. These economic reforms, if enacted, would be but one prong of a multi-faceted approach to national security that must also include similarly creative, intelligent, and forward-thinking long-term solutions to tackling energy, education, health care, and other issues as well, all at the same time. Employment is inextricably linked to education because schools are funded through property taxes. Our energy problems cannot be solved without highly-educated people and a strong committment to science. And so on. All our problems are intertwined, and any solutions we devise must be mindful of that simple fact.
- Though it had been brewing for years, Fed Chief Bernanke figured out in August that the real estate crisis could really mess up the economy as a whole after sitting down and having people try to explain to him what the heck was going on with all this toxic debt that was getting bundled and resold and repackaged and resold until it was like a Christmas present wrapped in a box wrapped in a box wrapped inside another box that was wrapped up inside another package of shit.
- The 'present' was finally unwrapped, the shit fell on the floor, and all hell broke loose.
- Treasury Secretary Paulson submitted a 3-page plan to fix the economy and save the world, which amounted to: a) giving him a ginormous sum of money ($700 Billion was concocted because it sounded like a really big number), b) let him do his thing, no questions asked, with no interference of any kind from any body, be it legislative or judicial, and no accountability of any kind.
- Somehow, Congress was permitted to vote on this plan, and because they're not completely batshit insane (and because many people contacted letting them know that Paulson's plan WAS batshit insane), they voted 'thanks, but no thanks' to that bridge to nowhere, which is to say they voted 'nay'.
- A new plan was put together, chillingly similar to the old plan, but longer, and with some strings attached.
- The world at large was informed that it would come to an end if this new plan was not passed.
- The new plan was passed.
- Sec. Paulson said the best thing to do would be to use all that borrowed money to buy up a bunch of bad debt.
- People hollered, pointing out that Paulson's idea was abrasively stupid.
- Sec. Paulson changed his mind about that whole buying up bad debt thing, and decided instead the best thing to do would be to just give a bunch of that borrowed money to banks, trusting them to lend that money intelligently in order to keep the economy from swirling down the toilet.
- People pointed out that maybe those same banks that demonstrated stupendously poor judgement and caused this big giant horrible mess might perhaps not be worthy of that kind of trust.
- The recipients of corporate welfare immediately proved people right by declaring that, instead of intelligently lending money to keep the economy from swirling down the shitter, they would be giving their executives big fat bonuses in time for the holidays, and pay dividends to their shareholders, and go out and get a nice massage at a fancy resort. Stuff like that. Real '90's type stuff.
- Sec. Paulson changed his mind about that whole giving loads of money to banks thing, and decided maybe a better course of action might be to just do nothing at all, hang onto all that borrowed money, and let the new guy deal with the problems in a couple of months.
"It is true that this crisis included failures, by leaders and borrowers, by financial firms, by governments and independent regulators," Bush said. "But the crisis was not a failure of the free market system. And the answer is not to try to reinvent that system."This crisis was, in fact, caused by the free market system. Alan Greenspan, who managed that system, admitted as much. The crisis was caused not only by decades of deregulation driven by a poisonous, faulty ideology that maintained the 'market' was some sort of organic, sentient being that could heal itself, but also by a radical change in the public perception of what corporations are, what they do and are supposed to do, and how to define their success. Barry C. Lynn will enlighten us further about that in Part 2.
President Bush is absolutely correct about one thing he said the other day:
"Our aim should not be more government, it should be smarter government."This is something he's apparently come to realize after dramatically increasing the size of our government and dumbing it down to a state of exasperating incompetence, inert confusion, and panic.
We stand at a crossroads.
Fortunately, Henry Paulson's ideas are not the only ones we have from which to draw. There actually are good ideas out there, including the seven published in the November issue of Harper's, which I am going to share with you in this special RadicalHead series.
Note that while the title of the series is "How to Save Capitalism", I readily acknowledge the fact that our economic system is not a capitalist one. I'm simply using the term for convenience, much in the way that we call our political system a "democracy", even though it's actually a broken Representative Republic sitting atop a two-legged stool. Also, the title was taken from the Harper's piece I am reproducing here.
I do not have permission to reprint the content from Harper's that I'm sharing here, but given the importance of the topic and the value of these ideas, I don't think they should be available only to subscribers (though I encourage you to subscribe--it really is the best magazine around).
Note too that even if we implemented, with all due urgency, every one of the seven suggestions that follow, it will still not be enough to keep the US from a drastic downward spiral. These economic reforms, if enacted, would be but one prong of a multi-faceted approach to national security that must also include similarly creative, intelligent, and forward-thinking long-term solutions to tackling energy, education, health care, and other issues as well, all at the same time. Employment is inextricably linked to education because schools are funded through property taxes. Our energy problems cannot be solved without highly-educated people and a strong committment to science. And so on. All our problems are intertwined, and any solutions we devise must be mindful of that simple fact.
19 November, 2008
Obama, Lieberman, and New Years' Resolutions
Somebody please share Glenn Greenwald's excellent piece about bipartisanship with my parents. I'm done trying to convince them that up is not, in fact, down. No matter how many times you try to explain to some people that "the left", as exemplified by Congressional Democrats, is actually the left of the right, you just can't compete with the Faux News propaganda that delights in painting conservative Democrats as far-left loonies. To be fair, there are some legitimately liberal Democrats in Congress, but I'll bet I could count them on my digits and never have to take off my shoes.
So while I agree completely with Greenwald regarding bipartisanship (we need much less, not more), I'm going to stick my neck out and differ from what seems to be the majority liberal opinion on Lieberman.
Personally, I can't stand the guy. I think he's partially responsible for Gore 'losing' in the first place, and he's got the personal appeal of a sticky gym sock. I don't, however, think he's a traitor or a Benedict Arnold as I see many on the left calling him, and I think it's disingenuous to make claims like that while applauding rational Republicans like Ron Paul or Chuck Hagel when they vocally refuse to toe their party's line.
I agree that allowing Lieberman to keep his chairmanship of the Homeland Security committee after he campaigned for McCain (and said some somewhat nasty things about Obama while he was at it) is questionable, I'm willing to give the President-Elect the benefit of the doubt. After all, I supported the guy knowing full well that he was a centrist. And I do believe that Lieberman's colleagues voted the way they did (allowing him to retain his chairmanship) because Obama wanted it so. I suspect there was a certain amount of political calculation involved there, fueled by the lingering possibility that Democrats could still reach that magical 60 number in the Senate (which is purely symbolic and not at all substantive in any truly practical way).
In the end though, I think it boils down to this: while I might have preferred to punish Lieberman more severely, as many others did too, Barack Obama didn't want that simply because he is better than I am. That's why I voted for him. He's confident, magnanimous, and he full well realizes that there is no sense in punishing the vanquished when you are the victor. He won, dammit. Just because it is impossible to unite Americans doesn't mean it shouldn't be tried, and how could Obama move that ball forward if he behaved like a Republican and encouraged his colleagues to marginalize and punish Lieberman for opposing him, sowing the seeds of division?
It strikes me that it's also entirely possible that Lieberman, as someone who has embraced a more fearful (if seemingly irrational) view of the threats to our country than Obama, might actually do a better job on that committee than someone who has become anaesthetized to the Right's cries of 'wolf!'. It could be a presciently pragmatic decision in that way.
The past eight years have taught us well to embrace and cultivate division. Bush and his supporters have made themselves damned easy to riducule and scorn, and the natural reaction to being attacked is to counterattack. We liberals, many or most of us, have allowed ourselves to see our own country as a battlefield, our own neighbors--family members even--as opponents. Just because we've been attacked and likened to terrorists or terrorist-sympathizers is not a good excuse. Yes, it's disheartening when adults with power say such childish things, but reacting in anger is like arguing with a three-year-old for calling you a poopyhead.
For Barack Obama's sake (by which I mean for the sake of progress and unity), I'm going to try to do better than that, and to see the wisdom of forgiveness. Rather than thinking of others, "you're wrong, you're ignorant, and I'd like to spit in your eye", I resolve to try to replace those thoughts with something more like, "I'm sorry you feel that way." I resolve better to internalize Yoda's lessons that anger, fear, and hate pave the path to the Dark Side, and giving in to them only serves the interests of Karl Rove, Emporer Palpatine, and their red-sabered brethren.
Criticism is necessary, but as a tool, not as a weapon. It is for building--not for destroying.
Now--you can go ahead and call me a big fat hypocrite. But please--do it with affection, will ya?
So while I agree completely with Greenwald regarding bipartisanship (we need much less, not more), I'm going to stick my neck out and differ from what seems to be the majority liberal opinion on Lieberman.
Personally, I can't stand the guy. I think he's partially responsible for Gore 'losing' in the first place, and he's got the personal appeal of a sticky gym sock. I don't, however, think he's a traitor or a Benedict Arnold as I see many on the left calling him, and I think it's disingenuous to make claims like that while applauding rational Republicans like Ron Paul or Chuck Hagel when they vocally refuse to toe their party's line.
I agree that allowing Lieberman to keep his chairmanship of the Homeland Security committee after he campaigned for McCain (and said some somewhat nasty things about Obama while he was at it) is questionable, I'm willing to give the President-Elect the benefit of the doubt. After all, I supported the guy knowing full well that he was a centrist. And I do believe that Lieberman's colleagues voted the way they did (allowing him to retain his chairmanship) because Obama wanted it so. I suspect there was a certain amount of political calculation involved there, fueled by the lingering possibility that Democrats could still reach that magical 60 number in the Senate (which is purely symbolic and not at all substantive in any truly practical way).
In the end though, I think it boils down to this: while I might have preferred to punish Lieberman more severely, as many others did too, Barack Obama didn't want that simply because he is better than I am. That's why I voted for him. He's confident, magnanimous, and he full well realizes that there is no sense in punishing the vanquished when you are the victor. He won, dammit. Just because it is impossible to unite Americans doesn't mean it shouldn't be tried, and how could Obama move that ball forward if he behaved like a Republican and encouraged his colleagues to marginalize and punish Lieberman for opposing him, sowing the seeds of division?
It strikes me that it's also entirely possible that Lieberman, as someone who has embraced a more fearful (if seemingly irrational) view of the threats to our country than Obama, might actually do a better job on that committee than someone who has become anaesthetized to the Right's cries of 'wolf!'. It could be a presciently pragmatic decision in that way.
The past eight years have taught us well to embrace and cultivate division. Bush and his supporters have made themselves damned easy to riducule and scorn, and the natural reaction to being attacked is to counterattack. We liberals, many or most of us, have allowed ourselves to see our own country as a battlefield, our own neighbors--family members even--as opponents. Just because we've been attacked and likened to terrorists or terrorist-sympathizers is not a good excuse. Yes, it's disheartening when adults with power say such childish things, but reacting in anger is like arguing with a three-year-old for calling you a poopyhead.
For Barack Obama's sake (by which I mean for the sake of progress and unity), I'm going to try to do better than that, and to see the wisdom of forgiveness. Rather than thinking of others, "you're wrong, you're ignorant, and I'd like to spit in your eye", I resolve to try to replace those thoughts with something more like, "I'm sorry you feel that way." I resolve better to internalize Yoda's lessons that anger, fear, and hate pave the path to the Dark Side, and giving in to them only serves the interests of Karl Rove, Emporer Palpatine, and their red-sabered brethren.
Criticism is necessary, but as a tool, not as a weapon. It is for building--not for destroying.
Now--you can go ahead and call me a big fat hypocrite. But please--do it with affection, will ya?
18 November, 2008
Tim Robbins' Letter to NYC Board of Elections
Mr. Gregory C. Soumas
Board of Elections in the City of New York
Executive Office
32 Broadway
New York, NY 10004-1609
November 17, 2008
Dear Mr. Soumas:
I would like to publicly apologize for being such a dim-witted dilettante on Election Day. I was under the naïve assumption that I could vote where I voted in the last two elections. Your thoughtful letter pointed out that if I had voted in the recent primary election in September I would have discovered that I was no longer registered in the polling place I have voted in since 2004. Considering your position at the Board of Elections and your deep respect for the democratic process I must assume that my local 14th St. poll worker, Betty J. Williamson's assertion that my name was on the active voter rolls for the primary in September of this year was erroneous and that she must be as confused and wrongheaded as I am. If Ms. Williamson saw my name in the book in September that would mean that you are lying. Certainly you wouldn't lie about a thing like that. That is unbecoming of a man of your bureaucratic stature. And why would anyone in the Board of Elections be eliminating legitimate voters from the rolls in late September and October of 2008? That's just crazy and un-democratic.
I should also apologize for the misguided actions of Justice Paul G. Feinman in issuing a court order on Election Day allowing me to vote on 14th St. He apparently thought that a printed out record from your own Board of Elections computer verifying my polling place as 14th St was justification for issuing the court order. If he had only thought to contact you, you could have helped him understand the logic and wisdom of eliminating my name from the book on 14th St. where I have always voted and leaving my name registered at a place I have never voted.
I must also thank you for sending your letter not to me but to all the major newspapers in the New York area and across the internet. I understand it was your way of clearing up this matter and for that I am grateful. I am particularly appreciative of your sending a copy of my voter registration card with my home address and driver's license number to all the newspapers and, by extension, to millions across the internet. What celebrity dilettante wouldn't want his private information made public? What kind of snob gets angry that his family's safety might be compromised? It comes with the territory, right? I was thinking of returning that favor by publishing your home address in this letter but then I thought that maybe one of the thousands of New Yorkers that were taken off the voter rolls in the last two months might not understand what a patriotic upstanding man you are and might show up at your doorstep with the misguided assumption that you are a petty vindictive corrupt scumbag.
Tim Robbins
New Yorker since 1961
Voter since 1976
P.S. If anyone reading this letter had a similar experience on Election Day it can and should be reported at 866ourvote.org.
cc:
Commissioners of Elections
Marcus Cederqvist, Executive Director
George Gonzalez, Deputy Executive Director
Pamela Perkins, Administrative Manager
Beth Fossella, Coordinator, Voter Registration
Steven H. Richman, General Counsel
Troy Johnson, Chief Clerk
Timothy Gay, Deputy Chief Clerk
17 November, 2008
The Awesome SpeedFit
Now if only somebody would create a stationary bike that you could take outside and pedal around the neighborhood! Imagine the possibilities!
(Thanks, Joel.)
The Hidden Cost of Nuclear Power
They were talking the environment and energy on Midmorning this morning, and as usual, I was baffled about why nobody ever mentions the issue of water in the context of nuclear power. What many don't know about nuclear power is that it's nothing more than an extremely high-tech and needlessly dangerous way to boil water. In goes fission, out comes steam.
A steam engine, which predates the fucking Industrial Revolution.
I'm too lazy to look up the actual number right now, but I remember reading during the summer when Georgia was experiencing a severe water shortage that something like two thirds (possibly more, but not less) of the water used in the area was used by power plants, including nuclear plants. That's a hella lotta water, and as time goes on, we will have less and less potable water to spare.
Nuclear power should be rejected for that reason alone if the other compelling reasons -- like radioactive waste that never goes away and kills you -- aren't good enough.
Nuclear power should be rejected for that reason alone if the other compelling reasons -- like radioactive waste that never goes away and kills you -- aren't good enough.
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