Reflections at the Intersection of Economy & Society

"Self-Interest, Without Morals, Leads to Capitalism’s Self-Destruction" by Jeffrey Sachs

2012-01-25T01:24:00.000-08:00

The German sociologist Max Weber argued that Reformed Protestantism--Calvinism--provided the cultural ethos and foundational values that gave birth to modern capitalism. The contemporary literature has advanced the idea that if markets are to function properly and achieve sustainability, then they must be embedded in a deeper set of social and cultural values. In the article below, Jeffrey Sachs, professor at Columbia University and Director of The Earth Institute, argues that this idea has been lost. For example, self-interest without a corresponding set of social and cultural values to orient and constrain modern markets leads to capitalism's self-destruction.

NEW YORK - Capitalism earns its keep through Adam Smith’s famous paradox of the invisible hand: self-interest, operating through markets, leads to the common good. Yet the paradox of self-interest breaks down when stretched too far. This is our global predicament today.

Self-interest promotes competition, the division of labor, and innovation, but fails to support the common good in four ways.

First, it fails when market competition breaks down, whether because of natural monopolies (in infrastructure), externalities (often related to the environment), public goods (such as basic scientific knowledge), or asymmetric information (in financial fraud, for example).

Second, it can easily turn into unacceptable inequality. The reasons are legion: luck; aptitude; inheritance; winner-takes-all-markets; fraud; and perhaps most insidiously, the conversion of wealth into power, in order to gain even greater wealth.

Third, self-interest leaves future generations at the mercy of today’s generation. Environmental unsustainability is a gross inequality of wellbeing across generations rather than across social classes.

Fourth, self-interest leaves our fragile mental apparatus, evolved for the African savannah, at the mercy of Madison Avenue. To put it more bluntly, our sense of self-interest, unless part of a large value system, is easily transmuted into a hopelessly addictive form of consumerism.

For these reasons, successful capitalism has never rested on a moral base of self-interest, but rather on the practice of self-interest embedded in a larger set of values. Max Weber explained that Europe’s original modern capitalists, the Calvinists, pursued profits in the search for proof of salvation. They saved ascetically to accumulate wealth to prove God’s grace, not to sate their consumer appetites.

Keynes noted the same regarding the mechanisms underpinning Pax Britannica at the end of the 19th Century. As he put it, the economic machine held together because those who ostensibly owned the cake only pretended to consume it. American capitalism, more secular and less patriotic, created its own vintage of social restraint. The greatest capitalist of the second half of the 19th century, Andrew Carnegie developed his Gospel of Wealth, according to which the great wealth of the entrepreneur was not personal property but a trust for society.

Our 21st century predicament is that these moral strictures have mostly vanished. On the one hand, the power of self-interest is alive and well and is delivering much that is good, indeed utterly remarkable, at a global scale. Former colonies and laggard regions are bounding forward as technologies diffuse and incomes surge through global trade and investment.

Yet global capitalism has mostly shed its moral constraints. Self-interest is no longer embedded in higher values. Consumerism is the world’s secular religion, more than science, humanism, or any other -ism. “Greed is good” is not only the mantra of a 1980s Hollywood moral fable: it is the operating principle of the top tiers of world society.

Capitalism is at risk of failing today not because we are running out of innovations, or because markets are failing to inspire private actions, but because we’ve lost sight of the operational failings of unfettered gluttony. We are neglecting a torrent of market failures in infrastructure, finance, and the environment. We are turning our backs on a grotesque worsening of income inequality and willfully continuing to slash social benefits. We are destroying the Earth as if we are indeed the last generation. We are poisoning our own appetites through addictions to luxury goods, cosmetic surgery, fats and sugar, TV watching, and other self-medications of choice or persuasion. And our politics are increasingly pernicious, as we turn political decisions over to the highest-bidding lobby, and allow big money to bypass regulatory controls.

Unless we regain our moral bearings our scope for collective action will be lost. The day may soon arrive when money fully owns our politics, markets have utterly devastated the environment, and gluttony relentlessly commands our personal choices. Then we will have arrived at the ultimate paradox: the self-destruction of prosperity at the very moment when technological knowhow enables sustainable prosperity for all.

"Insatiable Consumers are Undermining Democracy" by Robert Reich

2012-01-24T02:59:00.000-08:00

Is there a causal relationship between the macro phenomenon of increasing inequality and the micro behavior of consumers to buy from the lowest price retailer? Robert Reich, the Chancellor's Professor of Public Policy at the University of California at Berkeley and secretary of labor under President Bill Clinton, argues that the everyday consumer (yes, you and me) needs to change their consumption pattern to better reflect a deeper set of social and political values.

BERKELEY - It is far too easy to blame the crisis of capitalism on global finance and sky-high executive salaries. At a deeper level the crisis marks the triumph of consumers and investors over workers and citizens. And since most of us occupy all four roles, the real crisis centres on the increasing efficiency by which we as consumers and investors can get great deals, and our declining capacity to be heard as workers and citizens.

Modern technologies allow us to shop in real time, often worldwide, for the lowest prices, highest quality, and best returns. Through the internet we can now get relevant information instantaneously, compare deals, and move our money at the speed of electronic impulses. Consumers and investors have never been so empowered.

Yet these great deals come at the expense of our jobs and wages, and widening inequality. The goods we want or the returns we seek can often be produced more efficiently elsewhere by companies offering lower pay and fewer benefits. They come at the expense of main streets, the hubs of our communities.

Great deals can also have devastating environmental consequences. Technology allows us to efficiently buy low-priced items from poor nations with scant environmental standards, sometimes made in factories that spill toxic chemicals into water supplies or release pollutants into the air. We shop for cars that spew carbon into the air and for airline tickets in jet planes that do even worse.

Other great deals offend common decency. We may get a low price or high return because a producer has cut costs by hiring children in South Asia or Africa who work 12 hours a day, seven days a week. Or by subjecting people to death-defying working conditions. As workers or as citizens most of us would not intentionally choose these outcomes but we are responsible for them.

Even if we are fully aware of these consequences, we still opt for the best deal because we know other consumers and investors will also do so. It makes little sense for a single individual to forgo a great deal in order to be “socially responsible” with no effect. Some companies pride themselves on selling goods and services produced in responsible ways but most of us don’t want to pay extra for responsible products. Not even consumer boycotts and socially-responsible investment funds trump the lure of a bargain.

The best means of balancing the demands of consumers and investors against those of workers and citizens has been through democratic institutions that shape and constrain markets. Laws and rules offer some protection for jobs and wages, communities, and the environment. Although such rules are likely to be costly to us as consumers and investors because they stand in the way of the very best deals, they are intended to approximate what we as members of a society are willing to sacrifice for these other values.

But technologies are outpacing the capacities of democratic institutions to counterbalance them. For one thing, national rules intended to protect workers, communities, and the environment typically extend only to a nation’s borders. Yet technologies for getting great deals enable buyers and investors to transcend borders with increasing ease, at the same time making it harder for nations to monitor or regulate such transactions.

Goals other than the best deals are less easily achieved within the confines of a single nation. The most obvious example is the environment, whose fragility is worldwide. In addition, corporations routinely threaten to move jobs and businesses away from places that impose higher costs on them – and therefore, indirectly, on their consumers and investors – to more “business friendly” jurisdictions.

Finally, corporate money is undermining democratic institutions in the name of better deals for consumers and investors. Campaign contributions, fleets of well-paid lobbyists, and corporate-financed PR campaigns about public issues are overwhelming the capacities of legislatures, parliaments, regulatory agencies, and international bodies to reflect the values of workers and citizens. The US Supreme Court has even decided that, under the First Amendment to the Constitution, money is speech and corporations are people, thereby opening the floodgates to money in politics.

As a result, consumers and investors are doing increasingly well but job insecurity is on the rise, inequality is widening, communities are becoming less stable, and climate change is worsening. None of this is sustainable over the long term but no one has yet figured out a way to get capitalism back into balance. Blame global finance and worldwide corporations all you want. But save some of your blame for the insatiable consumers and investors inhabiting almost every one of us, who are entirely complicit.

"Bring Back Boring Banks" by Amar Bhidé

2012-01-08T07:18:00.000-08:00

Scholars and politicians have recognized that the 2008 financial crisis exposed a large number of systemic failures to the economic system, which need to be addressed if long-term stability and growth are to be achieved. The work of Amar Bhidé, professor and author of A Call for Judgment: Sensible Finance for a Dynamic Economy published by Oxford University Press in 2010, argues that the federal government needs to play a larger role in regulating the banking sector by limiting the activities and financial techniques (or what have been called financial innovations) available to the traditional banking institutions.

CENTRAL bankers barely averted a financial panic before Christmas by replacing hundreds of billions of dollars of deposits fleeing European banks. But confidence in the global banking system remains dangerously low. To prevent the next panic, it’s not enough to rely on emergency actions by the Federal Reserve and theEuropean Central Bank. Instead, governments should fully guarantee all bank deposits — and impose much tighter restrictions on risk-taking by banks. Banks should be forced to shed activities like derivatives trading that regulators cannot easily examine.

The Dodd-Frank financial reform act of 2010 did nothing to secure large deposits and very little to curtail risk-taking by banks. It was a missed opportunity to fix a regulatory effort that goes back nearly 150 years.

Before the Civil War, the United States did not have a public currency. Each bank issued its own notes that it promised to redeem with gold and silver. When confidence in banks ebbed, people would rush to exchange notes for coins. If banks ran out of coins, their notes would become worthless.

In 1863, Congress created a uniform, government-issued currency to end panicky redemptions of the notes issued by banks. But it didn’t stop bank runs because people began to use bank accounts, instead of paper currency, to store funds and make payments. Now, during panics, depositors would scramble to turn their account balances into government-issued currency (instead of converting bank notes into gold).

The establishment of the Fed in 1913 as a lender of last resort that would temporarily replace the cash withdrawn by fleeing depositors was an important advance toward banking stability. But although the Fed could ameliorate the consequences of panics, it couldn’t prevent them. The system wasn’t stabilized until the 1930s, when the government separated commercial banking from investment banking, tightened bank regulation and created deposit insurance. This system of rules virtually eliminated bank runs and bank failures for decades, but much of it was junked in a deregulatory process that culminated in 1999 with the repeal of the 1933 Glass-Steagall Act.

The Federal Deposit Insurance Corporation now covers balances up to a $250,000 limit, but this does nothing to reassure large depositors, whose withdrawals could cause the system to collapse.

In fact, an overwhelming proportion of the “quick cash” in the global financial system is uninsured and prone to manic-depressive behavior, swinging unpredictably from thoughtless yield-chasing to extreme risk aversion. Much of this flighty cash finds its way into banks through lightly regulated vehicles like certificates of deposits or repurchase agreements. Money market funds, like banks, are a repository for cash, but are uninsured and largely unexamined.

Relying on the Fed and other central banks to counter panics is dangerous brinkmanship. A lender of last resort ought not to be a first line of defense. Rather, we need to take away the reason for any depositor to fear losing money through an explicit, comprehensive government guarantee. The government stands behind all paper currency regardless of whose wallet, till or safe it sits in. Why not also make all short-term deposits, which function much like currency, the explicit liability of the government?

Guaranteeing all bank accounts would pave the way for reinstating interest-rate caps, ending the competition for fickle yield-chasers that helps set off credit booms and busts. (Banks vie with one another to attract wholesale depositors by paying higher rates, and are then impelled to take greater risks to be able to pay the higher rates.) Stringent limits on the activities of banks would be even more crucial. If people thought that losses were likely to be unbearable, guarantees would be useless.

Banks must therefore be restricted to those activities, like making traditional loans and simple hedging operations, that a regulator of average education and intelligence can monitor. If the average examiner can’t understand it, it shouldn’t be allowed. Giant banks that are mega-receptacles for hot deposits would have to cease opaque activities that regulators cannot realistically examine and that top executives cannot control. Tighter regulation would drastically reduce the assets in money-market mutual funds and even put many out of business. Other, more mysterious denizens of the shadow banking world, from tender option bonds to asset-backed commercial paper, would also shrivel.

These radical, 1930s-style measures may seem a pipe dream. But we now have the worst of all worlds: panics, followed by emergency interventions by central banks, and vague but implicit guarantees to lure back deposits. Since the 2008 financial crisis, governments and central bankers have been seriously overstretched. The next time a panic starts, markets may just not believe that the Treasury and Fed have the resources to stop it.

Deposit insurance was also a long shot in 1933 — President Franklin D. Roosevelt, the Treasury secretary, the comptroller of the currency and the American Bankers Association opposed it. Somehow advocates rallied public opinion. The public mood is no less in favor of radical reform today. What’s missing is bold, thoughtful leadership.

"Is Modern Capitalism Sustainable?" by Kenneth Rogoff

2011-12-04T05:29:00.000-08:00

Many social scientists and philosophers have speculated about what type of economic system is after capitalism. The empirical reality, however, is that capitalism exists in multiple forms around the globe and will organize societies in the future (in one form or another). Thus, the more important questions that need to be addressed are: 1) how have different forms of modern capitalism been constructed; 2) how are economic institutions changing over time; and 3) what are the social consequences of changing economic institutions on how resources and societies are governed--e.g. among class, race, and gender. According to Kenneth Rogoff, the Thomas D. Cabot Professor of Public Policy and Professor of Economics at Harvard University, we need to realized that all current forms of capitalism are ultimately transitional. The focus for academics and public policy should be to develop specific mechanisms that address capitalism’s problems.

CAMBRIDGE: I am often asked if the recent global financial crisis marks the beginning of the end of modern capitalism. It is a curious question, because it seems to presume that there is a viable replacement waiting in the wings. The truth of the matter is that, for now at least, the only serious alternatives to today’s dominant Anglo-American paradigm are other forms of capitalism.

Continental European capitalism, which combines generous health and social benefits with reasonable working hours, long vacation periods, early retirement, and relatively equal income distributions, would seem to have everything to recommend it – except sustainability. China’s Darwinian capitalism, with its fierce competition among export firms, a weak social-safety net, and widespread government intervention, is widely touted as the inevitable heir to Western capitalism, if only because of China’s huge size and consistent outsize growth rate. Yet China’s economic system is continually evolving.

Indeed, it is far from clear how far China’s political, economic, and financial structures will continue to transform themselves, and whether China will eventually morph into capitalism’s new exemplar. In any case, China is still encumbered by the usual social, economic, and financial vulnerabilities of a rapidly growing lower-income country.

Perhaps the real point is that, in the broad sweep of history, all current forms of capitalism are ultimately transitional. Modern-day capitalism has had an extraordinary run since the start of the Industrial Revolution two centuries ago, lifting billions of ordinary people out of abject poverty. Marxism and heavy-handed socialism have disastrous records by comparison. But, as industrialization and technological progress spread to Asia (and now to Africa), someday the struggle for subsistence will no longer be a primary imperative, and contemporary capitalism’s numerous flaws may loom larger.

First, even the leading capitalist economies have failed to price public goods such as clean air and water effectively. The failure of efforts to conclude a new global climate-change agreement is symptomatic of the paralysis.

Second, along with great wealth, capitalism has produced extraordinary levels of inequality. The growing gap is partly a simple byproduct of innovation and entrepreneurship. People do not complain about Steve Jobs’s success; his contributions are obvious. But this is not always the case: great wealth enables groups and individuals to buy political power and influence, which in turn helps to generate even more wealth. Only a few countries – Sweden, for example – have been able to curtail this vicious circle without causing growth to collapse.

A third problem is the provision and distribution of medical care, a market that fails to satisfy several of the basic requirements necessary for the price mechanism to produce economic efficiency, beginning with the difficulty that consumers have in assessing the quality of their treatment.

The problem will only get worse: health-care costs as a proportion of income are sure to rise as societies get richer and older, possibly exceeding 30% of GDP within a few decades. In health care, perhaps more than in any other market, many countries are struggling with the moral dilemma of how to maintain incentives to produce and consume efficiently without producing unacceptably large disparities in access to care.

It is ironic that modern capitalist societies engage in public campaigns to urge individuals to be more attentive to their health, while fostering an economic ecosystem that seduces many consumers into an extremely unhealthy diet. According to the United States Centers for Disease Control, 34% of Americans are obese. Clearly, conventionally measured economic growth – which implies higher consumption – cannot be an end in itself.

Fourth, today’s capitalist systems vastly undervalue the welfare of unborn generations. For most of the era since the Industrial Revolution, this has not mattered, as the continuing boon of technological advance has trumped short-sighted policies. By and large, each generation has found itself significantly better off than the last. But, with the world’s population surging above seven billion, and harbingers of resource constraints becoming ever more apparent, there is no guarantee that this trajectory can be maintained.

Financial crises are of course a fifth problem, perhaps the one that has provoked the most soul-searching of late. In the world of finance, continual technological innovation has not conspicuously reduced risks, and might well have magnified them.

In principle, none of capitalism’s problems is insurmountable, and economists have offered a variety of market-based solutions. A high global price for carbon would induce firms and individuals to internalize the cost of their polluting activities. Tax systems can be designed to provide a greater measure of redistribution of income without necessarily involving crippling distortions, by minimizing non-transparent tax expenditures and keeping marginal rates low. Effective pricing of health care, including the pricing of waiting times, could encourage a better balance between equality and efficiency. Financial systems could be better regulated, with stricter attention to excessive accumulations of debt.

Will capitalism be a victim of its own success in producing massive wealth? For now, as fashionable as the topic of capitalism’s demise might be, the possibility seems remote. Nevertheless, as pollution, financial instability, health problems, and inequality continue to grow, and as political systems remain paralyzed, capitalism’s future might not seem so secure in a few decades as it seems now. (read more)

"The Unfinished Business of Financial Reform" by Paul Volcker

2011-11-16T08:32:00.000-08:00

Three years after the financial collapse of the US economy, what has been done by the federal government to ensure the crisis is not repeated? What progress has been made for financial regulatory reform, and what still needs to be done? According to Paul Volcker, a former Chairman of the Federal Reserve and Chairman of the President’s Economic Recovery Advisory Board, there has not been enough to address the unsustainable, imbalances between and within national economies. Additionally, there are a number of failures in national economic policy and an absence of a disciplined international monetary system.

NYRB: It should be clear that among the causes of the recent financial crisis was an unjustified faith in rational expectations, market efficiencies, and the techniques of modern finance. That faith was stoked in part by the huge financial rewards that enabled the extremes of borrowing, the economic imbalances, and the pretenses and assurances of the credit-rating agencies to persist so long. A relaxed approach by regulators and legislators reflected the new financial zeitgeist.

All the seeming mathematical precision that was brought to investment, all the complicated new products, including the explosion of derivatives, that were intended to diffuse and minimize risk, did not work as had been claimed. Instead, the vaunted efficiency helped justify an explosion of weak credit and an emphasis on trading along with exceedingly large compensation for traders.

If those remarks sound critical—and they are meant to inspire caution—let me also emphasize that the breakdown in financial markets and the “Great Recession” since 2007 are also the culmination of years of growing, and ultimately unsustainable, imbalances between and within national economies. These are matters of failures of national economic policy and the absence of a disciplined international monetary system.

Take the most familiar and egregious case. The huge surpluses China has accumulated from its external trade reflect the view of the Chinese government that it is desirable to have rapidly growing export industries that support employment growth. China was willing to build up trillions of short-term dollar assets, mainly US securities paying low interest rates—and thus kept the process going. Conversely, the United States happily utilized that inflow of low-interest dollars from China to sustain heavy consumer spending—much of it on Chinese products—a growing budget deficit, and eventually an enormous housing bubble.

Or consider the current European crisis. At its roots are years of growing imbalances within the countries of the eurozone. As in other parts of the world, the ability to borrow at low rates bridged for a while the proclivities of some countries to spend and import beyond their means, while other countries saved and invested, tending to reinforce an underlying gap in productivity between national economies.

Those were fundamentally matters of public policy—the result of decisions on taxing, spending, and exchange rates; they were not a reflection of the characteristics of the financial market. But neither can we ignore the fact that financial practices helped sustain such imbalances. In the end, the build-up in leverage, the failure of credit discipline, and the opaqueness of new kinds of securities and derivatives such as credit default swaps helped facilitate, to a truly dangerous extent, accommodation to the underlying imbalances and to the eventual bubbles.

All these developments derive in some part from the complexity implicit in the growth of the so-called shadow banking system—the nondepository banks, hedge funds, insurers, money market funds, and other largely unregulated entities that grew enormously in size after 2000—a system that by June 2008 was roughly the size of the traditional banking system. In the end, the consequence was to intensify the financial crisis and to severely wound the real-world economy. Even today, four years after the first intimations of the subprime mortgage debacle, high indebtedness and leverage, impaired banking capital, and a pervasive loss of confidence in a number of major financial institutions constrict an easy flow of credit to smaller businesses, potential home buyers, and consumers alike. (read more)

Capitalism and Democracy: Can Capitalist Markets and Democratic Politics Coexist?

2011-10-24T06:26:00.000-07:00

Is there an inherent conflict between capitalism and democracy in modern societies? Can an economic system that operates according to a free-market logic be compatible with a political system that operates according to collectivities securing social needs and entitlements for a broad spectrum of society? Are the economic and political principals in advanced capitalist societies reconcilable? If so, how? If not, what is the solution? This month's New Left Review has an excellent historical account of the instability in the socio-economic order that repeatedly creates crises in democratic capitalist economies. According to Wolfgang Streeck, Director of the Max Planck Institute for the Study of Societies and Professor of Economic Sociology and Political Economy, "the present crisis can only be fully understood in terms of the ongoing, inherently conflictual transformation of the social formation we call ‘democratic capitalism’." Enjoy the article below and I look forward to any comments, critiques, and questions.

NLR: The collapse of the American financial system that occurred in 2008 has since turned into an economic and political crisis of global dimensions. How should this world-shaking event be conceptualized? Mainstream economics has tended to conceive society as governed by a general tendency toward equilibrium, where crises and change are no more than temporary deviations from the steady state of a normally well-integrated system. A sociologist, however, is under no such compunction. Rather than construe our present affliction as a one-off disturbance to a fundamental condition of stability, I will consider the ‘Great Recession’ and the subsequent near-collapse of public finances as a manifestation of a basic underlying tension in the political-economic configuration of advanced-capitalist societies; a tension which makes disequilibrium and instability the rule rather than the exception, and which has found expression in a historical succession of disturbances within the socio-economic order. More specifically, I will argue that the present crisis can only be fully understood in terms of the ongoing, inherently conflictual transformation of the social formation we call ‘democratic capitalism’.

Democratic capitalism was fully established only after the Second World War and then only in the ‘Western’ parts of the world, North America and Western Europe. There it functioned extraordinarily well for the next two decades—so well, in fact, that this period of uninterrupted economic growth still dominates our ideas and expectations of what modern capitalism is, or could and should be. This is in spite of the fact that, in the light of the turbulence that followed, the quarter century immediately after the war should be recognizable as truly exceptional. Indeed I suggest that it is not the trente glorieuses but the series of crises which followed that represents the normal condition of democratic capitalism—a condition ruled by an endemic conflict between capitalist markets and democratic politics, which forcefully reasserted itself when high economic growth came to an end in the 1970s. In what follows I will first discuss the nature of that conflict and then turn to the sequence of political-economic disturbances that it produced, which both preceded and shaped the present global crisis.

I. Markets Versus Voters?

Suspicions that capitalism and democracy may not sit easily together are far from new. From the nineteenth century and well into the twentieth, the bourgeoisie and the political Right expressed fears that majority rule, inevitably implying the rule of the poor over the rich, would ultimately do away with private property and free markets. The rising working class and the political Left, for their part, warned that capitalists might ally themselves with the forces of reaction to abolish democracy, in order to protect themselves from being governed by a permanent majority dedicated to economic and social redistribution. I will not discuss the relative merits of the two positions, although history suggests that, at least in the industrialized world, the Left had more reason to fear the Right overthrowing democracy, in order to save capitalism, than the Right had to fear the Left abolishing capitalism for the sake of democracy. However that may be, in the years immediately after the Second World War there was a widely shared assumption that for capitalism to be compatible with democracy, it would have to be subjected to extensive political control—for example, nationalization of key firms and sectors, or workers’ ‘co-determination’, as in Germany—in order to protect democracy itself from being restrained in the name of free markets. While Keynes and, to some extent, Kalecki and Polanyi carried the day, Hayek withdrew into temporary exile.

Since then, however, mainstream economics has become obsessed with the ‘irresponsibility’ of opportunistic politicians who cater to an economically uneducated electorate by interfering with otherwise efficient markets, in pursuit of objectives—such as full employment and social justice—that truly free markets would in the long run deliver anyway, but must fail to deliver when distorted by politics. Economic crises, according to standard theories of ‘public choice’, essentially stem from market-distorting political interventions for social objectives. In this view, the right kind of intervention sets markets free from political interference; the wrong, market-distorting kind derives from an excess of democracy; more precisely, from democracy being carried over by irresponsible politicians into the economy, where it has no business. Not many today would go as far as Hayek, who in his later years advocated abolishing democracy as we know it in defence of economic freedom and civil liberty. Still, the cantus firmus of current neo-institutionalist economic theory is thoroughly Hayekian. To work properly, capitalism requires a rule-bound economic policy, with protection of markets and property rights constitutionally enshrined against discretionary political interference; independent regulatory authorities; central banks, firmly protected from electoral pressures; and international institutions, such as the European Commission or the European Court of Justice, that do not have to worry about popular re-election. Such theories studiously avoid the crucial question of how to get there from here, however; very likely because they have no answer, or at least none that can be made public.

There are various ways to conceptualize the underlying causes of the friction between capitalism and democracy. For present purposes, I will characterize democratic capitalism as a political economy ruled by two conflicting principles, or regimes, of resource allocation: one operating according to marginal productivity, or what is revealed as merit by a ‘free play of market forces’, and the other based on social need or entitlement, as certified by the collective choices of democratic politics. Under democratic capitalism, governments are theoretically required to honour both principles simultaneously, although substantively the two almost never align. In practice they may for a time neglect one in favour of the other, until they are punished by the consequences: governments that fail to attend to democratic claims for protection and redistribution risk losing their majority, while those that disregard the claims for compensation from the owners of productive resources, as expressed in the language of marginal productivity, cause economic dysfunctions that will become increasingly unsustainable and thereby also undermine political support. (read more)

The Role of Political Institutions in Economic Markets

2011-09-26T12:42:00.000-07:00

The political economy and economic sociology scholarship has repeatedly shown that markets are dependent on political institutions for stability, predictability, and growth. If political institutions do not establish the broader rules, constraints, and mechanisms needed to make markets function, then they will experience repeated crises and collapse. This empirical reality, however, has had difficulty making its way into the chambers of our political leader's offices. In this month's New York Review of Books, George Soros has written a great article linking the euro crisis--which is wreaking havoc throughout Western Europe and the global economy--to the failures in the political institutions that govern markets.

NYRB: The euro crisis is a direct consequence of the crash of 2008. When Lehman Brothers failed, the entire financial system started to collapse and had to be put on artificial life support. This took the form of substituting the sovereign credit of governments for the bank and other credit that had collapsed. At a memorable meeting of European finance ministers in November 2008, they guaranteed that no other financial institutions that are important to the workings of the financial system would be allowed to fail, and their example was followed by the United States.

Angela Merkel then declared that the guarantee should be exercised by each European state individually, not by the European Union or the eurozone acting as a whole. This sowed the seeds of the euro crisis because it revealed and activated a hidden weakness in the construction of the euro: the lack of a common treasury. The crisis itself erupted more than a year later, in 2010.

There is some similarity between the euro crisis and the subprime crisis that caused the crash of 2008. In each case a supposedly riskless asset—collateralized debt obligations (CDOs), based largely on mortgages, in 2008, and European government bonds now—lost some or all of their value.

Unfortunately the euro crisis is more intractable. In 2008 the US financial authorities that were needed to respond to the crisis were in place; at present in the eurozone one of these authorities, the common treasury, has yet to be brought into existence. This requires a political process involving a number of sovereign states. That is what has made the problem so severe. The political will to create a common European treasury was absent in the first place; and since the time when the euro was created the political cohesion of the European Union has greatly deteriorated. As a result there is no clearly visible solution to the euro crisis. In its absence the authorities have been trying to buy time.

In an ordinary financial crisis this tactic works: with the passage of time the panic subsides and confidence returns. But in this case time has been working against the authorities. Since the political will is missing, the problems continue to grow larger while the politics are also becoming more poisonous.

It takes a crisis to make the politically impossible possible. Under the pressure of a financial crisis the authorities take whatever steps are necessary to hold the system together, but they only do the minimum and that is soon perceived by the financial markets as inadequate. That is how one crisis leads to another. So Europe is condemned to a seemingly unending series of crises. Measures that would have worked if they had been adopted earlier turn out to be inadequate by the time they become politically possible. This is the key to understanding the euro crisis. (read more)

The Economic Consequences of Deregulation and Speculators

2011-07-29T11:17:00.000-07:00

A recent report by The Pew Research Center’s Social & Demographic Trends demonstrates the shocking wealth inequalities that have developed in the United States. For example, the median wealth of white households is 20 times that of black households and 18 times that of Hispanic households. For those not familiar with Pew Research Center, the project studies behaviors and attitudes of Americans in key realms of their lives, including family, community, health, finance, work and leisure. The project explores these topics by combining original public opinion survey research with social, economic and demographic data analysis.

It is one of seven projects that make up the Pew Research Center, a nonpartisan “fact tank” that provides information on the issues, attitudes and trends shaping America and the world. It does not take positions on policy issues. The Pew Research Center is an independent subsidiary of the Pew Charitable Trusts.

PEW: These lopsided wealth ratios are the largest since the government began publishing such data a quarter century ago and roughly twice the size of the ratios that had prevailed between these three groups for the two decades prior to the Great Recession that ended in 2009. The Pew Research analysis finds that, in percentage terms, the bursting of the housing market bubble in 2006 and the recession that followed from late 2007 to mid-2009 took a far greater toll on the wealth of minorities than whites. From 2005 to 2009, inflation-adjusted median wealth fell by 66% among Hispanic households and 53% among black households, compared with just 16% among white households.

As a result of these declines, the typical black household had just $5,677 in wealth (assets minus debts) in 2009; the typical Hispanic household had $6,325 in wealth; and the typical white household had $113,149. Moreover, about a third of black (35%) and Hispanic (31%) households had zero or negative net worth in 2009, compared with 15% of white households. In 2005, the comparable shares had been 29% for blacks, 23% for Hispanics and 11% for whites.

Hispanics and blacks are the nation’s two largest minority groups, making up 16% and 12% of the U.S. population respectively. These findings are based on the Pew Research Center’s analysis of data from the Survey of Income and Program Participation (SIPP), an economic questionnaire distributed periodically to tens of thousands of households by the U.S. Census Bureau. It is considered the most comprehensive source of data about household wealth in the United States by race and ethnicity. The two most recent administrations of SIPP that focused on household wealth were in 2005 and 2009. Data from the 2009 survey were only recently made available to researchers.

Plummeting house values were the principal cause of the recent erosion in household wealth among all groups, with Hispanics hit hardest by the meltdown in the housing market. From 2005 to 2009, the median level of home equity held by Hispanic homeowners declined by half—from $99,983 to $49,145—while the homeownership rate among Hispanics was also falling, from 51% to 47%. A geographic analysis suggests the reason: A disproportionate share of Hispanics live in California, Florida, Nevada and Arizona, which were in the vanguard of the housing real estate market bubble of the 1990s and early 2000s but that have since been among the states experiencing the steepest declines in housing values. (read more)

Political Ideology Holding the American Economy & Society Hostage

2011-07-27T02:16:00.000-07:00

THE PRESIDENT: Good evening. Tonight, I want to talk about the debate we’ve been having in Washington over the national debt -- a debate that directly affects the lives of all Americans.

For the last decade, we’ve spent more money than we take in. In the year 2000, the government had a budget surplus. But instead of using it to pay off our debt, the money was spent on trillions of dollars in new tax cuts, while two wars and an expensive prescription drug program were simply added to our nation’s credit card.

As a result, the deficit was on track to top $1 trillion the year I took office. To make matters worse, the recession meant that there was less money coming in, and it required us to spend even more -– on tax cuts for middle-class families to spur the economy; on unemployment insurance; on aid to states so we could prevent more teachers and firefighters and police officers from being laid off. These emergency steps also added to the deficit.

Now, every family knows that a little credit card debt is manageable. But if we stay on the current path, our growing debt could cost us jobs and do serious damage to the economy. More of our tax dollars will go toward paying off the interest on our loans. Businesses will be less likely to open up shop and hire workers in a country that can’t balance its books. Interest rates could climb for everyone who borrows money -– the homeowner with a mortgage, the student with a college loan, the corner store that wants to expand. And we won’t have enough money to make job-creating investments in things like education and infrastructure, or pay for vital programs like Medicare and Medicaid.

Because neither party is blameless for the decisions that led to this problem, both parties have a responsibility to solve it. And over the last several months, that’s what we’ve been trying to do. I won’t bore you with the details of every plan or proposal, but basically, the debate has centered around two different approaches.

The first approach says, let’s live within our means by making serious, historic cuts in government spending. Let’s cut domestic spending to the lowest level it’s been since Dwight Eisenhower was President. Let’s cut defense spending at the Pentagon by hundreds of billions of dollars. Let’s cut out waste and fraud in health care programs like Medicare -- and at the same time, let’s make modest adjustments so that Medicare is still there for future generations. Finally, let’s ask the wealthiest Americans and biggest corporations to give up some of their breaks in the tax code and special deductions.

This balanced approach asks everyone to give a little without requiring anyone to sacrifice too much. It would reduce the deficit by around $4 trillion and put us on a path to pay down our debt. And the cuts wouldn’t happen so abruptly that they’d be a drag on our economy, or prevent us from helping small businesses and middle-class families get back on their feet right now.

This approach is also bipartisan. While many in my own party aren’t happy with the painful cuts it makes, enough will be willing to accept them if the burden is fairly shared. While Republicans might like to see deeper cuts and no revenue at all, there are many in the Senate who have said, “Yes, I’m willing to put politics aside and consider this approach because I care about solving the problem.” And to his credit, this is the kind of approach the Republican Speaker of the House, John Boehner, was working on with me over the last several weeks.

The only reason this balanced approach isn’t on its way to becoming law right now is because a significant number of Republicans in Congress are insisting on a different approach -- a cuts-only approach -– an approach that doesn’t ask the wealthiest Americans or biggest corporations to contribute anything at all. And because nothing is asked of those at the top of the income scale, such an approach would close the deficit only with more severe cuts to programs we all care about –- cuts that place a greater burden on working families.

So the debate right now isn’t about whether we need to make tough choices. Democrats and Republicans agree on the amount of deficit reduction we need. The debate is about how it should be done. Most Americans, regardless of political party, don’t understand how we can ask a senior citizen to pay more for her Medicare before we ask a corporate jet owner or the oil companies to give up tax breaks that other companies don’t get. How can we ask a student to pay more for college before we ask hedge fund managers to stop paying taxes at a lower rate than their secretaries? How can we slash funding for education and clean energy before we ask people like me to give up tax breaks we don’t need and didn’t ask for? (read more)

The Busts Keep Getting Bigger: Why?

2011-07-21T08:37:00.000-07:00

Was the 2008-2009 financial crisis a historical anomaly? Is it empirically accurate to categorize the crisis as a black swan? Or was this financial crisis simply the latest event in what has become a reoccurring, and increasingly more harmful, pattern of "engineered" economic shocks? If so, what are the social and political forces driving these harmful economic shocks? In this month's New York Review of Books, Paul Krugman and Robin Wells have a excellent review of new research by Jeff Madrick that sheds light on these questions.

PRINCETON: Suppose we describe the following situation: major US financial institutions have badly overreached. They created and sold new financial instruments without understanding the risk. They poured money into dubious loans in pursuit of short-term profits, dismissing clear warnings that the borrowers might not be able to repay those loans. When things went bad, they turned to the government for help, relying on emergency aid and federal guarantees—thereby putting large amounts of taxpayer money at risk—in order to get by. And then, once the crisis was past, they went right back to denouncing big government, and resumed the very practices that created the crisis.

What year are we talking about?

We could, of course, be talking about 2008–2009, when Citigroup, Bank of America, and other institutions teetered on the brink of collapse, and were saved only by huge infusions of taxpayer cash. The bankers have repaid that support by declaring piously that it’s time to stop “banker-bashing,” and complaining that President Obama’s (very) occasional mentions of Wall Street’s role in the crisis are hurting their feelings.

But we could also be talking about 1991, when the consequences of vast, loan-financed overbuilding of commercial real estate in the 1980s came home to roost, helping to cause the collapse of the junk-bond market and putting many banks—Citibank, in particular—at risk. Only the fact that bank deposits were federally insured averted a major crisis. Or we could be talking about 1982–1983, when reckless lending to Latin America ended in a severe debt crisis that put major banks such as, well, Citibank at risk, and only huge official lending to Mexico, Brazil, and other debtors held an even deeper crisis at bay. Or we could be talking about the near crisis caused by the bankruptcy of Penn Central in 1970, which put its lead banker, First National City—later renamed Citibank—on the edge; only emergency lending from the Federal Reserve averted disaster.

You get the picture. The great financial crisis of 2008–2009, whose consequences still blight our economy, is sometimes portrayed as a “black swan” or a “100-year flood”—that is, as an extraordinary event that nobody could have predicted. But it was, in fact, just the most recent installment in a recurrent pattern of financial overreach, taxpayer bailout, and subsequent Wall Street ingratitude. And all indications are that the pattern is set to continue.

Jeff Madrick’s Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present is an attempt to chronicle the emergence and persistence of this pattern. It’s not an analytical work, which, as we’ll explain later, sometimes makes the book frustrating reading. Instead, it’s a series of vignettes—and these vignettes are both fascinating and, taken as a group, deeply disturbing. For they suggest not just that we’re seeing a repeating cycle, but that the busts keep getting bigger. And since it seems that nothing was learned from the 2008 crisis, you have to wonder just how bad the next one will be.

The first thing you need to know about the cycle of financial overreach, crisis, and bailout is that it was not always thus. (read more)

Global Governance in a Multipolar World Economy

2011-06-13T02:47:00.000-07:00

What will the world economy look like in 10 years? How will the growth of China, India, Brazil, and Russia affect the power relations with the United States, Western Europe, and Japan? What will governance in a mulipolar world economy look like? Will global governance operate at the national, regional, or international levels? These questions are fundamental to anyone interested in economics, development, and economic sociology. According to Justin Yifu Lin, the chief economist at the World Bank, and colleagues their research suggests that by 2025 the increasingly multipolar global economy is likely to change the way the world conducts and governs international business.

WASHINGTON, DC – At a time when the global economy is suffering from a crisis of confidence, structural imbalances, and subdued growth prospects, looking ahead ten years to predict the course of development requires careful modeling and something beyond sagacity. What is needed is a multifaceted approach that combines a sense of history with careful analysis of current forces such as the shift in the balance of global growth toward the emerging world.

Such forecasting also requires an understanding of how advanced economies are coming to grips with that shift, and how the international monetary system will adjust as a result. Having studied these factors, we believe that the world economy is on the verge of a transformative change – the transition to a multipolar world economic order.

Throughout history, paradigms of economic power have been drawn and redrawn according to the rise and fall of those countries best equipped to drive global growth and provide stimulus to the global economy. Multipolarity, meaning more than two dominant growth poles, has at times been a key feature of the world economy. But at no time in modern history have developing countries been at the forefront of a multipolar economic system.

This pattern is set to change. By 2025, six emerging economies – Brazil, China, India, Indonesia, South Korea, and Russia – will collectively account for about one-half of global growth. The international monetary system is likely to cease being dominated by a single currency over the same years. As they pursue growth opportunities abroad and are encouraged by improved polices at home, emerging-market corporations will play an increasingly prominent role in global business and cross-border investment, while large pools of capital within their borders will allow emerging economies to become key players in financial markets.

As dynamic emerging economies evolve to take their place at the helm of the world economy, a rethink of the conventional approach to global economic governance is needed. The current approach rests on three premises: the link between concentrated economic power and stability; the North-South axis of capital flows; and the centrality of the US dollar.

Since the end of World War II, the US-centered global economic order has been built on a complementary set of tacit economic and security arrangements between the United States and its core partners, with emerging economies playing a peripheral role. In exchange for the US assuming the responsibilities of system maintenance, serving as market of last resort, and accepting the international role of the dollar, its key economic partners, Western Europe and Japan, acquiesced in the special privileges enjoyed by the US – seigniorage gains, domestic macroeconomic-policy autonomy, and balance-of-payments flexibility.

Broadly, this arrangement still holds today, though hints of its erosion became evident some time ago. The benefits that emerging economies have reaped from expanding their presence in international trade and finance are but one example of this.

An increasingly multipolar global economy is likely to change the way the world conducts international business. A number of dynamic emerging-market firms are on a path toward dominating their industrial sectors globally in the coming years – much in the same way that companies based in advanced economies have done for the past half-century. In the years ahead, such firms are likely to press for economic reforms at home, serving as a force for increased integration of their home countries into global trade and finance.

So the time may be ripe to move forward with the sort of multilateral framework for regulating cross-border investment that has been derailed several times since the 1920’s. In contrast to international trade and monetary relations, no multilateral regime exists to promote and govern cross-border investment.

For now, the US dollar remains the most important international currency. But this dominance is waning, as evidenced by its declining use as an official reserve currency, as well as for invoicing goods and services, denominating international claims, and anchoring exchange rates.

The euro represents the dollar’s strongest competitor, so long as the eurozone successfully addresses its current sovereign-debt crisis through bailouts and longer-term institutional reforms that safeguard the gains from a long-running single-market project. But developing countries’ currencies will undoubtedly become more prominent in the longer term.

The size and dynamism of China’s economy, and the rapid globalization of its corporations and banks, makes the renminbi especially likely to take on a more important international role. In Global Development Horizons 2011, the World Bank presents what it believes to be the most probable global currency scenario in 2025 – a multicurrency arrangement centered on the dollar, euro, and renminbi. This scenario is buttressed by the likelihood that the US, the eurozone, and China will constitute the three major growth poles at that time.

Finally, the international financial community must live up to its responsibility to ensure that the development agenda remains a priority. Countries with global economic clout have a special responsibility to accept that their policy actions have important spillover effects on other countries. Monetary-policy initiatives that emphasize increased collaboration among central banks to achieve financial stability and sustainable growth in global liquidity thus would be particularly welcome.

Despite the considerable progress that developing countries have made in integrating themselves into international trade and finance channels, there is still much work to be done to ensure that they share the burden of maintaining the global system in which they have a rapidly growing stake. At the same time, it is critical that major developed countries craft policies that take into account their growing interdependency with developing countries. More and more, global governance will depend on leveraging that interdependency to strengthen international cooperation and boost worldwide prosperity.

Complex Technology In Tightly Coupled Financial Markets

2011-05-09T12:13:00.000-07:00

Donald MacKenzie, professor at the University of Edinburgh and one of the leading minds in the sociology of markets (social studies of finance), has a great new article in the London Review of Books that examines how the use of complex technology in tightly coupled financial markets potentially leads to an unstable and flawed economic system.

LONDON: What goes on in stock markets appears quite different when viewed on different timescales. Look at a whole day’s trading, and market participants can usually tell you a plausible story about how the arrival of news has changed traders’ perceptions of the prospects for a company or the entire economy and pushed share prices up or down. Look at trading activity on a scale of milliseconds, however, and things seem quite different.

When two American financial economists, Joel Hasbrouck and Gideon Saar, did this a couple of years ago, they found strange periodicities and spasms. The most striking periodicity involves large peaks of activity separated by almost exactly 1000 milliseconds: they occur 10-30 milliseconds after the ‘tick’ of each second. The spasms, in contrast, seem to be governed not directly by clock time but by an event: the execution of a buy or sell order, the cancellation of an order, or the arrival of a new order. Average activity levels in the first millisecond after such an event are around 300 times higher than normal. There are lengthy periods – lengthy, that’s to say, on a scale measured in milliseconds – in which little or nothing happens, punctuated by spasms of thousands of orders for a corporation’s shares and cancellations of orders. These spasms seem to begin abruptly, last a minute or two, then end just as abruptly.

Little of this has to do directly with human action. None of us can react to an event in a millisecond: the fastest we can achieve is around 140 milliseconds, and that’s only for the simplest stimulus, a sudden sound. The periodicities and spasms found by Hasbrouck and Saar are the traces of an epochal shift. As recently as 20 years ago, the heart of most financial markets was a trading floor on which human beings did deals with each other face to face. The ‘open outcry’ trading pits at the Chicago Mercantile Exchange, for example, were often a mêlée of hundreds of sweating, shouting, gesticulating bodies. Now, the heart of many markets (at least in standard products such as shares) is an air-conditioned warehouse full of computers supervised by only a handful of maintenance staff.

The deals that used to be struck on trading floors now take place via ‘matching engines’, computer systems that process buy and sell orders and execute a trade if they find a buy order and a sell order that match. The matching engines of the New York Stock Exchange, for example, aren’t in the exchange’s century-old Broad Street headquarters with its Corinthian columns and sculptures, but in a giant new 400,000-square-foot plain-brick data centre in Mahwah, New Jersey, 30 miles from downtown Manhattan. Nobody minds you taking photos of the Broad Street building’s striking neoclassical façade, but try photographing the Mahwah data centre and you’ll find the police quickly taking an interest: it’s classed as part of the critical infrastructure of the United States.

Human beings can, and still do, send orders from their computers to the matching engines, but this accounts for less than half of all US share trading. The remainder is algorithmic: it results from share-trading computer programs. Some of these programs are used by big institutions such as mutual funds, pension funds and insurance companies, or by brokers acting on their behalf. The drawback of being big is that when you try to buy or sell a large block of shares, the order typically can’t be executed straightaway (if it’s a large order to buy, for example, it will usually exceed the number of sell orders in the matching engine that are close to the current market price), and if traders spot a large order that has been only partly executed they will change their own orders and their price quotes in order to exploit the knowledge. The result is what market participants call ‘slippage’: prices rise as you try to buy, and fall as you try to sell. (read more)

"Nudging" Markets Towards Efficiency

2011-04-25T09:46:00.000-07:00

A very interesting initiative is being done within the US and Britain that attempts to improve our lives by making markets more useful, productive, empowering, and efficient--based on the theoretical models of leading behavioral economists. These initiatives are excellent examples of how governments and private market actors can work in cooperation to create an economic system that benefits society, not just a small group of dominant actors. Below is an article from Richard H. Thaler, professor of economics at University of Chicago GSB, describing a number of these initiatives.

NEW YORK: Governments have learned a cheap new way to improve people’s lives. Here is the basic recipe: Take data that you and I have already paid a government agency to collect, and post it online in a way that computer programmers can easily use. Then wait a few months. Voilà! The private sector gets busy, creating Web sites and smartphone apps that reformat the information in ways that are helpful to consumers, workers and companies.

Not surprisingly, San Francisco, with its proximity to Silicon Valley, has been a pioneer in these efforts. For some years, Bay Area transit systems had been tracking the locations of their trains and buses via onboard GPS. Then someone got the bright idea to post that information in real time. Thus the delightful app Routesy was born. Install it on a smartphone and the app can tell you that your bus is stuck in traffic and will be 10 minutes late — or it can help you realize that you are standing on the wrong street, dummy. It gives consumers a great new way to find out when and where the bus is coming, and all at minimal government expense.

Another example involves weather data produced by the National Oceanographic and Atmospheric Administration. The forecasts you find on the Weather Channel, or on the evening news or online, use the agency’s information. Again, the government produces and releases raw data, and the private sector transforms it into something useful for the public.

Several other departments in the Obama administration are looking to expand the use of such techniques. On data.gov, you will find huge amounts of downloadable data that had heretofore been inaccessible. As a sign of the importance that President Obama has attached to this approach, he put it on the government’s agenda on Jan. 21, 2009, his second day in office. (Disclosure: My book, “Nudge,” published in 2008, advocated this broad idea; Cass R. Sunstein, co-author of the book, is now administrator of the White House Office of Information and Regulatory Affairs.)

Now the administration is pushing to use this concept as a tool for regulation, and as a method of avoiding more heavy-handed rule making. The idea is that making things more transparent can immediately turn consumers into better shoppers and make markets work better. One might think that such an initiative would receive nearly universal support — after all, who could be against openness and transparency? But it turns out that some people are.

Two cases are under discussion right now.

First, the Department of Transportation is considering a new rule requiring airlines to make all of their prices public and immediately available online. The postings would include both ticket prices and the fees for “extras” like baggage, movies, food and beverages. The data would then be accessible to travel Web sites, and thus to all shoppers.

The airlines would retain the right to decide how and where to sell their products and services. But many of them are insisting that they should be able to decide where and how to display these extra fees. The issue is likely to grow in importance as airlines expand their lists of possible extras, from seats with more legroom to business-class meals served in coach.

Electronic disclosure of all fees can make it much easier for consumers to figure out what a trip really costs, and thus make markets more efficient, without requiring new rules and regulations. (As someone who once bought two tickets on a discount airline from London to Dublin for the advertised price of £1 each, then ended up paying hundreds of dollars for the privilege of bringing along two heavy suitcases, I acknowledge having a sore spot on this issue.)

Another initiative has been proposed by the Consumer Product Safety Commission. In 2008, Congress overwhelmingly passed and President George W. Bush signed legislation mandating an online database of reported safety issues in products, at saferproducts.gov. The Web site ran for a few months in a “soft launch” and went into full operation on Friday.

But a majority in the House of Representatives passed an amendment last month that might have stopped this initiative in its tracks. The amendment, sponsored by Representative Mike Pompeo, a Kansas Republican, would have prohibited the agency from spending any further money to start the site. One goal, of course, was to cut the budget, although proponents of the amendment also argue that the Web site might include information that is erroneous and damaging to the businesses that sell children’s products.

Yet several provisions in the final rules protect manufacturers from false or malicious statements. Consumers have to include identifying information and sign an affidavit testifying to the truth of their complaints. Furthermore, manufacturers will be able to see complaints before they are posted, and can then correct mistakes or add comments.

ALTHOUGH this amendment was passed in the name of deficit reduction, the requested money for the site is a puny $3 million a year. If we want to reduce the cost of government regulation, this is exactly the kind of effort we should be applauding and expanding.

Compared with the tiny costs, the benefits of this program could be enormous. Thirteen years ago, two of my dear friends experienced the nightmare that parents dread most. They were called at work by their child-care provider and told that their 18-month-old son had died in a crib accident. Imagine their anguish when they later learned that other children had died in this model of crib, and that still others had died in cribs with similar design. Yet there was no easy way for any parent or child-care provider to know that.

In a recent three-year span, some 265 children under the age of 5 died in accidents related to nursery products, the government has reported. If this program could reduce that number even slightly, the cost would seem amply justified.

Moving the government into the 21st century should be applauded. In a future column, I will explain how the release of some kinds of data can even help consumers better understand themselves. (read more)

Man vs. Machine on Wall Street: How Computers Beat the Market

2011-04-20T06:20:00.000-07:00

William D. Cohan--the author of House of Cards: A Tale of Hubris and Wretched Excess on Wall Street (2007) and Money and Power: How Goldman Sachs Came to Rule the World--has an insightful article in The Atlantic that investigates the increasing role of computer modeling by quants in the financial markets. The ubiquitous use of technology and complex algorithmic modeling--which are often executed by computers themselves--to beat the market brings a number of socio-logically interesting questions to mind: 1) are computer driven models more likely to experience large swings; 2) are computer driven models more likely to exhibit social contagion and cause negative effects for the larger society; 3) can this technology be regulated by the State; and 4) can technology be guided so as to benefit capital allocation throughout the market, and the broader society.

The Atlantic--With the winter's second blizzard raging outside, Cliff Asness sat in his relatively modest office in Greenwich, Connecticut, surrounded by three of his partners, his PR guru, an impressive collection of unread books, and a sea of foot-tall hard-plastic replicas of Spiderman, the Incredible Hulk, and friends. "Let me be technical," he said. "It all sucked."

Asness--intense, bald, and bearded, with a $500 million fortune and a doctorate in finance--was reflecting on the dark days of 2008, when capitalism seemed to be imploding, when Bear Stearns and Lehman Brothers had collapsed and the government had hastily arranged bailouts of Merrill Lynch, Morgan Stanley, Goldman Sachs, and AIG, among others.

His own business, Applied Quantitative Research--one of the world's leading quantitative-investment, or "quant," funds--had also suffered painfully. The money his team managed fell to $17.2 billion in March 2009, from a peak of $39.1 billion in September 2007, as clients headed for the exits with what was left of their cash. Such losses can be fatal for fund managers like AQR, since sophisticated investors pay them big fees for exceptional performance and, understandably, have little patience for anything less. As AQR's founders felt the tremors from Wall Street rippling through their offices, Asness said, "we worried about the stability of the financial sector, the stability of the economy, and the stability of society." To Bloomberg Markets magazine, last fall, he was even more explicit: "I heard the Valkyries circling. I saw the Grim Reaper at my door."

Yet they survived. And AQR--which makes its fortune, like other quants, by using high-speed computers and financial models of extraordinary complexity--has made a stupendous recovery in the past two years. At the end of 2010, AQR had $33 billion in assets under management. Its funds' performance was up nearly 20 percent last year, after being up 38 percent in 2009.

This is all the more striking because many analysts believe the quants helped cause, or at least exacerbated, the meltdown by giving traders a false sense of security. The risk-control models these firms pioneered encouraged Wall Street to take on excessive leverage. Their trading strategies, which deliver excellent returns in normal times, functioned poorly in the irrationality of a financial panic, and reinforced a frenzy of selling. Although predictions of the death of AQR and its ilk, by the writer and investor Nassim Taleb, among others, turned out to have been greatly exaggerated, worries linger, even as some high-profile quants have surged back. Taleb and the other critics think their overreliance on computers gives quants excessive confidence and blinds them to the possibility of seemingly rare economic catastrophes--which seem to be not so rare these days. (This was the theme of Taleb's best-selling book, The Black Swan, which examined the effect of the "highly  improbable" on markets, and on life.) As Exhibit A, they point to the extraordinary events of May 6, 2010, when the Dow dropped by nearly 1,000 points in a few minutes after an algorithmic program executed by the investment firm Waddell & Reed, in Kansas, triggered a terrifying blitz of automated buying and selling by other financial computers. The market quickly recovered, but many worry that the episode was a preview of greater turbulence ahead as machines gain control of more and more trading.

Scott Patterson, a former Wall Street Journal reporter and the author of the 2010 book The Quants, told me he can envision a world, not too far away, in which artificial intelligence could vanquish human trading altogether, just as it has Garry Kasparov on the chessboard. "I'm not totally against quants at all, because I think they are a very powerful way of investing," Patterson said. But, like a number of other critics, he thinks they might encourage a cycle of booms and busts, and possibly intensify the next crisis. "Go to a trading room, it's just guys on computers," he said. "And a lot of times it's not even guys, it's just the computer running the machine. I don't want to demonize it. I think there has to be a happy medium. But I'm personally worried that it can run off the rails."

As much as anyone else, Cliff Asness has shaped and  embodied this world of automated high finance. And though his experience--from academia to Wall Street to Greenwich--has been marked by recurring crises, and though he admits that no one can predict when the next big one will hit, he's more confident than ever in the power of data and mathematical models, in his hands, to beat the market consistently over the long term. And, once again, the data are telling him he's right. (read more)

Offshore Banking and Tax Havens are Central to the Global Economy

2011-04-18T14:09:00.000-07:00

As millions of Americans prepare to file their income taxes ahead of Monday’s deadline, this report looks at how corporations and the wealthy use offshore banks and tax havens to avoid paying taxes and other governmental regulations. "Tax havens have grown so fast in the era of globalization, since the 1970s, that they are now right at the heart of the global economy and are absolutely huge," says British journalist Nicholas Shaxson. "There are anywhere between $10 and $20 trillion sitting offshore at the moment. Half of world trade is processed in one way or another through tax havens." Shaxson is the author of the new book, Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens. (read more)

The Post-Crash: Wall Street Won

2011-04-11T08:33:00.000-07:00

The April 18th issue of New York Magazine titled "The Post-Crash: Wall Street Won...
So why is it so worried?" investigates the effects of the 2008 financial crisis on the minds of Wall Street bankers, financiers, and money managers. Three articles, in particular, shed light into the ecstatic, neurotic, and perhaps deluded psychology of the post-crash financier. The articles raise a number of interesting points, which in-turn lead to a number of interesting questions: 1) what have financial organizations and entrepreneurs learned from the 2008 financial crisis?; 2) will there be any changes in the cultural norms on Wall Street?; 3) how can regulators attempt to reign in a financial sector that has return to its pre-crisis power?; and 4) if individuals on Main Street once again see that their pensions and retirement portfolios are increasing in value, then will they support strong legislation that restricts the financial sector?

The following is an excerpt from "The Wall Street Mind: Triumphant…" At the end of March, Neil Barofsky, on his final day as the special inspector general of the Troubled Asset Relief Program (TARP), published a scathing indictment of the program over which he’d served as watchdog since its inception in that awful, apocalyptic autumn of 2008. On the op-ed page of the New York Times, Barofsky argued that TARP had “failed to meet some of its most important goals”: protecting home values, easing the foreclosure crisis, alleviating the credit crunch—helping Main Street, in other words. Indeed, only when it came to aiding Wall Street had TARP worked like a charm. “Billions of dollars in taxpayer money allowed institutions that were on the brink of collapse not only to survive but even to flourish,” he wrote. “These banks now enjoy record profits and the seemingly permanent competitive advantage that accompanies being deemed ‘too big to fail.’ ”

Without necessarily intending to, Barofsky’s op-ed provided the perfect coda for the era of bailout rage—a two-and-a-half-year spasm of populist fury that promised, or threatened, to inflict enormous changes on the financial sector. In the political realm, Wall Street faced the prospect of root-and-branch reregulation, up to and including the potential nationalization of the industry’s largest players, and in the cultural realm its transfiguration into a kind of pariah state. Once upon a time, the Street’s leading lights had been glamorized and admired to the point of worship; now the likes of Robert Rubin, Lloyd Blankfein, and Richard Fuld were relentlessly pilloried and demonized. Once the megabanks were seen as indomitable powerhouses and sources of “financial innovation” (whatever the hell that was); now the greatest and most fearsome of them all, Goldman Sachs, was recast—by a famous and infamous Rolling Stone screed—as a “great vampire squid.”

Yet today on Wall Street, all of that seems a very long time ago. Not only are the banks rolling in dough again, but their denizens’ customs and sense of self-esteem have largely reverted to the status quo ante. With the enactment of a financial-reform law that is widely seen as toothless, the peril posed by government intervention has receded, and with it the industry’s concerns about the vicissitudes of public opinion. Vampire squids? That’s so 2009—an eon ago in Wall Street time. We won, you lost, get over it, is the prevailing attitude.

A mixture of indifference to and disdain for the views of outsiders has, of course, always been a feature of Wall Street culture—an inevitable outgrowth of the industry’s profound insularity. “Most bankers haven’t a clue what the rest of the world thinks of them,” says Henry Blodget, the fallen Merrill Lynch analyst now reborn as a bumptious web entrepreneur. “Wall Street is its own world, with its own tribes, its own customs, and its own pay scales, which are otherworldly. Once you’re in that world, what matters most is your place in that world, not what the rest of the world thinks of you. Given their druthers, bankers would not choose to be loathed and ridiculed. But in the hierarchy of priorities, this concern comes at the end of a long list of concerns that starts with this year’s bonus.”

Now, you might think that, given the gargantuan havoc they wreaked on the global economy and the vicious backlash it inspired, the bankers might have engaged in a modicum of self-scrutiny over these past months—and in the process arrived at, if not enlightenment, then at least a mildly less exalted conception of their own value and virtue. But this supposition presumes at once a degree of reflectiveness never much in evidence on Wall Street and a sense of culpability for the crash that was equally unapparent even at its depths.

“This is a profession with a lot of smart people, but who aren’t necessarily terribly introspective,” says one of the city’s most prominent private-equity kingpins. “They think they actually deserve to make all this money. [And] they created for themselves a narrative where the irrational actions by a few people caused the meltdown. None of them were sitting there saying to themselves, ‘I was responsible for this crisis. Shame on me.’ ”

None of which is to say that the bankers were utterly impervious to the loud calls for their decapitation. “The crisis momentarily alerted Wall Streeters to the fact that the rest of world is flabbergasted and appalled by how much money everyone makes,” Blodget says. “This revelation was startling to Wall Street, and with the threat of incarceration [and reregulation] on the table, it led to a temporary focus on relative decorum. But that’s all over now, so Wall Street has cheerfully gone back to doing what it’s great at.” (read more)

A Shifting Economics Paradigm?

2011-04-05T04:39:00.000-07:00

The 2008 financial crisis shook the foundations of our society and how we think about the interconnectedness of economy and society. An important force in shaping how we think of the economic system is the economics discipline. Economics has historically built the conceptual and theoretical models that have influenced economic policy by our nation's leaders and central banks, and firm's strategies in the market. These dominant ways of thinking--paradigms--hindered most economists from accurately predicting the near-collapse of the financial markets and the broader shocks to the credit and housing markets. As a result, many argue that the profession is partly responsible for the crisis and must re-evaluate how it approaches the study of the economy. The dominant paradigm of the economics profession has been called into question. There is, however, a new community of scholars who are trying to nudge the economic's profession in a new direction and to shift the dominant paradigms that underlie it forward--The Institute for New Economic Thinking.

INETeconomics--It’s time everybody recognized that our 20th century economic thinking is not fit for life as we know it in the 21st century.

The prevailing thinking, that the economy is an idealized system of perfectly rational, optimizing individuals and institutions, who, by trading in markets, bring the economy to a balanced, efficient equilibrium has been rendered obsolete by developments in recent years.

Markets are global. Money moves instantaneously 24/7, and is now a raw material for financial innovations. Regulators are fallible and market participants frequently fall below the standard of being perfectly rational.

Economic thinking has not kept up with these and other developments that now define us, and that fact deeply affects everyone – as we learned in our most recent global financial crisis.

Spurred by the financial crisis and recent developments in the economics field, a far more realistic view of the economy is emerging that takes into account imperfections in individuals, institutions, and information, as well as the existence of complex global networks of interaction, and the dynamism of innovation.

This “new economic thinking” has the potential to profoundly impact society in areas ranging from government policy and financial system reform, to solving climate change, poverty and inequality, and driving sustainable growth in the long run. In other words, new economic thinking can enable a better world for all.

The Institute for New Economic Thinking’s mission is to nurture a global community of next-generation economic leaders, to provoke new economic thinking, and to inspire the economics profession to engage the challenges of the 21st century.

A Self-Fulfilling Prophecy: The Bailout Of Fannie And Freddie

2011-03-30T02:27:00.000-07:00

A great three-part series on Fannie Mae and Freddie Mac done by NPR and Planet Money provides a nice empirical example of the causal mechanism of self-fulfilling prophecy. A self-fulfilling prophecy as a concept has been around for centuries but was crystalized in the work of Robert K. Merton--the 20th century sociologist and social theorist. In his book Social Theory and Social Structure, Merton gives the following example of the self-fulfilling prophecy: when Roxanna falsely believes her marriage will fail, her fears of such failure actually cause the marriage to fail.

The self-fulfilling prophecy is, in the beginning, a false definition of the situation evoking a new behaviour which makes the original false conception come 'true'. This specious validity of the self-fulfilling prophecy perpetuates a reign of error because the prophet will cite the actual course of events as proof that he was right from the very beginning. In other words, a prophecy declared as truth when it is actually false may sufficiently influence people, either through fear or logical confusion, so that their reactions ultimately fulfill the once-false prophecy.

NPR--By the beginning of the 21st century, almost half of all the mortgages in America were made through Fannie and Freddie. Fannie and Freddie were private companies, with shareholders and highly paid CEOs. But they'd achieved this dominance because of the implicit guarantee they had from the U.S. government. Because the world believed the government stood behind them, Fannie and Freddie paid less to borrow money than any other financial institution in the country. This gave them a big advantage.

Despite the fact that the implicit guarantee had turned Fannie and Freddie into two of the largest and most powerful companies in US history, people continued to deny that the guarantee existed. At the top of every security that Fannie and Freddie issued, right there in big black letters, it said, "This security is not backed by the U.S. government." High-powered government officials from both parties also denied that the guarantee existed. In 2003, Democratic congressman Barney Frank put it this way:

There is no guarantee. There's no explicit guarantee. There's no implicit guarantee. There's no wink-and-nod guarantee. Invest and you're on your own. Nobody who invests in them should come looking to me for a nickel. Nor anyone else in the federal government.

And in public, Fannie and Freddie would "adamantly lash back at anybody who argued that there was in fact a government subsidy," according to New York Times columnist Joe Nocera.

But to some of the people who mattered — the ones who were buying Fannie and Freddie securities — the companies said something else entirely. Scott Simon was one of those buyers. He works in the mortgage department at Pimco, the world's largest bond manager, and one of the biggest buyers of Fannie and Freddie securities:

"Fannie and Freddie in meetings with investors, whether it was us or anybody else, essentially just would sort of laugh and say, 'Well, you know the government will stand behind us,'" Simon says.

Truer words were never secretly spoken. But when the bailout finally did happen, it happened in a way almost no one would have foreseen. For decades, Fannie and Freddie had used their implicit government guarantee to get huge and powerful. But they got huge and powerful in a pretty boring way. They dealt mostly with standard, 30-year, fixed-rate loans. Borrowers had to document their employment and income, and most made a down payment of 10 to 20 percent. But then, in the mid-2000s, subprime lenders came on the scene, making loans to people with no income and no jobs.

This kind of easy money made going through all the work to get a Fannie or Freddie loan unappealing for many borrowers, according to Barry Zigas, who was an executive at Fannie Mae during this time. Imagine a customer going through the lengthy process of qualifying for a Fannie Mae loan, scraping together a down payment, showing up at the bank office, with all the requisite documents in tow.

"And they walk out and in the parking lot is a broker saying, 'Would you like a home loan? Cause let's sit down right here in my car.... We'll do the paperwork right now.' Which was literally what was happening," Zigas says. "And as a consequence, the Fannie Mae share of the market in mortgage backed securities dropped."

We now know that the subprime broker in the parking lot was a sign that we were in the midst of the largest housing bubble in national history. But at the time, folks at Fannie and Freddie had no idea what was going on. These subprime companies that had been around for just a couple years, that had no government guarantee, were stealing Fannie and Freddie's customers.

And this is the point where the hybrid nature of Fannie and Freddie came back to haunt them. Because, remember, they had private shareholders. And those private shareholders were not happy with Fannie and Freddie's falling market share.

So, after much hand-wringing and internal soul-searching, Fannie and Freddie decided they would follow the subprime industry into the abyss. Fannie and Freddie started accepting lower credit scores, stopped requiring proof of income from all borrowers, and invested in securities made up of subprime loans.

It was "total corporate delusion," says journalist Bethany McLean. "It wasn't actually until really the summer of 2008, when everybody kind of realized the obvious, which was: The mortgage market is falling apart. Fannie and Freddie are the biggest players in the mortgage market. Oh my goodness, what are we going to do?" (read more)

Negative Consequences of an Increasing Financialization of Society

2011-03-26T11:05:00.000-07:00

The Kauffman Foundation recently released a paper that evaluates how growing wage and skill premiums in finance suppress innovation and entrepreneurship for the larger U.S. society.

March 25, 2011 – The expansion of the financial sector over the past few decades shifted the flow of capital toward financial assets, creating inefficiencies that had material economic impacts, according to "Financialization and Its Entrepreneurial Consequences," a study the Ewing Marion Kauffman Foundation released today.

One of those impacts may have been the financial industry's effect on entrepreneurship. Although widespread entrepreneurial capitalism requires a significant and active financial services sector, the industry's growing size potentially suppressed entrepreneurship as financial services and young companies compete for many of the same employees, according to the study.

The financial sector, which includes lending, stock brokerage, complex securities and insurance, among many other services, derives enormous profits from collateralized debt obligations. These new products require such sophisticated engineering that the industry now focuses its recruiting on new master's- and doctoral-level graduates of science, engineering, math and physics, and pays them starting wages that are five times or more what they would have earned had they remained in their own fields.

"Because these new hires are often the very individuals who otherwise would have comprised the most robust pool of prospective founders of high-growth companies, the financial services industry's steady rise has had a cannibalizing effect on entrepreneurship in the U.S. economy," said Paul Kedrosky, Kauffman Foundation senior fellow and one of the paper's authors. "Excessive financialization exacerbated and distorted the flow of capital in the economy, potentially suppressing entrepreneurship by drawing away entrepreneurial talent."

History has shown that human and other capital inevitably flows to the opportunities that provide the highest risk-adjusted returns. Regulations and feed processes can change these capital allocations, however, tilting the balance by starving some sectors and opportunities, while creating a flood of capital for others, leading to inflated or deflated asset prices, reduced productivity, less innovation and less entrepreneurship, thus lowering job creation and overall economic growth.

"While the rate of entrepreneurship fell and then flattened over the past two decades, financialization also likely affected the caliber of startups," said Dane Stangler, Kauffman research manager and co-author of the paper. "An excessively dominant financial sector may have made it easier for weaker (or potentially weaker) companies to obtain financing, thus helping to maintain that steady rate of entrepreneurship but possibly contributing to the declining quality of newly established businesses."

When the financial sector shrinks as a share of GDP, as it is likely to do in the near future, the study predicts it will coincide with a number of other trends and help increase the rate of new business creation, as well as providing an environment for higher social value from new companies. The authors note that while a "smaller" financial services sector will be smaller relative to recent history, it still likely will be larger than in prior decades, meaning that it could continue to provide the financial intermediation services young companies need most.

A smaller financial sector also should improve allocative efficiency among technical graduates, and among financial services employees who lose their jobs in the industry but respond by establishing companies that otherwise might not have existed.

Spread of Insider Information Within Social Networks

2011-03-26T10:16:00.000-07:00

Recent crack downs by the SEC have shown that the spread of insider information within networks of financial organizations has become ubiquitous. Luigi Zingales, Professor of Entrepreneurship and Finance at University of Chicago Graduate School, has a recent article that points out that the spread of insider information is happening at the highest levels of the financial world.

CHICAGO: If you thought that America’s financial sector had gotten enough of bad publicity, think again. The insider-trading trial of Raj Rajaratnam, a billionaire hedge-fund manager, has now begun. It is likely to provide an especially lurid exposé of the corrupt underbelly of the financial world.

Rajaratnam’s trial is remarkable in many ways. First, it is one of the few insider-trading cases ever to be brought against a professional hedge-fund manager. Historically, both state and federal attorney generals have preferred to prosecute “occasional” traders, who stick out like a sore thumb.

For example, when a tiny Italian bank received from someone who never traded a large order for shares of US Shoe shortly before the company was acquired by Italian eyewear maker Luxottica, it was not difficult to smell a fish. In other words, precisely because occasional traders trade rarely, it is much easier to prove the nexus of causality between their trades and an illegal tip. By contrast, it is much more difficult to identify a problem when a person makes hundreds of trades every day.

In Rajaratnam’s case, the possibility of establishing such a link has come through telephone surveillance. This is the trial’s second remarkable aspect: it is the first insider-trading case to rely on an instrument generally reserved for pursuing drug or mafia cases. When the contents of these conversations are revealed in court, they will not allay the public’s already considerable distrust of the financial sector, to say the least.

But the most remarkable aspect of this case is the level of the people involved. Past insider-trading prosecutions of people other than occasional traders usually involved rogue financiers, like Ivan Boesky in the 1980’s.

This time, we are talking about the very heart of corporate America. A managing director of McKinsey, Anil Kumar, has already pled guilty to providing inside information to Rajaratnam in exchange for cash payments of at least $1.75 million. Raja Gupta, McKinsey’s worldwide managing director for nine years, is accused of being one of the conspirators, as is Rajiv Goel, a managing director of Intel.

It is so difficult to imagine that successful executives would jeopardize their careers and reputations in this way that many of us probably hope that the accusations turn out to be without merit. But recent academic research – by Lauren Cohen, Andrea Frazzini, and Christopher Malloy – shows that it is not far-fetched that university friends like Kumar, Goel, and Rajaratnam would get together to share confidential information.

This research shows that portfolio managers place larger bets on firms that have directors who are their college friends and acquaintances, earning an 8% excess annual return. A benign interpretation of these results is that college mates know each other better; thus, a portfolio manager has an advantage in judging the quality of the CEO if they spent time with him or her in college. But this benign interpretation is difficult to reconcile with the finding that these positive returns are concentrated around corporate news announcements.

After ten weeks of a trial like this, it will be easy for the public to conclude that all hedge funds are crooked, and that the system is rigged against the outsiders. Fortunately, this is not the case. While there are certainly some rotten apples in the hedge-fund industry, the majority of traders behave properly, and their legitimate research contributes to making the market more efficient.

Nevertheless, it will be difficult for legitimate hedge-fund managers to remove the taint that rogue traders have now spread over their industry. One way to do this is to be proactive in their disclosure. Hedge funds should publicly report all past trades that are at least two years old. Such delayed disclosure would not weaken their competitiveness, since the half-life of most trading strategies is very short, but it would give them the credibility that comes with having nothing to hide.

Voluntary public disclosure by hedge funds could also prevent a much stronger regulatory intervention that might otherwise cling to the alarming headlines generated by Rajaratnam’s trial.

Global Markets are Embedded in National Systems of Governance

2011-03-25T04:36:00.000-07:00

Over at The American Prospect, Robert Kuttner has a nice article this month that argues that some of the leading mainstream economists are starting to embrace the realization that markets are embedded in social and political systems, and are dependent on them for stability and growth.

March 15th, 2011: By training, economists tend to be uncomfortable with politics. In the purest version of the standard economic paradigm, political interference by narrow interests or clumsy bureaucrats distorts the efficiencies of markets. Since the financial collapse, that narrative has necessarily been on the defensive. Even so, most of the profession remains wedded to the master story of market efficiency -- and nowhere more emphatically than in the area of the global economy where an outmoded idiom of "free trade" versus "protectionism" still reigns. Radical political economists have never bought this story, but revisionism by mainstream economists is still relatively novel and risky to one's career.

Dani Rodrik is an economist of impeccable credentials, with a doctorate from Princeton and a Harvard chair in international political economy. His new book, The Globalization Paradox, is simply the best recent treatment of the globalization dilemma that I've read, by an economist or anyone else. The paradox of his title is the fact that markets need states, but states are weakened, perhaps fatally, as globalization advances. When they promote ever deeper globalization, economists undermine the very markets they cherish as well as the state's capacity to reflect the democratic wishes of its citizens.

In 1997, a younger Rodrik wrote a more tentative critique, Has Globalization Gone Too Far?, which addressed the disruptive effect of globalization on domestic well-being, as brokered by democratic states. In this new volume, he gives us nothing less than a general theory of globalization, development, democracy, and the state. The book provides the pleasure of following a thoughtful, critical mind working through a complex puzzle. Rodrik writes in highly friendly and nontechnical prose, blending a wide-ranging knowledge of economic history and politics and a gentle, occasionally incredulous, skepticism about the narrow and distorting lens of his fellow economists.

Rodrik begins by observing that when you look at actual economic history, "markets and states are complements, not substitutes." Over the past three centuries, some states have facilitated economic development well, and some have done it badly, but there is no successful case of pure laissez-faire. He recounts the history of governments as enablers of global commerce, the hypocrisy of nations such as Britain that commended free trade but benefited from colonies, and the actual extensive role of the state in promoting business. Next, he describes how most economists just get this story wrong, either because they can't bring themselves to study the messy details of politics and history or because they cling deductively to assumptions rather than addressing evidence.

Turning to a rare moment when sensible economic theory was married to good economic practice, Rodrik invokes the postwar Bretton Woods era as an ideal middle ground, when statesmen devised a balanced system that promoted foreign commerce but recognized the necessary role of the state as an agent of development, stability, and democracy: "A delicate compromise animated the new [global] regime: allow enough international discipline and progress toward trade liberalization to ensure vibrant world commerce, but give plenty of space for governments to respond to social and economic needs at home. ... The goal would be moderate globalization, not hyperglobalization." Looking back at the past century and the headlong rush to ever deeper globalization, he concludes, "A 'thin' version of globalization, a la Bretton Woods, seems to work best."

The trade regime of the early postwar years allowed government interventions that were plainly inconsistent with both the norm of free trade and the subsequent stampede to hyperglobalization. Those interventions included state subsidies, anti-dumping duties, the wholesale exclusion of textiles and agriculture from rules of liberal trade, moderately high tariffs, and tight national regulation of global capital movements or speculation in currencies. But the system worked. It allowed high levels of growth and permitted democratic states to respond to the demands of citizens. "Until the 1980s," Rodrik wrote in a 2000 article, "these loose rules left enough space for countries to follow their own ... paths of development."

After the fixed exchange rates of the Bretton Woods system collapsed, mainly because the dollar was in the unsustainable role of both a national currency and a global one, the middle ground of "moderate globalization" collapsed with it. A newly fundamentalist economics profession became a scholarly lobby for laissez-faire trade, while business elites lobbied for deep globalization to escape the regulatory constraints of states. "Domestic economic management was to become subservient to international trade and finance, rather than the other way around."

Developing countries, nonetheless, went right on violating the practice of laissez-faire, and their state-led development served them well. Mainstream economists preserved their theories only by leaving out Asia. Yet the rush to deep globalization continued. The "hyperglobalizers," Rodrik demonstrates, suffered from two fatal blind spots: "One was that we could push for rapid and deep integration of the world economy and let institutional underpinnings catch up later. The second was that hyperglobalization would have no, or mostly benign, effects on domestic institutional arrangements."

The folly of financial globalization underscored why the conventional wisdom was catastrophically wrong. The costs in increased instability far outstripped any efficiency gains. Global finance, Rodrik says, outran national regulation: "Domestic finance is underpinned by common standards, deposit insurance, bankruptcy rules, court-enforced contracts, a lender-of-last resort, a fiscal backstop, [and] regulatory and supervisory agencies. None of these exists globally."

Given the implausibility of global government and the abysmal failure of partial global regulatory regimes such as the Basel Accords on capital standards, the nation state is still the only game in town, says Rodrik: "The scope of workable globalization limits the scope of desirable globalization." Summing up elegantly, Rodrik defines a "trilemma." Despite the beau ideal of most of the economics profession, it is not possible to have deep globalization and political democracy and a competent nation state. At most, you can have two out of three. "Ultimately," Rodrik says, the quest for global governance leaves us with too little real governance." Rodrik's plea is for us to give up the dangerous fantasy of deep globalization to preserve the state as instrument of democracy and an efficient mixed economy. According to Rodrik, the "golden straitjacket" commended by Thomas Friedman, of a single set of rules and norms to attract global capital, is a straitjacket all right, but a disastrous one.

In his final chapters, Rodrik calls for a Capitalism 3.0 -- a mixed system in the spirit of Bretton Woods. Though I could quibble with some details, his basic principles are spot-on: "Markets must be deeply embedded in systems of governance. ... There is no 'one way' to prosperity. ... Countries have the right to protect their own social arrangements, regulations, and institutions. ... Non-democratic countries cannot count on the same rights and privileges in the international economic order as democracies."

Rodrik has done an immense service by reconnecting economics to politics, reviving an older tradition of political economy and generalized social science. One area he leaves out, however, is the politics of why deep globalization keeps gaining ground despite its practical failures -- specifically, its distorting effect on deliberation within the democracies. Had he ventured even further into the political thicket, he might have shed more light on the hegemonic alliance that links the economics profession, political elites, the global business class, and its low-wage partners in developmental states. Overthrowing this perverse paradigm in practice will be even more difficult than demolishing it in theory, as Rodrik has so elegantly done. (read more)

America's New Shadow Democracy

2011-03-23T10:34:00.000-07:00

A new report by the People For the American Way (PFAW) has been released that investigates the negative effects of the Citizens United v. FEC ruling for U.S. Democracy. The Supreme Court’s 5-4 ruling in Citizens United v. FEC (2010) held that the First Amendment right of free speech applies with little distinction to both individuals and corporations. Since Buckley v. Valeo (1976) established campaign spending as a form of protected speech, the Court’s decision allows for corporations to engage in political spending and to donate unrestricted funds from their general treasuries to other political organizations, effectively overturning decades of state and federal campaign finance laws. Fearing effects of greater corporate influence on American political democracy, Justice Stevens in his dissenting opinion warned that corporations can “amass and deploy financial resources on a scale few natural persons can match,” but are not “themselves members of ‘We the People’ by, whom, and for whom our Constitution was established.”

Although “we the corporations” now have a constitutional right to contribute money to independent expenditure groups, they are not bound to publicly disclose the sources of their funding. Even though the majority opinion in Citizens United upheld Congress’s right to enact disclosure laws, acknowledging that such “transparency enables the electorate to make informed decisions” without “impos[ing] a chill on speech or expression,” today’s 501 (c)4 and (c)6 organizations are under no obligation to disclose their their financial backers but are increasingly engaged in electioneering advocacy across the country.

While we do not know who is funding such organizations, we do know that the groups which played a significant role in the 2010 elections are overwhelmingly backing right-wing candidates. “Outside groups raised and spent $126 million on elections without disclosing the source,” according to the Sunlight Foundation, which “represents more than a quarter of the total $450 million spent by outside groups.” Republican candidates largely benefited from the downpour of undisclosed money, as pro-GOP groups that did not reveal their donors outspent similar pro-Democratic groups by a 6:1 margin. The nonpartisan Center for Responsive Politics reports that of the top ten groups which did not disclose their sources of funding, eight were conservative pro-GOP organizations.

A post-election report by Politico found that organizations such as Crossroads GPS, the US Chamber of Commerce, the 60 Plus Association, and the American Action Network, “backed by millions in corporate cash and contributions by secret donors,” coordinated with each other and the National Republican Congressional Committee to ensure that “vulnerable Democrats got the full brunt of GOP spending.” By coordinating their political activities, many of these groups were able to increase the number of Democrats facing a deluge of negative advertisements, making Democrats in once-safe seats more vulnerable to defeat.

Citizens United and related judicial and administrative decisions have also allowed for the emergence of so-called Super PACs, which can take in unlimited amounts of money from corporations and individuals. A number of the new political organizations have been exposed as front groups for the oil and gas and insurance industries and Wall Street moguls, and new revelations reveal that some groups even receive substantial funding from federal government contractors and foreign businesses. Corporate dollars are also financing many Tea Party and other conservative “grassroots” organizations, giving “astroturfing” an even more prominent role in American politics.

The Center for Responsive Politics reported that conservative outside groups spent $188.8 million in 2010, while left-leaning groups spent less than half that amount. In the last ninety days of the election, the twenty largest conservative outside groups ran 144,182 television ads, and seventy-seven percent of those ads came from organizations which do not disclose their donors.

Legislative remedies, most notably the currently stalled DISCLOSE Act, will bring more transparency to the process while still leaving corporate intervention in electoral politics mostly intact. Due to the sweeping language of the Supreme Court’s ruling in Citizens United, only a constitutional amendment can effectively overturn the decision.

This report looks into the groups that, armed with the 5-4 Citizens United decision, promoted their pro-corporate agenda and built a wall of conservative propaganda across America during the recent election cycle. Many groups originated in the aftermath of Citizens United and directly cite the ruling as essential to their founding; others had been active for years but gained new funding, energy and prominence as a result of the decision. What they all had in common was a relentless desire to discredit progressive ideas and elect pro-corporate candidates to office across the country. As discussed below, they also shared an alarming tactical bent for deceitfulness and distortion in the campaign process. (read more)

The Poverty of Dictatorship by Dani Rodrik

2011-03-02T10:21:00.000-08:00

CAMBRIDGE – Perhaps the most striking finding in the United Nations’ recent 20th anniversary Human Development Report is the outstanding performance of the Muslim countries of the Middle East and North Africa. Here was Tunisia, ranked sixth among 135 countries in terms of improvement in its Human Development Index (HDI) over the previous four decades, ahead of Malaysia, Hong Kong, Mexico, and India. Not far behind was Egypt, ranked 14th.

The HDI is a measure of development that captures achievements in health and education alongside economic growth. Egypt and (especially) Tunisia did well enough on the growth front, but where they really shone was on these broader indicators. At 74, Tunisia’s life expectancy edges out Hungary’s and Estonia’s, countries that are more than twice as wealthy. Some 69% of Egypt’s children are in school, a ratio that matches much richer Malaysia’s. Clearly, these were states that did not fail in providing social services or distributing the benefits of economic growth widely.

Yet in the end it did not matter. The Tunisian and Egyptian people were, to paraphrase Howard Beale, mad as hell at their governments, and they were not going to take it anymore. If Tunisia’s Zine El Abidine Ben Ali or Egypt’s Hosni Mubarak were hoping for political popularity as a reward for economic gains, they must have been sorely disappointed.

One lesson of the Arab annus mirabilis, then, is that good economics need not always mean good politics; the two can part ways for quite some time. It is true that the world’s wealthy countries are almost all democracies. But democratic politics is neither a necessary nor a sufficient condition for economic development over a period of several decades.

Despite the economic advances they registered, Tunisia, Egypt, and many other Middle Eastern countries remained authoritarian countries ruled by a narrow group of cronies, with corruption, clientelism, and nepotism running rife. These countries’ rankings on political freedoms and corruption stand in glaring contrast to their rankings on development indicators.

In Tunisia, Freedom House reported prior to the Jasmine revolution, “the authorities continued to harass, arrest, and imprison journalists and bloggers, human rights activists, and political opponents of the government.” The Egyptian government was ranked 111th out of 180 countries in Transparency International’s 2009 survey of corruption.

And of course, the converse is also true: India has been democratic since independence in 1947, yet the country didn’t begin to escape of its low “Hindu rate of growth” until the early 1980’s.

A second lesson is that rapid economic growth does not buy political stability on its own, unless political institutions are allowed to develop and mature rapidly as well. In fact, economic growth itself generates social and economic mobilization, a fundamental source of political instability.

As the late political scientist Samuel Huntington put it more than 40 years ago, “social and economic change – urbanization, increases in literacy and education, industrialization, mass media expansion – extend political consciousness, multiply political demands, broaden political participation.” Now add social media such as Twitter and Facebook to the equation, and the destabilizing forces that rapid economic change sets into motion can become overwhelming.

These forces become most potent when the gap between social mobilization and the quality of political institutions widens. When a country’s political institutions are mature, they respond to demands from below through a combination of accommodation, response, and representation. When they are under-developed, they shut those demands out in the hope that they will go away – or be bought off by economic improvements.

The events in the Middle East amply demonstrate the fragility of the second model. Protesters in Tunis and Cairo were not demonstrating about lack of economic opportunity or poor social services. They were rallying against a political regime that they felt was insular, arbitrary, and corrupt, and that did not allow them adequate voice.

A political regime that can handle these pressures need not be democratic in the Western sense of the term. One can imagine responsive political systems that do not operate through free elections and competition among political parties. Some would point to Oman or Singapore as examples of authoritarian regimes that are durable in the face of rapid economic change. Perhaps so. But the only kind of political system that has proved itself over the long haul is that associated with Western democracies.

Which brings us to China. At the height of the Egyptian protests, Chinese Web surfers who searched the terms “Egypt” or “Cairo” were returned messages saying that no results could be found. Evidently, the Chinese government did not want its citizens to read up on the Egyptian protests and get the wrong idea. With the memory of the 1989 Tiananmen Square movement ever present, China’s leaders are intent on preventing a repeat.

China is not Tunisia or Egypt, of course. The Chinese government has experimented with local democracy and has tried hard to crack down on corruption. Even so, protest has spread over the last decade. There were 87,000 instances of what the government calls “sudden mass incidents” in 2005, the last year that the government released such statistics, which suggests that the rate has since increased. Dissidents challenge the supremacy of the Communist Party at their peril.

The Chinese leadership’s gamble is that a rapid increase in living standards and employment opportunities will keep the lid on simmering social and political tensions. That is why it is so intent on achieving annual economic growth of 8% or higher – the magic number that it believes will contain social strife.

But Egypt and Tunisia have just sent a sobering message to China and other authoritarian regimes around the world: don’t count on economic progress to keep you in power forever.

Revolution in Cairo: The Power to Organize

2011-02-23T02:50:00.000-08:00

FRONTLINE just released an investigative report that gives a behind the scenes look at two organizations at the center of the Revolution in Cairo--the secular youth movement and the muslim brotherhood. Overall, the report gives great insight into how organizational power and the power to organize came together in a unifying force that toppled a 30+ year dictator. The missing social force behind the Revolution in Cairo, which was only briefly eluded to in the FRONTLINE portrayal, was the Egyptian people who had experienced economic hardships and political repression. For example, for years the Egyptian economy has been struggling with economic inequality, inflation, unemployment, and poverty. Thus, while the two dominant organizational groups--secular youth movement and muslim brotherhood--used their power to organize successfully, the full story needs to take into account the large economically deprived population of the Egyptian Society that fundamentally were the foot soldiers in the Revolution in Cairo.

As the protest movement in Egypt sent shock waves throughout the country -- and the world -- FRONTLINE dispatched teams to Cairo for this special report. "This is a story that no one could have predicted, and everyone now wants to know more about," says FRONTLINE executive producer David Fanning. "We're using our new monthly magazine to be able to respond quickly to timely events and help fill the need for added depth and insight on these important breaking stories."

In this hour's lead story, Revolution in Cairo, FRONTLINE gains unique access to the April 6 Youth Movement as they plot strategy, then head out into Cairo's Tahrir Square, hoping to bring down President Hosni Mubarak. The film traces these young Egyptian activists' long road to revolution, as they made increasingly bold use of the Internet in their underground resistance over the last few years. Through sites like Facebook, Twitter and YouTube, the members of April 6 and related groups helped organize a political movement that the secret police did not understand and could not stop, despite the arrest and torture of some of the movement's key members.

For the second story, The Brothers, veteran Middle East correspondent Charles Sennott of GlobalPost is on the ground in Cairo for FRONTLINE to investigate the Muslim Brotherhood, the controversial but poorly understood Islamist political movement that's poised to play a key role in Egypt's future. While the group was absent in Tahrir Square when young demonstrators first ignited Egypt's revolt, the Brotherhood assumed a larger role over the course of the protests, taking frontline positions in rock-throwing battles with regime supporters and helping to run emergency medical clinics. Now that the Muslim Brotherhood stands to take a prominent place at the negotiating table, we examine what the group believes and how it may influence politics in the country and the region.

The Ascent of Money: The Financial History of the World

2011-02-22T03:33:00.000-08:00

As the world continues to struggle to find its footing amid rising unemployment, constricted credit and crumbling banks and industries — raising questions about how the economic system collapsed — PBS presents Niall Ferguson’s ASCENT OF MONEY. This groundbreaking four-part series examines the creation of the economic system by taking viewers on a global trek through the history of money. (An abbreviated version of the documentary, which focused on the current economic crisis at the advent of the Obama administration, aired in January; it can be streamed in full on the Website.) The four-hour version delves deeper into how the complex system of global finance evolved over the centuries, how money has shaped the course of human affairs and how the mechanics of this economic system work to create seemingly unlimited wealth — or catastrophic loss.

ASCENT OF MONEY is based on Ferguson’s best-selling book The Ascent of Money: A Financial History of the World, which predicted the current economic crisis and was released within weeks of the meltdown of sub-prime loans.

Said Ferguson, “In the midst of a major economic depression, it is often hard to appreciate the historical precedents and truly understand that while a situation may look dire, our system of finance, banking and trade has allowed for unprecedented progress. I’m hopeful the film will allow viewers to better understand the on-going evolution of our financial system and how our economy remains extraordinarily viable even as we are grappling with a crisis of historic proportions.”

For millions of people, the recession has generated a thirst for knowledge about how our global economic system really works, especially when so many financial experts seem to be equally baffled. In ASCENT OF MONEY, economist, author and historian Ferguson offers insight into these questions by taking viewers step-by-step through the milestones of the financial history that created this system, visiting the locations where key events took place and poring over actual ledgers and documents — such as the first publicly traded share of a company — that would change human history. Ferguson maintains that the history of money is indeed at the core of our human history, with economic strength determining political dominance, wars fought to create wealth and individual financial barons determining the fates of millions.

Among the places Ferguson visits are Bolivia, where Spain established vast gold and silver mines — still in operation — and enslaved the indigenous people to create so much currency for the Spanish crown that it eventually became worthless; Italy, where the Medici family transformed the sinful practice of usury into the banking system we know today and in the process became as powerful as monarchs; Paris, where Scotsman John Law created a Ponzi scheme tied to the Louisiana territory that brought France to its knees; London, where bonds trader Nathan Rothschild and his family nearly went bankrupt by helping to finance the British army’s war against Napoleon, then achieved enormous wealth through the buying and selling of war bonds; Scotland, where two ministers established the first life insurance fund, and New Orleans, where the shortcomings of their calculations would be demonstrated to tragic effect in the wake of Hurricane Katrina; and New York, where Ferguson interviews financial wizard George Soros about the concept he introduced of short selling derivatives based on a prediction that they will lose value.

Through this history, viewers learn economic fundamentals that inform the meanings of sub-prime mortgages and credit default swaps and an understanding how the Chinese economy has risen to dominate the world.

Unions: Institutions as Counterweights to the Power of Big Money

2011-02-21T04:24:00.000-08:00

Krugman has a great article over at the NYT that emphasizes the reality that unions are one of the essential institutions that acts as a counterweight to the power of big business and money. I recommend reading.

Krugman--Last week, in the face of protest demonstrations against Wisconsin’s new union-busting governor, Scott Walker — demonstrations that continued through the weekend, with huge crowds on Saturday — Representative Paul Ryan made an unintentionally apt comparison: “It’s like Cairo has moved to Madison.”

It wasn’t the smartest thing for Mr. Ryan to say, since he probably didn’t mean to compare Mr. Walker, a fellow Republican, to Hosni Mubarak. Or maybe he did — after all, quite a few prominent conservatives, including Glenn Beck, Rush Limbaugh and Rick Santorum, denounced the uprising in Egypt and insist that President Obama should have helped the Mubarak regime suppress it.

In any case, however, Mr. Ryan was more right than he knew. For what’s happening in Wisconsin isn’t about the state budget, despite Mr. Walker’s pretense that he’s just trying to be fiscally responsible. It is, instead, about power. What Mr. Walker and his backers are trying to do is to make Wisconsin — and eventually, America — less of a functioning democracy and more of a third-world-style oligarchy. And that’s why anyone who believes that we need some counterweight to the political power of big money should be on the demonstrators’ side.

Some background: Wisconsin is indeed facing a budget crunch, although its difficulties are less severe than those facing many other states. Revenue has fallen in the face of a weak economy, while stimulus funds, which helped close the gap in 2009 and 2010, have faded away.

In this situation, it makes sense to call for shared sacrifice, including monetary concessions from state workers. And union leaders have signaled that they are, in fact, willing to make such concessions.

But Mr. Walker isn’t interested in making a deal. Partly that’s because he doesn’t want to share the sacrifice: even as he proclaims that Wisconsin faces a terrible fiscal crisis, he has been pushing through tax cuts that make the deficit worse. Mainly, however, he has made it clear that rather than bargaining with workers, he wants to end workers’ ability to bargain.

The bill that has inspired the demonstrations would strip away collective bargaining rights for many of the state’s workers, in effect busting public-employee unions. Tellingly, some workers — namely, those who tend to be Republican-leaning — are exempted from the ban; it’s as if Mr. Walker were flaunting the political nature of his actions.

Why bust the unions? As I said, it has nothing to do with helping Wisconsin deal with its current fiscal crisis. Nor is it likely to help the state’s budget prospects even in the long run: contrary to what you may have heard, public-sector workers in Wisconsin and elsewhere are paid somewhat less than private-sector workers with comparable qualifications, so there’s not much room for further pay squeezes.

So it’s not about the budget; it’s about the power.

In principle, every American citizen has an equal say in our political process. In practice, of course, some of us are more equal than others. Billionaires can field armies of lobbyists; they can finance think tanks that put the desired spin on policy issues; they can funnel cash to politicians with sympathetic views (as the Koch brothers did in the case of Mr. Walker). On paper, we’re a one-person-one-vote nation; in reality, we’re more than a bit of an oligarchy, in which a handful of wealthy people dominate.

Given this reality, it’s important to have institutions that can act as counterweights to the power of big money. And unions are among the most important of these institutions.

You don’t have to love unions, you don’t have to believe that their policy positions are always right, to recognize that they’re among the few influential players in our political system representing the interests of middle- and working-class Americans, as opposed to the wealthy. Indeed, if America has become more oligarchic and less democratic over the last 30 years — which it has — that’s to an important extent due to the decline of private-sector unions. (read more)

Algorithms Take Control of Wall Street

2011-02-14T08:03:00.000-08:00

Felix Salmon has an excellent article over at WIRED Magazine on the increasing use of mathematical algorithms on Wall Street and the consequences this has for our broader economic and social system. It adds to my previous movie post (see below) that documents how quantitative analyst--trained in mathematics, physics, computer science--are fundamentally changing what takes place in the research offices of Wall St in the most important financial institutions in the world.

By Felix Salmon--Last spring, Dow Jones launched a new service called Lexicon, which sends real-time financial news to professional investors. This in itself is not surprising. The company behind The Wall Street Journal and Dow Jones Newswires made its name by publishing the kind of news that moves the stock market. But many of the professional investors subscribing to Lexicon aren’t human—they’re algorithms, the lines of code that govern an increasing amount of global trading activity—and they don’t read news the way humans do. They don’t need their information delivered in the form of a story or even in sentences. They just want data—the hard, actionable information that those words represent.

Lexicon packages the news in a way that its robo-clients can understand. It scans every Dow Jones story in real time, looking for textual clues that might indicate how investors should feel about a stock. It then sends that information in machine-readable form to its algorithmic subscribers, which can parse it further, using the resulting data to inform their own investing decisions. Lexicon has helped automate the process of reading the news, drawing insight from it, and using that information to buy or sell a stock. The machines aren’t there just to crunch numbers anymore; they’re now making the decisions.

That increasingly describes the entire financial system. Over the past decade, algorithmic trading has overtaken the industry. From the single desk of a startup hedge fund to the gilded halls of Goldman Sachs, computer code is now responsible for most of the activity on Wall Street. (By some estimates, computer-aided high-frequency trading now accounts for about 70 percent of total trade volume.) Increasingly, the market’s ups and downs are determined not by traders competing to see who has the best information or sharpest business mind but by algorithms feverishly scanning for faint signals of potential profit.

Algorithms have become so ingrained in our financial system that the markets could not operate without them. At the most basic level, computers help prospective buyers and sellers of stocks find one another—without the bother of screaming middlemen or their commissions. High-frequency traders, sometimes called flash traders, buy and sell thousands of shares every second, executing deals so quickly, and on such a massive scale, that they can win or lose a fortune if the price of a stock fluctuates by even a few cents. Other algorithms are slower but more sophisticated, analyzing earning statements, stock performance, and newsfeeds to find attractive investments that others may have missed. The result is a system that is more efficient, faster, and smarter than any human.

It is also harder to understand, predict, and regulate. Algorithms, like most human traders, tend to follow a fairly simple set of rules. But they also respond instantly to ever-shifting market conditions, taking into account thousands or millions of data points every second. And each trade produces new data points, creating a kind of conversation in which machines respond in rapid-fire succession to one another’s actions. At its best, this system represents an efficient and intelligent capital allocation machine, a market ruled by precision and mathematics rather than emotion and fallible judgment.

But at its worst, it is an inscrutable and uncontrollable feedback loop. Individually, these algorithms may be easy to control but when they interact they can create unexpected behaviors—a conversation that can overwhelm the system it was built to navigate. On May 6, 2010, the Dow Jones Industrial Average inexplicably experienced a series of drops that came to be known as the flash crash, at one point shedding some 573 points in five minutes. Less than five months later, Progress Energy, a North Carolina utility, watched helplessly as its share price fell 90 percent. Also in late September, Apple shares dropped nearly 4 percent in just 30 seconds, before recovering a few minutes later. (read more)

Quants: The Alchemists of Wall Street

2011-02-09T08:21:00.000-08:00

Quants are the math wizards and computer programmers in the engine room of our global financial system who designed the financial products that almost crashed Wall st. The credit crunch has shown how the global financial system has become increasingly dependent on mathematical models trying to quantify human (economic) behaviour. Now the quants are at the heart of yet another technological revolution in finance: trading at the speed of light.

What are the risks of treating the economy and its markets as a complex machine? Will we be able to keep control of this model-based financial system, or have we created a monster?

A story about greed, fear and randomness from the insides of Wall Street.

Probing the Depths of the ‘Submerged State’

2011-02-08T11:24:00.000-08:00

A welter of tax credits, breaks and incentives help Americans out in ways they don’t understand or appreciate. This ignorance could have real consequences in debates about tax reform and deficit reduction.

By Lee Drutman

In 2009, when President Obama negotiated a stimulus bill that included $288 billion in tax cuts, his advisers decided to structure their “Making Work Pay” tax credits so that workers’ regular paychecks were a little bit bigger, and the money would flow back into circulation gradually, rather than all at once. They believed it would have a greater economic impact that way.

Without running the counterfactual, it’s hard to know whether the tax credits had the desired economic impact. But one thing is clear: It was just about the worst-advertised tax cut ever. One year later, just 12 percent of respondents knew that their taxes had been reduced. Twice as many (24 percent) thought that their taxes had actually increased.

In its subterranean nature, “Making Work Pay” resembles an astonishingly large collection of other tax credits, benefits, breaks and other sundry market-structuring incentives that direct economic activity and redistribute wealth in ways that are quite hidden from most citizens. Collectively they make up a substantial “submerged state” — a term coined by Cornell political scientist Suzanne Mettler and explored in an article in the September issue of Perspectives on Politics. (Mettler is now working on a book on the subject.)

“The average person is quite unaware of them, how they work and what their effects are,” Mettler said in an interview. “They are submerged. Ordinary people look at it and see private organizations and actors doing things.”

Which means many people fail to appreciate the role of government in helping them because that role is frequently oblique. That potentially leads them to an unjustifiably negative attitude toward both the tax code and the federal government, frustrating possibilities for reform.

Submerged state policies exist in many sectors of the economy. For example, mortgage deductions, student loan programs and child tax credits are all government programs that shape individuals’ behaviors through incentives. Yet in Mettler’s survey, 60 percent of individuals claiming the home mortgage interest deduction, 53 percent of people using student loan programs and 52 percent of people claiming the child and dependent care tax credit said that “no, I have not used a government social program.” (read more)

When Irish Eyes Are Crying by Michael Lewis

2011-02-07T13:14:00.000-08:00

Vanity Fair has an excellent article by Michael Lewis--the financial journalist and author of "The Big Short"--that looks at the gross misallocation of capital by Irish banks and government, and how the public is left picking up the tab. I highly recommend reading the article in its entirety. First Iceland. Then Greece. Now Ireland, which headed for bankruptcy with its own mysterious logic. In 2000, suddenly among the richest people in Europe, the Irish decided to buy their country—from one another. After which their banks and government really screwed them. So where’s the rage?

By Michael Lewis (Photograph by Jonas Fredwall Karlsson)

When I flew to Dublin in early November, the Irish government was busy helping the Irish people come to terms with their loss. It had been two years since a handful of Irish politicians and bankers decided to guarantee all the debts of the country’s biggest banks, but the people were only now getting their minds around what that meant for them. The numbers were breathtaking. A single bank, Anglo Irish, which, two years before, the Irish government had claimed was merely suffering from a “liquidity problem,” faced losses of up to 34 billion euros. To get some sense of how “34 billion euros” sounds to Irish ears, an American thinking in dollars needs to multiply it by roughly one hundred: $3.4 trillion. And that was for a single bank. As the sum total of loans made by Anglo Irish, most of it to Irish property developers, was only 72 billion euros, the bank had lost nearly half of every dollar it invested.

The two other big Irish banks, Bank of Ireland and, especially, Allied Irish Banks (A.I.B.), remained Ireland’s dirty little secrets. Both older than Ireland itself (the Bank of Ireland was founded back in 1783; A.I.B. is made up of three banks founded in the 19th century), both were now also obviously bust. The Irish government owned big chunks of the two ancient banks but revealed less about them. As they had lent vast sums not only to Irish property developers but also to Irish homebuyers, their losses were also obviously vast—and similar in spirit to the losses at the upstart Anglo Irish.

Even in an era when capitalists went out of their way to destroy capitalism, the Irish bankers set some kind of record for destruction. Theo Phanos, a London hedge-fund manager with interests in Ireland, says that “Anglo Irish was probably the world’s worst bank. Even worse than the Icelandic banks.” (read more)

Repression and Poverty Underpin the Uprising in Egypt

2011-01-31T11:33:00.000-08:00

Recent events in Egypt could be an opportunity for the United States to support the people of Egypt, but no Obama administration official has recommended publicly that President Hosni Mubarak should step down. We speak with Samer Shehata, assistant professor of Arab politics at Georgetown University, about the U.S.-backed Mubarak regime and the record inflation and poverty that underpin the ongoing protests. "In Egypt, from 2004 until the present, the government and its reforms were applauded in Washington by World Bank, the IMF and U.S. officials," Shehata says. "But what all of that masked was what was going on at the level of real people and ordinary lives."

WHY INDEPENDENT MEDIA? For true democracy to work, people need easy access to independent, diverse sources of news and information. But the last two decades have seen unprecedented corporate media consolidation. The U.S. media was already fairly homogeneous in the early 1980s: some fifty media conglomerates dominated all media outlets, including television, radio, newspapers, magazines, music, publishing and film. In the year 2000, just six corporations dominated the U.S. media.

In addition, corporate media outlets in the U.S. are legally responsible to their shareholders to maximize profits. And U.S. "public" media outlets accept funding from major corporations, as well as from the Corporation for Public Broadcasting, which has attempted in the past to exert political and editorial influence on public news producers.

Democracy Now! is funded entirely through contributions from listeners, viewers, and foundations. They do not accept advertisers, corporate underwriting, or government funding. This allows them to maintain their independence.

Calls for "Civil and Honest Public Discourse" by President Obama

2011-01-13T10:45:00.000-08:00

More than 26,000 people attended a memorial Wednesday night to remember the victims of Saturday’s shooting in Tucson that left six people dead and 20 wounded, including Democratic Rep. Gabrielle Giffords, who remains in critical condition. In his 33-minute address, President Obama called for civil and honest public discourse and paid tribute to the victims of Saturday’s shooting.

THE PRESIDENT: You see, when a tragedy like this strikes, it is part of our nature to demand explanations –- to try and pose some order on the chaos and make sense out of that which seems senseless. Already we’ve seen a national conversation commence, not only about the motivations behind these killings, but about everything from the merits of gun safety laws to the adequacy of our mental health system. And much of this process, of debating what might be done to prevent such tragedies in the future, is an essential ingredient in our exercise of self-government.

But at a time when our discourse has become so sharply polarized -– at a time when we are far too eager to lay the blame for all that ails the world at the feet of those who happen to think differently than we do -– it’s important for us to pause for a moment and make sure that we’re talking with each other in a way that heals, not in a way that wounds.

Scripture tells us that there is evil in the world, and that terrible things happen for reasons that defy human understanding. In the words of Job, “When I looked for light, then came darkness.” Bad things happen, and we have to guard against simple explanations in the aftermath.

For the truth is none of us can know exactly what triggered this vicious attack. None of us can know with any certainty what might have stopped these shots from being fired, or what thoughts lurked in the inner recesses of a violent man’s mind. Yes, we have to examine all the facts behind this tragedy. We cannot and will not be passive in the face of such violence. We should be willing to challenge old assumptions in order to lessen the prospects of such violence in the future. But what we cannot do is use this tragedy as one more occasion to turn on each other. That we cannot do. That we cannot do.

As we discuss these issues, let each of us do so with a good dose of humility. Rather than pointing fingers or assigning blame, let’s use this occasion to expand our moral imaginations, to listen to each other more carefully, to sharpen our instincts for empathy and remind ourselves of all the ways that our hopes and dreams are bound together.

After all, that’s what most of us do when we lose somebody in our family -– especially if the loss is unexpected. We’re shaken out of our routines. We’re forced to look inward. We reflect on the past: Did we spend enough time with an aging parent, we wonder. Did we express our gratitude for all the sacrifices that they made for us? Did we tell a spouse just how desperately we loved them, not just once in a while but every single day?

So sudden loss causes us to look backward -– but it also forces us to look forward; to reflect on the present and the future, on the manner in which we live our lives and nurture our relationships with those who are still with us. (Read More)

Battle for Haiti

2011-01-12T10:09:00.000-08:00

On the night of the earthquake that devastated Haiti last January, something happened in Port au Prince, the capital city, which would threaten the effectiveness of international aid efforts and undermine the country's political stability: 4,500 of the country's most violent criminals escaped from Haiti's overcrowded National Penitentiary.

Now, on the one-year anniversary of the quake -- and in the aftermath of Haitian presidential elections that threatened further crisis -- FRONTLINE presents Battle for Haiti. FRONTLINE producer Dan Reed films with the beleaguered special police units tasked with apprehending the escaped gangsters. At the same time, Reed captures the daily lives of the despairing inhabitants of the slums and tent cities who are often terrorized by these gangsters.

Reed also tracks down some of the escaped prisoners themselves. "When I got out, I tried to go straight, but I couldn't," one of the escapees tells Reed. "The police are after me and all the other guys who escaped from prison."

The escapees include many of the hard-core criminals, kidnappers and gang bosses who had reduced Haiti to anarchy before being subdued by an all-out military onslaught by the police and heavily armed U.N. peacekeepers from 2004-7. Now the gangsters are largely free to regain control of the slums and the tent cities where most Haitians live, using murder and rape to enforce their rule, as Haiti proves more vulnerable and less well policed than ever before.

Helping battle the escaped gangsters is Mario Andresol, Haiti's police chief, who had put many of the gangsters in prison earlier in the decade, surviving two assassination attempts in the process. Now, Andresol has to do it all over again. But his force is rumored to be riddled with corruption, and many of his best officers are without homes and living in tent camps. Andresol admits the situation is bad: "It's chaos out there right now. There is a state of fear because the escapees are murdering, kidnapping, robbing..."

The head of the U.N. mission, Edmond Mulet, tells FRONTLINE that unless the gangsters are controlled and stopped, "all the efforts that the international community is doing on reconstruction, on rebuilding, on development ... will be in vain." Other senior U.N. officials echo this analysis.

CRUDE: The Real Price of Oil

2011-01-06T11:08:00.000-08:00

Three years in the making, this cinéma-vérité feature from acclaimed filmmaker Joe Berlinger (Brother’s Keeper, Paradise Lost, Metallica: Some Kind of Monster) is the epic story of one of the largest and most controversial environmental lawsuits on the planet. The inside story of the infamous “Amazon Chernobyl” case, Crude is a real-life high stakes legal drama, set against a backdrop of the environmental movement, global politics, celebrity activism, human rights advocacy, the media, multinational corporate power, and rapidly-disappearing indigenous cultures. Presenting a complex situation from multiple viewpoints, the film subverts the conventions of advocacy filmmaking, exploring a complicated situation from all angles while bringing an important story of environmental peril and human suffering into focus.

The landmark case takes place in the Amazon jungle of Ecuador, pitting 30,000 indigenous and colonial rainforest dwellers against the U.S. oil giant Chevron. The plaintiffs claim that Texaco – which merged with Chevron in 2001 – spent three decades systematically contaminating one of the most biodiverse regions on Earth, poisoning the water, air and land. The plaintiffs allege that the pollution has created a “death zone” in an area the size of the Rhode Island, resulting in increased rates of cancer, leukemia, birth defects, and a multiplicity of other health ailments. They further allege that the oil operations in the region contributed to the destruction of indigenous peoples and irrevocably impacted their traditional way of life. Chevron vociferously fights the claims, charging that the case is a complete fabrication, perpetrated by “environmental con men” who are seeking to line their pockets with the company’s billions.

The case takes place not just in a courtroom, but in a series of field inspections at the alleged contamination sites, with the judge and attorneys for both sides trudging through the jungle to litigate. And the battleground has expanded far beyond the legal process. The cameras rolled as the conflict raged in and out of court, and the case drew attention from an array of celebrities, politicians and journalists, and landed on the cover of Vanity Fair. Some of the film’s subjects sparked further controversy as they won a CNN “Hero” award and the Goldman Award, the environmental equivalent of the Nobel Prize.

Shooting in dozens of locations on three continents and in multiple languages, Berlinger and his crew gained extraordinary access to players on all sides of the legal fight and beyond, capturing the drama as it unfolded while the case grew from a little-known legal story to an international cause célèbre. Crude is a ground-level view of one of the most extraordinary legal dramas of our time, one that has the potential of forever changing the way international business is conducted. While the environmental impact of the consumption of fossil fuels has been increasingly documented in recent years, Crude focuses on the human cost of our addiction to oil and the increasingly difficult task of holding a major corporation accountable for its past deeds. For entire movie, click here.

Alternatives to Austerity by Joseph Stiglitz

2011-01-05T03:08:00.000-08:00

The ongoing economic crisis brings an opportunity to focus our priorities and assess the values we hold as a nation. According to Joseph Stiglitz, draconian austerity measures are not necessary and there are many alternatives.

NEW YORK--In the aftermath of the Great Recession, countries have been left with unprecedented peacetime deficits and increasing anxieties about their growing national debts. In many countries, this is leading to a new round of austerity – policies that will almost surely lead to weaker national and global economies and a marked slowdown in the pace of recovery. Those hoping for large deficit reductions will be sorely disappointed, as the economic slowdown will push down tax revenues and increase demands for unemployment insurance and other social benefits.

The attempt to restrain the growth of debt does serve to concentrate the mind – it forces countries to focus on priorities and assess values. The United States is unlikely in the short term to embrace massive budget cuts, à la the United Kingdom. But the long-term prognosis – made especially dire by health-care reform’s inability to make much of a dent in rising medical costs – is sufficiently bleak that there is increasing bipartisan momentum to do something. President Barack Obama has appointed a bipartisan deficit-reduction commission, whose chairmen recently provided a glimpse of what their report might look like.

Technically, reducing a deficit is a straightforward matter: one must either cut expenditures or raise taxes. It is already clear, however, that the deficit-reduction agenda, at least in the US, goes further: it is an attempt to weaken social protections, reduce the progressivity of the tax system, and shrink the role and size of government – all while leaving established interests, like the military-industrial complex, as little affected as possible.

In the US (and some other advanced industrial countries), any deficit-reduction agenda has to be set in the context of what happened over the last decade:

·a massive increase in defense expenditures, fueled by two fruitless wars, but going well beyond that;

·growth in inequality, with the top 1% garnering more than 20% of the country’s income, accompanied by a weakening of the middle class – median US household income has fallen by more than 5% over the past decade, and was in decline even before the recession;

·underinvestment in the public sector, including in infrastructure, evidenced so dramatically by the collapse of New Orleans’ levies; and

·growth in corporate welfare, from bank bailouts to ethanol subsidies to a continuation of agricultural subsidies, even when those subsidies have been ruled illegal by the World Trade Organization.

As a result, it is relatively easy to formulate a deficit-reduction package that boosts efficiency, bolsters growth, and reduces inequality. Five core ingredients are required. First, spending on high-return public investments should be increased. Even if this widens the deficit in the short run, it will reduce the national debt in the long run. What business wouldn’t jump at investment opportunities yielding returns in excess of 10% if it could borrow capital – as the US government can – for less than 3% interest? . . . (read more)

--Joseph E. Stiglitz is University Professor at Columbia University and a Nobel laureate in Economics. His latest book, Freefall: Free Markets and the Sinking of the Global Economy, is now available in French, German, Japanese, and Spanish.

The Critique of American Culture Through the Art Of Protest

2011-01-01T13:37:00.000-08:00

This documentary describes, arguably, the most provocative American band of the last 20 years. Rage Against The Machine have since their explosive debut, been the group most associated with the American protest movement. This film dissects the work and career of RATM and looks at their place in this always fascinating lineage of artists and performers who have spoken out on behalf of, and drawn attention to, the world's marginalised, downtrodden and oppressed. Picking up the flame from a linear musical tradition going back to the War Of Independence, with the best known protagonists coming up during the 1950s and 60s civil rights movement via artists such as Pete Segar and the young Bob Dylan, the anger remained as brutal as ever during the final decade of the 20th Century in Rage and contemporaries like Public Enemy.

FEATURING: interviews with: renowned Rage producer and engineer, Garth Richardson; RATM Biographer, Colin Devenish; the band's live sound engineer, Dave 'Rat' Levine and the man who signed them Michael Goldstone. With further contributions from folk-protest singer and author Jerry Silverman, ex-'Rolling Stone' editor Joe Levy, and Professor of American Studies and English at Washington State University, T.V. Reed.

Presidential Press Conference on a Historic Congressional Session

2010-12-23T03:10:00.000-08:00

President Obama hails the bipartisan cooperation that resulted in the most productive post-election Congressional session in decades and saw the passage of important legislation on tax cuts, the repeal of Don't Ask Don't Tell, medical assistance for 9/11 responders, and the ratification of a new START treaty. It is important to acknowledge, however, that the historic productivity is the result of the front line political soldiers in the Congress over the last two years--many who have fallen in the changing political climate. E.J. Dionne, Jr. covers this point nicely in his December 22 article.

By E.J. Dionne, Jr--At the beginning of 2009, the choice before Democrats who controlled the 111th Congress was whether they would enact historic legislation, even at the risk of their majority, or whether they would play it safe.

They gave the safe option a pass, with two results: This will go down as the most productive Congress since the 89th, which was even more Democratic because of Lyndon Johnson’s 1964 landslide. And 52 Democratic House incumbents, most elected in 2006 or 2008, lost their seats. The departing Democrats are, as one in their ranks put it, “Obama’s Orphans.” So many of them cast vote after vote for the president’s program. They were then left at the side of the road while history moved by.

During the recent campaign, these loyalists were accused of being “out of touch,” and they certainly were out of sync with the prevailing mood of those who chose to vote this year. But this accusation begs an important question: To whom did these members owe their real loyalty?

Instead of yielding to the feelings of the moment, they kept faith with those who supported them precisely because of their promises to change the direction of the country. And change the country they did. Say what you will about the new health care law. It was a response to (how easily we forget) a widely held sentiment that our health system was broken, that too many of us lacked coverage or feared we might lose it. The final product was a start in addressing these anxieties.

It is a tribute to the 111th Congress that its achievements will largely set the agenda for the 112th. The new Republican House majority is devoted less to a bold agenda of its own than to repealing, scaling back or derailing the accomplishments of the outgoing majority.

The fact that wiping out what they call “Obamacare” is a unifying priority for the conservative newcomers is a backhanded compliment to those who enacted it: Yes, it was a big deal after all, and in the forthcoming debate, reform’s supporters will get a second chance to make the case for what they did.

Republicans also hope to undercut financial reform, giving the law’s supporters the opportunity to explain more clearly why a financial system with loose rules becomes little more than a casino operated by people in much nicer suits than those worn by the average croupier.

And some of the 111th’s achievements will stand without challenge because they so plainly reflected the country’s will. Congressional leaders never gave up on ending “don’t ask, don’t tell,” knowing they were building on a three-decade long revolution in the attitudes of average Americans toward gays and lesbians. That really is a change we can believe in. That so many other reforms have been virtually unheralded is another monument to the efforts of Obama’s Orphans. Bills that in another Congress would have loomed large were passed with hardly a ripple in the media. Consider: the new food safety rules, the big repair in the student loan program, stronger regulations on the credit card industry, the creation of a financial consumer protection agency, an improved children’s health care program and a broad expansion of national service opportunities.

The startling achievements of this lame-duck session owed to the decision of Senate Majority Leader Harry Reid and outgoing House Speaker Nancy Pelosi to shun the counsel of those who said they should just pack it in after a bad election. If a certain amount of boldness had cost some of their colleagues at the polls in November, the same audacity would at least permit those on their way out to add to their record. They would use their majorities right to the end.

Our media and political systems are obsessed with presidents. We are also very tough on those who lose, in elections no less than in sports. As a result, end-of-year commentary will concentrate on how much stronger President Obama looks today than even a month ago, and on all he got done. The vanquished of 2010 will get barely a nod on their way to the rest of their lives.

But the president’s accomplishments were possible only because a group of younger, largely unsung politicians—the infantry of political change—refused to think only about polls, politics and their personal ambitions. Obama’s Orphans deserve to take a bow.

The War You Don't See by John Pilger

2010-12-21T09:02:00.000-08:00

A powerful and timely investigation into the media's role in war, tracing the history of 'embedded' and independent reporting from the carnage of World War One to the destruction of Hiroshima, and from the invasion of Vietnam to the current war in Afghanistan and disaster in Iraq. As weapons and propaganda become even more sophisticated, the nature of war is developing into an 'electronic battlefield' in which journalists play a key role, and civilians are the victims. But who is the real enemy?

John Pilger says in the film: "We journalists... have to be brave enough to defy those who seek our collusion in selling their latest bloody adventure in someone else's country... That means always challenging the official story, however patriotic that story may appear, however seductive and insidious it is. For propaganda relies on us in the media to aim its deceptions not at a far away country but at you at home... In this age of endless imperial war, the lives of countless men, women and children depend on the truth or their blood is on us... Those whose job it is to keep the record straight ought to be the voice of people, not power."

Our Century's Greatest Injustice by Sheryl WuDun

2010-12-05T14:17:00.000-08:00

Pulitzer Prize-winning reporting team, husband and wife Nicholas D. Kristof and Sheryl WuDunn, take us on a journey through Africa and Asia to meet an extraordinary array of exceptional women struggling against terrible circumstances. More girls have been killed in the last fifty years, precisely because they are girls, than men were killed in all the wars of the twentieth century combined. More girls are killed in this routine 'gendercide' in any one decade than people were slaughtered in all the genocides of the twentieth century.

In the nineteenth century, the central moral challenge was slavery. In the twentieth, it was totalitarianism. In the twenty-first, Kristof and WuDunn demonstrate, it will be the struggle for gender equality in the developing world. Fierce, moral, pragmatic, full of amazing stories of courage and inspiration, HALF THE SKY is essential reading for every global citizen.

Insight into Western Democracy: Implications of the Secret US Embassy Cables

2010-12-02T02:04:00.000-08:00

Wikileaks began on Sunday November 28th publishing 251,287 leaked United States embassy cables, the largest set of confidential documents ever to be released into the public domain. The documents will give people around the world an unprecedented insight into US Government foreign activities.

The cables, which date from 1966 up until the end of February this year, contain confidential communications between 274 embassies in countries throughout the world and the State Department in Washington DC. 15,652 of the cables are classified Secret.

The embassy cables will be released in stages over the next few months. The subject matter of these cables is of such importance, and the geographical spread so broad, that to do otherwise would not do this material justice.

The cables show the extent of US spying on its allies and the UN; turning a blind eye to corruption and human rights abuse in "client states"; backroom deals with supposedly neutral countries; lobbying for US corporations; and the measures US diplomats take to advance those who have access to them.

This document release reveals the contradictions between the US’s public persona and what it says behind closed doors – and shows that if citizens in a democracy want their governments to reflect their wishes, they should ask to see what’s going on behind the scenes.

Every American schoolchild is taught that George Washington – the country’s first President – could not tell a lie. If the administrations of his successors lived up to the same principle, today’s document flood would be a mere embarrassment. Instead, the US Government has been warning governments -- even the most corrupt -- around the world about the coming leaks and is bracing itself for the exposures.

The full set consists of 251,287 documents, comprising 261,276,536 words (seven times the size of "The Iraq War Logs", the world's previously largest classified information release).

The cables cover from 28th December 1966 to 28th February 2010 and originate from 274 embassies, consulates and diplomatic missions.

More Information:
The Guardian
New York Times

Governance Gaps in the Global Supply Chain by Auret van Heerden

2010-11-13T14:38:00.000-08:00

Labor activist Auret van Heerden talks about the next frontier of workers' rights -- globalized industries where no single national body can keep workers safe and protected. How can we keep our global supply chains honest? Van Heerden makes the business case for fair labor. At the head of the Fair Labor Association, Auret van Heerden takes a practical approach to workers' rights, persuading corporations and NGOs to protect labor in global supply chains.

Why You Should Listen to Him:

Raised in apartheid South Africa, Auret van Heerden became an activist early. As a student, he agitated for workers' rights and co-wrote a book on trade unionism; he was tortured and placed in solitary confinement, then exiled in 1987. (Later, in post-apartheid South Africa, he became labor attaché to the South African mission to the UN.) For the past decade he's been the president and CEO of the Fair Labor Association, or FLA, an initiative that brings together companies, NGOs and universities to develop and keep up international labor standards in global supply chains.

Founded in 1999, the FLA grew out of a task force convened by President Clinton to investigate and end child labor and other sweatshop practices. Difficult enough in the US, protecting labor is even more complex in the global economy, with its multiple sets of laws and layers of contractors and outsourcers. Policing the entire chain is impossible, so the FLA works instead to help all parties agree that protecting workers is the best way to do business, and agree on voluntary initiatives to get there.

Van Heerden and FLA create a safe space in which stakeholders representing different interest groups within a global supply chain can work together to resolve conflicts of rights and interests, filling in the governance gap. Van Heerden's newest initiative: the Institute for Social and Environmental Responsibility, which will conduct research and convene multi-stakeholder forums on corporate responsibility.

"The gold standard, I think, is the Fair Labor Association. It leads the way ... because its Secretariat is encouraged and even mandated to cast a critical eye on performance and to recommend practical innovations."

John Ruggie, UN Special Representative on Business and Human Rights

Inside Job: A Documentary by Charles Ferguson

2010-11-12T01:30:00.000-08:00

A brilliant new (dramatic) documentary from Academy Award® nominated filmmaker, Charles Ferguson ("No End In Sight"). Inside Job is the first film to expose the shocking truth behind the economic crisis of 2008. The global financial meltdown, at a cost of over $20 trillion, resulted in millions of people losing their homes and jobs. Through extensive research and interviews with major financial insiders, politicians and journalists, Inside Job traces the rise of a rogue industry and unveils the corrosive relationships which have corrupted politics, regulation and academia. Enjoy:)

Crisis of Capitalism by David Harvey

2010-11-09T13:29:00.000-08:00

David Harvey, the British-born geographer and Professor of Anthropology, spoke at the Royal Society for the encouragement of Arts, Manufactures and Commerce (RSA) in London recently on the Crises of Capitalism. The RSA, in turn, produced this short animated feature.

Dr. Harvey, who is perhaps best known for his critique of neo-liberalism, remains one of the leading exponents of Marxist socio-economic thought. Having said this listen to his brief 11 minute lecture and see if there is anything with which you can disagree. Dr. Harvey is currently on a lecture tour for his Marxist critique of both the global financial crisis and the narratives told about it.

The principal question that he addresses is it time to look beyond capitalism towards a new social order that would allow us to live within a system that could be responsible, just and humane?

FRONTLINE: God In America

2010-10-28T14:20:00.000-07:00

Watch the full episode. See more FRONTLINE.

"The American story cannot be fully understood without understanding the country's religious history," says series executive producer Michael Sullivan. "By examining that history, God in America will offer viewers a fresh, revealing and challenging portrait of the country."

As God in America unfolds, it reveals the deep roots of American religious identity in the universal quest for liberty and individualism -- ideas that played out in the unlikely political union between Thomas Jefferson and defiant Baptists to oppose the established church in Virginia and that were later embraced by free-wheeling Methodists and maverick Presbyterians. Catholic and Jewish immigrants battled for religious liberty and expanded its meaning. In their quest for social reform, movements as different as civil rights and the religious right found authority and energy in their religious faith. The fight to define religious liberty fueled struggles between America's secular and religious cultures on issues from evolution to school prayer, and American individualism and the country's experiment in religious liberty were the engine that made America the most religiously diverse nation on earth.

The Republican Corporate Power Grab

2010-09-18T12:14:00.000-07:00

Back in January, in my State of the Union Address, I warned of the danger posed by a Supreme Court ruling called Citizens United. This decision overturned decades of law and precedent. It gave the special interests the power to spend without limit – and without public disclosure – to run ads in order to influence elections.

Now, as an election approaches, it’s not just a theory. We can see for ourselves how destructive to our democracy this can become. We see it in the flood of deceptive attack ads sponsored by special interests using front groups with misleading names. We don’t know who’s behind these ads or who’s paying for them. Even foreign-controlled corporations seeking to influence our democracy are able to spend freely in order to swing an election toward a candidate they prefer.

We’ve tried to fix this with a new law – one that would simply require that you say who you are and who’s paying for your ad. This way, voters are able to make an informed judgment about a group’s motivations. Anyone running these ads would have to stand by their claims. And foreign-controlled corporations would be restricted from spending money to influence elections, just as they were before the Supreme Court opened up this loophole.

This is common sense. In fact, this is the kind of proposal that Democrats and Republicans have agreed on for decades. Yet, the Republican leaders in Congress have so far said “no.” They’ve blocked this bill from even coming up for a vote in the Senate. It’s politics at its worst. But it’s not hard to understand why.

Over the past two years, we have fought back against the entrenched special interests – weakening their hold on the levers of power in Washington. We have taken a stand against the worst abuses of the financial industry and health insurance companies. We’ve rolled back tax breaks for companies that ship jobs overseas. And we’ve restored enforcement of common sense rules to protect clean air and clean water. We have refused to go along with business as usual.

Now, the special interests want to take Congress back, and return to the days when lobbyists wrote the laws. And a partisan minority in Congress is hoping their defense of these special interests and the status quo will be rewarded with a flood of negative ads against their opponents. It’s a power grab, pure and simple. They’re hoping they can ride this wave of unchecked influence all the way to victory.

What is clear is that Congress has a responsibility to act. But the truth is, any law will come too late to prevent the damage that has already been done this election season. That is why, any time you see an attack ad by one of these shadowy groups, you should ask yourself, who is paying for this ad? Is it the health insurance lobby? The oil industry? The credit card companies?

But more than that, you can make sure that the tens of millions of dollars spent on misleading ads do not drown out your voice. Because no matter how many ads they run – no matter how many elections they try to buy – the power to determine the fate of this country doesn’t lie in their hands. It lies in yours. It’s up to all of us to defend that most basic American principle of a government of, by, and for the people. What’s at stake is not just an election. It’s our democracy itself.

Thank you.

Remarks of President Barack Obama

Saturday, September 18, 2010

The Crisis of Credit Visualized

2010-06-27T07:59:00.000-07:00

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

This a simple yet powerful video about the credit crisis, which makes very complex financial techniques and innovations easy to understand. For example, the video does a nice job on the concepts of securitization, CDOs, CDFs, asset backed securities, and maps out the relationship between economic actors. Enjoy:)

The Crisis of Credit Visualized distills the economic crisis into a short and simple story by giving it form. It also argues that designers have the ability to see a complex situation, then turn around and communicate it to others. By giving graphic form to the credit crisis, it becomes comprehensible. Not only do economic activities take shape, but new relationships can emerge between these shapes.

Worse Than War | Full-Length Documentary

2010-06-06T18:29:00.000-07:00

This is a brilliant documentary that attempts to understand a social phenomenon that is worse than war--genocide. "By the most fundamental measure -- the number of people killed -- the perpetrators of mass murder since the beginning of the twentieth century have taken the lives of more people than have died in military conflict. So genocide is worse than war," reiterates Goldhagen. "This is a little-known fact that should be a central focus of international politics, because once you know it, the world, international politics, and what we need to do all begin to look substantially different from how they are typically conceived."

WORSE THAN WAR documents Goldhagen¹s travels, teachings, and interviews in nine countries around the world, bringing viewers on an unprecedented journey of insight and analysis. In a film that is highly cinematic and evocative throughout, he speaks with victims, perpetrators, witnesses, politicians, diplomats, historians, humanitarian aid workers, and journalists, all with the purpose of explaining and understanding the critical features of genocide and how to finally stop it. More about the film--click here.

The Hidden Influences of Social Networks by Nicholas Christakis

2010-05-13T10:38:00.000-07:00

This is a brilliant talk on the role of social networks in our human lives. We're all embedded in vast social networks of friends, family, co-workers and more. Nicholas Christakis tracks how a wide variety of traits -- from happiness to obesity -- can spread from person to person, showing how your location in the network might impact your life in ways you don't even know.

Why you should listen to him:

People aren't merely social animals in the usual sense, for we don't just live in groups. We live in networks -- and we have done so ever since we emerged from the African savannah. Via intricately branching paths tracing out cascading family connections, friendship ties, and work relationships, we are interconnected to hundreds or thousands of specific people, most of whom we do not know. We affect them and they affect us.

Nicholas Christakis' work examines the biological, psychological, sociological, and mathematical rules that govern how we form these social networks, and the rules that govern how they shape our lives. His work shows how phenomena as diverse as obesity, smoking, emotions, ideas, germs, and altruism can spread through our social ties, and how genes can partially underlie our creation of social ties to begin with. His work also sheds light on how we might take advantage of an understanding of social networks to make the world a better place. For more on his work click here.

NOVA: Mind Over Money

2010-05-06T04:58:00.000-07:00

In the aftermath of the worst financial crisis since the Great Depression, NOVA presents "Mind Over Money"—an entertaining and penetrating exploration of why mainstream economists failed to predict the crash of 2008 and why we so often make irrational financial decisions. It's a show that reveals how our emotions interfere with our decision-making and explores controversial new arguments about the world of finance. Before the current crash, most Wall Street analysts believed that markets are "efficient"—that investors are reasonable and always operate in their own economic self-interest. Most of the time, these assumptions of classical economics work well enough. But in extreme situations, people panic and conventional theories collapse. In the face of the recent crash, can a new science that aims to incorporate human psychology into finance—behavioral economics—do better?

"Mind Over Money" features some of this new field's most compelling experiments. We'll see how the brains and bodies of Wall Street traders respond as they buy and sell stocks. We'll watch as an ingenious experiment reveals how an excessive number of spending choices can overwhelm consumers' ability to make rational decisions. Through these entertaining real-life experiments, NOVA will show how mood, decision-making, and economic activity are all tightly interwoven. By delivering unexpected insights from leading analysts and powerful experiments, "Mind Over Money" exposes the mysterious and surprising nature of two of the most powerful forces on our planet: the human mind and money. View full video here: CLICK

Debate: Understanding Palestinian Politics

2010-04-04T04:30:00.000-07:00

Many in the Western media present Palestinian politics as a primitive, suicide-bombing expression of anti-Israeli anger. But nothing could be further from the truth. Watch a long-form debate between the two largest political factions, Fatah and Hamas, as they discuss reconciliation and the future of resistance.

FRONTLINE: The Quake

2010-03-31T17:49:00.000-07:00

On Jan. 12, 2010, one of the most devastating earthquakes in recorded history leveled the Haitian capital, Port-au-Prince. Those responsible for handling the catastrophe, including the Haitian government and the United Nations, were among the victims. FRONTLINE correspondent Martin Smith bears witness to the scale of the disaster and takes viewers on a searing and intimate journey into the camps, hospitals and broken neighborhoods of Port-au-Prince. Featuring never-before-seen footage of the moments after the earthquake and interviews with top officials from Port-au-Prince to Washington, The Quake ultimately asks, how will the world respond?

"Beyond immediate relief efforts lies a harder task," says FRONTLINE's Smith. "The world has to decide whether to simply patch up Haiti now or to take on the far more ambitious goal of building a functional Haitian state."

The Quake explores the recent history of aid efforts in Haiti and the prospects for real change, and draws on interviews with, among others, former President Bill Clinton, special envoy to Haiti; Secretary of State Hillary Rodham Clinton; and Dr. Paul Farmer, deputy special envoy to Haiti and co-founder of Partners in Health.

Haiti has more NGOs per capita than any other country in the world. For years, foreign assistance bypassed the Haitian government, leaving it weak and vulnerable. The Quake examines how, this time, things might be done differently.

"This is an opportunity to rethink how aid works and how we, the most powerful country in this part of the world, can work with our oldest neighbor," says Dr. Paul Farmer. "So I think all that possibility is built into this tragedy." Read more (click here).

The Story of Stuff

2010-03-30T19:13:00.000-07:00

The Story of Stuff is a 20-minute film that takes viewers on a provocative and eye-opening tour of the real costs of our consumer driven culture—from resource extraction to iPod incineration.

Annie Leonard, an activist who has spent the past 10 years traveling the globe fighting environmental threats, narrates the Story of Stuff, delivering a rapid-fire, often humorous and always engaging story about “all our stuff—where it comes from and where it goes when we throw it away.”

The video examines the real costs of extraction, production, distribution, consumption and disposal, and she isolates the moment in history where she says the trend of consumption mania began. The Story of Stuff examines how economic policies of the post-World War II era ushered in notions of “planned obsolescence” and “perceived obsolescence” —and how these notions are still driving much of the U.S. and global economies today. The inspiration for the film began as a personal musing over the question, “Where does all the stuff we buy come from, and where does it go when we throw it out?” The author traveled the world in pursuit of the answer to this seemingly innocent question, and what she found along the way were some very guilty participants and their unfortunate victims. Read more (click here).

Congratulations, America Passes Health Reform!

2010-03-30T18:59:00.000-07:00

This morning the President made it official: things are going to change quite a bit between Americans and their health insurance companies. The President signed health reform into law, with a package of fixes not far behind, and in the process created a future for the country in which Americans and small businesses are in control of their own health care, not the insurance industry.

The President explained what the signing was really about:

Today, I’m signing this reform bill into law on behalf of my mother, who argued with insurance companies even as she battled cancer in her final days.

I’m signing it for Ryan Smith, who’s here today. He runs a small business with five employees. He’s trying to do the right thing, paying half the cost of coverage for his workers. This bill will help him afford that coverage.

I’m signing it for 11-year-old Marcelas Owens, who’s also here. (Applause.) Marcelas lost his mom to an illness. And she didn’t have insurance and couldn’t afford the care that she needed. So in her memory he has told her story across America so that no other children have to go through what his family has experienced. (Applause.)

I’m signing it for Natoma Canfield. Natoma had to give up her health coverage after her rates were jacked up by more than 40 percent. She was terrified that an illness would mean she’d lose the house that her parents built, so she gave up her insurance. Now she’s lying in a hospital bed, as we speak, faced with just such an illness, praying that she can somehow afford to get well without insurance. Natoma’s family is here today because Natoma can’t be. And her sister Connie is here. Connie, stand up. (Applause.)

I’m signing this bill for all the leaders who took up this cause through the generations -- from Teddy Roosevelt to Franklin Roosevelt, from Harry Truman, to Lyndon Johnson, from Bill and Hillary Clinton, to one of the deans who’s been fighting this so long, John Dingell. (Applause.) To Senator Ted Kennedy. (Applause.) And it’s fitting that Ted’s widow, Vicki, is here -- it’s fitting that Teddy’s widow, Vicki, is here; and his niece Caroline; his son Patrick, whose vote helped make this reform a reality. (Applause.)

I remember seeing Ted walk through that door in a summit in this room a year ago -- one of his last public appearances. And it was hard for him to make it. But he was confident that we would do the right thing.

Our presence here today is remarkable and improbable. With all the punditry, all of the lobbying, all of the game-playing that passes for governing in Washington, it’s been easy at times to doubt our ability to do such a big thing, such a complicated thing; to wonder if there are limits to what we, as a people, can still achieve. It’s easy to succumb to the sense of cynicism about what’s possible in this country.

But today, we are affirming that essential truth -– a truth every generation is called to rediscover for itself –- that we are not a nation that scales back its aspirations. (Applause.) We are not a nation that falls prey to doubt or mistrust. We don't fall prey to fear. We are not a nation that does what’s easy. That’s not who we are. That’s not how we got here.

We are a nation that faces its challenges and accepts its responsibilities. We are a nation that does what is hard. What is necessary. What is right. Here, in this country, we shape our own destiny. That is what we do. That is who we are. That is what makes us the United States of America.

And we have now just enshrined, as soon as I sign this bill, the core principle that everybody should have some basic security when it comes to their health care. (Applause.) And it is an extraordinary achievement that has happened because of all of you and all the advocates all across the country.

So, thank you. Thank you. God bless you, and may God bless the United States. (Applause.) Thank you. Thank you. Read more (here).

Mr. President, Pass U.S. Healthcare

2010-03-14T06:18:00.000-07:00

Comprehensive health care reform can no longer wait. Rapidly escalating health care costs are crushing family, business, and government budgets. Employer-sponsored health insurance premiums have doubled in the last 9 years, a rate 3 times faster than cumulative wage increases. This forces families to sit around the kitchen table to make impossible choices between paying rent or paying health premiums. Given all that we spend on health care, American families should not be presented with that choice. The United States spent approximately $2.2 trillion on health care in 2007, or $7,421 per person – nearly twice the average of other developed nations. Americans spend more on health care than on housing or food. If rapid health cost growth persists, the Congressional Budget Office estimates that by 2025, one out of every four dollars in our national economy will be tied up in the health system. This growing burden will limit other investments and priorities that are needed to grow our economy. Rising health care costs also affect our economic competitiveness in the global economy, as American companies compete against companies in other countries that have dramatically lower health care costs.

The President has vowed that the health reform process will be different in his Administration – an open, inclusive, and transparent process where all ideas are encouraged and all parties work together to find a solution to the health care crisis. Working together with members of Congress, doctors and hospitals, businesses and unions, and other key health care stakeholders, the President is committed to making sure we finally enact comprehensive health care reform.

The Obama Administration believes that comprehensive health reform should:

Reduce long-term growth of health care costs for businesses and government
Protect families from bankruptcy or debt because of health care costs
Guarantee choice of doctors and health plans
Invest in prevention and wellness
Improve patient safety and quality of care
Assure affordable, quality health coverage for all Americans
Maintain coverage when you change or lose your job
End barriers to coverage for people with pre-existing medical conditions

Corporations Have First Amendment Rights?

2010-01-24T15:48:00.000-08:00

What did the Supreme Court decide in Citizens United? What does this mean for our Democracy? A sharply divided Supreme Court decided that the American people are powerless to stop corporations from using corporate funds to influence state and federal elections. The 5-4 decision ruled that the restrictions on corporate expenditures in elections contained in the federal Bipartisan Campaign Reform Act (known as BCRA or “McCain-Feingold”) violated the First Amendment protections of free speech.

The ruling dramatically expands the new “corporate rights” doctrine that has transformed the First Amendment in recent years, and exposes an already-corrupted political process to a new flow of billions of dollars of corporate money.

The result in Citizens United is radical. To accomplish this, the majority - - Chief Justice Roberts and Justices Scalia, Thomas, Kennedy and Alito - - had to overrule two previous cases where the Court ruled correctly that Congress and the States may try to keep corporate money out of politics. In the Citizens United case, the Court cast aside a 2003 decision, McConnell v. FEC, where the Court upheld the very provision it now ruled unconstitutional, and a 1990 decision, Austin v. Chamber of Commerce, where the Court had ruled that a Michigan law limiting corporate expenditures in elections did not violate the First Amendment.

The Court’s action dramatically dilutes the vote and the voice of every American who does not control a large corporate treasury. The decision unleashes billions of dollars in corporate money to dominate legislatures and elections.

Pretending that corporate wealth is “speech” beyond the ability of the American people to regulate will cost our democracy dearly. To illustrate the magnitude of the potential financial corruption of our elections, compare the amount of corporate money now available to influence elections to the level of fundraising before Citizens United, when corporate money in politics could be regulated. Corporate profits alone - - after taxes - - amounted to over $1.1 trillion in 2006. (Statistical Abstract of the United States 2008, Table 767). Under pre-Citizens United rules, the average House candidate in 2008 spent $1.3 million, and the average Senate candidate spent $3.1 million. (Center for Responsive Politics, Price of Admission, 2008).

Before Citizens United, it was undisputable that corporate influence distorted our political process. After Citizens United, with over a trillion dollars in corporate money available for misuse in elections, it is hard to dispute that the Court has broken our democracy. (read more)

Home: The 2009 Documentary

2009-12-21T08:08:00.000-08:00

This is one of the best documentaries I have ever seen--on visual, social, cultural, and political levels. The documentary chronicles the present day state of the Earth, its climate and how we as the dominant species have long-term repercussions on its future. A theme expressed throughout the documentary is that of linkage—how all organisms and the Earth are linked in a "delicate but crucial" natural balance with each other, and how no organism can be self-sufficient.

The first 15 minutes include footage of the beginning of the natural world, starting with single-celled algae developing at the edges of volcanic springs. By showing algae's essential role in the evolution of photosynthesis, it also explores the innumerable species of plants which all have their origins in this one-celled life form.

In the rest of the first hour of the film, the documentary takes on a more human-oriented focus, showing the agricultural revolution and its impacts, before moving on to talk about the harnessing of oil, leading to fire, industry, cities and inequality gaps like never before. It portrays the current predicament regarding cattle ranches, deforestation, food and water shortages, the use of non-renewable "fossil water", the over-quarrying crisis and the shortage of energy, namely electricity. Cities such as New York City, Las Vegas, Los Angeles, Shenzhen, Mumbai, Tokyo and Dubai are used as examples of the mismanagement and wastage of energy, water and food. The recession of marshlands and glaciers are shown in vast aerial shots of Antarctica, The North Pole and Africa, while mass emigration and refugee counts are shown currently and forecast in the event that these events remains unchanged.

It is at this point that the film begins to focus on global warming and the carbon crisis. Home shows how melting glaciers, rising sea levels and changing weather patterns are ravaging the people who have least to do with climate change, but also how it soon will affect rich populous areas.

Here, about three minutes of film is given to displaying harsh facts in large white text on a black background followed by a video representation of the fact. This is followed by a positive conclusion. The documentary shows the awful truths regarding our impact on the Earth, but also what we are now doing to combat and reverse it: including renewable energy, the creation of more and more national parks, international co-operation between various nations on environmental issues and the extra education and reform being had across the globe in response to the current problems facing the earth. To view the entire movie click here.

Sociology is a Martial Art

2009-11-11T08:47:00.000-08:00

" I often say sociology is a martial art, a means of self-defense. Basically, you use it to defend yourself, without having the right to use if for unfair attacks". Pierre Bourdieu

Pierre's Bourdieu's forty books and countless articles represent probably the most brilliant and fruitful renovation and application of social science in our era. The highly influential, at times controversial intellectual--a longtime Professor of Sociology at the College de France--passed away in January 2002.

A "committed" thinker in the vein of Foucault, his work is concerned with elucidating the processes of symbolic violence and cultural domination in various areas of social life. His most well known book, Distinction (1979), addressed these themes in an effort to overcome the opposition of objectivist (Marxist) and subjectivist (Weberian) theories of class.

In the late nineties he became something of a celebrity scholar, one of the world's most important academics actively associated with the anti-globalization movement. Bourdieu himself argued that scholars and writers could and should bring their specialized knowledge to bear on social and political issues. His powerful critiques of the neoliberal revolution were the natural outgrowth of a lifetime of research into economic, social and cultural class domination among peoples as disparate as Algerian peasants and French professors, and as expressed in everything from amateur photography to posture.

SOCIOLOGY IS A MARTIAL ART, a new documentary about Bourdieu's life, became an unexpected hit in France just prior to his death. Filmed over three years, director Pierre Carles' camera follows Bourdieu as he lectures, attends political rallies, travels, meets with his students, staff, and research team in Paris, and includes Bourdieu having a conversation with Günter Grass.

The film's very title stresses the degree of Bourdieu's political engagement. He took on the mantle of Emile Zola and Jean-Paul Sartre in French public life, slugging it out with politicians because he considered those lucky enough to have spent their lives studying the social world could not be indifferent to the struggle for justice.

"The finest documentary a social scientist could ever dream of...While discovering this fascinating man and his strong personality, we can understand how and why Bourdieu became the most famous French sociologist of the second half of the 20th century, and the most quoted social scientist on the Internet. [The film is] a vital documentary that should be part of every college or university library. It will be easily comprehensible to undergraduate students, and quite useful in various courses in social sciences."—International Sociology

A Journey Through the Global Criminal Underworld

2009-10-07T07:47:00.000-07:00

This is a great talk at the 2009 TED conference by the journalist Misha Glenny. Glenny spent several years in a courageous investigation of organized crime networks worldwide, which have grown to an estimated 15% of the global economy. From the Russian mafia, to giant drug cartels, his sources include not just intelligence and law enforcement officials but criminal insiders.

The talk is based on his book McMafia. In the book, former BBC World correspondent Glenny (The Balkans, 1804–1999) presents a riveting and chilling journey through the myriad criminal syndicates flourishing in our increasingly globalized world, which make up as much as 20% of global GNP. Tracing the growth of organized crime—ranging from the burgeoning sex trade in volatile, postcommunist Bulgaria to elaborate Internet frauds in Nigeria—Glenny expertly combines interviews with key players, economic studies and sociological analysis. He argues that the chaos and political upheaval following the demise of communism in Eastern Europe, along with increasing demand in the West and the easy flow of money and people provided the perfect opportunity for organized crime to gain a foothold on the dark side of the globalizing economy. Glenny's achievement is in introducing readers to the less familiar aspects of global crime, from Kazakhstan's caviar mafia to the flourishing marijuana trade in British Columbia. Consequently, his interview subjects are equally varied: sex slaves in Tel Aviv, a co-conspirator in the deadly 1993 Mumbai bombings and top Washington policy makers share the pages. Readers yearning for a deeper understanding of the real-life, international counterparts to The Sopranos need look no further than Glenny's engrossing study.

Chicago Schooled

2009-10-07T07:34:00.000-07:00

The visible hand of the recession has revitalized critics of the Chicago School of Economics. This intellectual school has led U.S. domestic and foreign policy for the last 3 decades. Will the current economic shock force the Chicago boys to change or adapt? Or will they simply keep prescribing to the same models? Is the Chicago School to blame for the economic disaster? According to Stiglitz, the 2001 Nobel lareate in economics, “The Chicago School bears the blame for providing a seeming intellectual foundation for the idea that markets are self-adjusting and the best role for government is to do nothing.” Enjoy the article and let me know if you have any comments or concerns.

By Michael Fitzgerald--On a sunny day this spring, more than 1,000 people streamed into the Sheraton near the Gleacher Center for a conference on the Future of Markets. Its keynote panel, headlined by Nobel laureate Gary S. Becker, AM’53, PhD’55, featured six Chicago economists with differing viewpoints. The stock market was in the early part of a rally that would yield its best quarter since 1998. Stock-market turnarounds usually signal better times coming, but in an economy contracting 6 percent, better was relative.

So the rally didn’t change the feeling among the free-market enthusiasts at the University of Chicago Booth School of Business management conference that market economics was on shaky ground: most of the financial industry, they felt, had been nationalized in all but name. Two of the three U.S. automakers looked like they would follow suit. The government was capping pay in the financial services. What in the name of the Chicago School was going on? (read more)

The Cycle of Human Consumption

2009-08-20T12:19:00.000-07:00

I came across this critical look at the cycle of human consumption in our modern economic system and loved it. Please take the time to watch the entire video--around 20 minutes. From its extraction through sale, use and disposal, all the stuff in our lives affects communities at home and abroad, yet most of this is hidden from view. The Story of Stuff is a, fast-paced, fact-filled look at the underside of our production and consumption patterns. The Story of Stuff exposes the connections between a huge number of environmental and social issues, and calls us together to create a more sustainable and just world. It'll teach you something, it'll make you laugh, and it just may change the way you look at all the stuff in your life forever.--by Annie Leonard

How Different Groups Spend Their Day

2009-08-02T07:22:00.000-07:00

This is a great interactive graph that breaks down how those in American society spend--or value--their time. The American Time Use Survey asks thousands of American residents to recall every minute of a day. Here is how people over age 15 spent their time in 2008.

The related NYT article points out that, on an average weekday, the unemployed sleep an hour more than their employed peers. They tidy the house, do laundry and yard work for more than two hours, twice as much as the employed. The unemployed also spend an extra hour in the classroom and an additional 70 minutes in front of the television.

The annual time use survey, which asks thousands of residents to recall every minute of a single day, is important to economists trying to value the time spent by those not bringing home a paycheck.

"If all we were doing is substituting production at home for production in the marketplace," said Daniel S. Hamermesh, an economics professor at the University of Texas at Austin, "then maybe unemployment wouldn't be so bad."

Alain de Botton: A Kinder, Gentler Philosophy of Success

2009-07-28T16:04:00.000-07:00

Alain de Botton examines our ideas of success and failure -- and questions the assumptions underlying these two judgments. Is success always earned? Is failure? He makes an eloquent, witty case to move beyond the typical view of these notions to find true pleasure in our work. In particular, it is important to face the subtle complexities of modern society that are holding us back--anxiety in modern society, competitive society, individualistic society, and the lack of a central component. I hope you enjoy! http://www.ted.com

Ghana: Digital Dumping Ground

2009-07-01T19:57:00.000-07:00

This is a shocking investigative report by FRONTLINE! As this month's digital conversion makes tens of millions of analog TVs obsolete, and Americans continue to trash computers and cell phones at alarming rates, FRONTLINE/WORLD presents a global investigation into the dirty secret of the digital age--the dumping and dangerous recycling of hundreds of millions of pounds of electronic waste across the developing world. The report also uncovers another byproduct of our disposable culture--data fraud, as thousands of old hard drives are finding their way into criminal hands.

On the outskirts of Ghana's biggest city sits a smoldering wasteland, a slum carved into the banks of the Korle Lagoon, one of the most polluted bodies of water on earth. The locals call it Sodom and Gomorrah.

Correspondent Peter Klein and a group of graduate journalism students from the University of British Columbia have come here as part of a global investigation -- to track a shadowy industry that's causing big problems here and around the world.

Their guide is a 13-year-old boy named Alex. He shows them his home, a small room in a mass of shanty dwellings, and offers to take them across a dead river to a notorious area called Agbogbloshie.

Agbogbloshie has become one of the world's digital dumping grounds, where the West's electronic waste, or e-waste, piles up -- hundreds of millions of tons of it each year.

The team meets with Mike Anane, a local journalist who has been writing about the boys at this e-waste dump.

“Life is really difficult; they eat here, surrounded by e-waste,” Anane tells them. “They basically are here to earn a living. But you can imagine the health implications.”

Some of the boys burn old foam on top of computers to melt away the plastic, leaving behind scraps of copper and iron they can collect to sell. The younger boys use magnets from old speakers to gather up the smaller pieces left behind at the burn site. (more)

The Science of Economic Bubbles and Busts

2009-06-22T12:31:00.000-07:00

It is great to see the new trend in economics--behavioral economics, finance economics, and neuroeconomics--away from classical economic theory to an investigation of the role of psychology in making economic decisions. What is next? An investigation of the role of socal structure and cultural schemes in economic markets:) I hope you enjoy the following article and I look forward to any reaction.

Gary Stix--Even people who do not use illicit drugs or get shot in the head have to contend with the reality that some of the decisions cooked up by the brain’s frontal lobes may lead them astray. A specific site within the prefrontal cortex, the ventromedial prefrontal cortex (VMPFC) is, in fact, among the suspects in the colossal global economic implosion that has recently rocked the globe.

The VMPFC turns out to be a central location for what economists call “money illusion.” The illusion occurs when people ignore obvious information about the distorting effects of inflation on a purchase and, in an irrational leap, decide that the thing is worth much more than it really is. Money illusion may convince prospective buyers that a house is always a great investment because of the misbegotten perception that prices inexorably rise. Robert J. Shiller, a professor of economics at Yale University, contends that the faulty logic of money illusion contributed to the housing bubble: “Since people are likely to remember the price they paid for their house from many years ago but remember few other prices from then, they have the mistaken impression that home prices have gone up more than other prices, giving a mistakenly exaggerated impression of the investment potential of houses.”

Economists have fought for decades about whether money illusion and, more generally, the influence of irrationality on economic transactions are themselves illusory. Milton Friedman, the renowned monetary theorist, postulated that consumers and employers remain undeluded and, as rational beings, take inflation into account when making purchases or paying wages. In other words, they are good judges of the real value of a good.

But the ideas of behavioral economists, who study the role of psychology in making economic decisions, are gaining increasing attention today, as scientists of many stripes struggle to understand why the world economy fell so hard and fast. And their ideas are bolstered by the brain scientists who make inside-the-skull snapshots of the VMPFC and other brain areas. Notably, an experiment reported in March in the Proceedings of the National Academy of Sciences USA by researchers at the University of Bonn in Germany and the California Institute of Technology demonstrated that some of the brain’s decision-making circuitry showed signs of money illusion on images from a brain scanner. A part of the VMPFC lit up in subjects who encountered a larger amount of money, even if the relative buying power of that sum had not changed, because prices had increased as well. (more)

If you like this, then here are a few books you should read:

Shiller, Robert. 2008. The Subprime Solution: How Today's Global Financial Crisis Happened and What to DO about It. Princeton University Press.

Akerlof, George A., and Robert Shiller. 2009. Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism. Princeton University Press.

Thaler, Richard H., and Cass Sunstein. 2009. Nudge: Improving Decisions about Health, Wealth and Happiness. Penguin Books.

Ariely, Dan. 2008. Predictably Irrational: The Hidden Forces That Shape Our Decisions. HarperCollins.

The Changing Role of Technology in Social Movements

2009-06-21T03:48:00.000-07:00

The recent turn of events in Iran have brought to the forefront the changing role of technology in social and political movements. There are those who argue that new media technology allows for the possibility of significant political resistance--and potential revolution. Others say that it is epiphenomenal to the larger organic social movement. However, I believe that we should understand the pros and cons of these new technologies and their potential role in the geo-political landscape. With this in mind, here is an interesting article by Noam Cohen spelling out the strengths and weaknesses of the micro blogging service called twitter.

Political revolutions are often closely linked to communication tools. The American Revolution wasn’t caused by the proliferation of pamphlets, written to whip colonists into a frenzy against the British. But it sure helped.

Social networking, a distinctly 21st-century phenomenon, has already been credited with aiding protests from the Republic of Georgia to Egypt to Iceland. And Twitter, the newest social-networking tool, has been identified with two mass protests in a matter of months — in Moldova in April and in Iran last week, when hundreds of thousands of people took to the streets to oppose the official results of the presidential election.

But does the label Twitter Revolution, which has been slapped on the two most recent events, oversell the technology? Skeptics note that only a small number of people used Twitter to organize protests in Iran and that other means — individual text messaging, old-fashioned word of mouth and Farsi-language Web sites — were more influential. But Twitter did prove to be a crucial tool in the cat-and-mouse game between the opposition and the government over enlisting world opinion. As the Iranian government restricts journalists’ access to events, the protesters have used Twitter’s agile communication system to direct the public and journalists alike to video, photographs and written material related to the protests. (As has become established custom on Twitter, users have agreed to mark, or “tag,” each of their tweets with the same bit of type — #IranElection — so that users can find them more easily). So maybe there was no Twitter Revolution. But over the last week, we learned a few lessons about the strengths and weaknesses of a technology that is less than three years old and is experiencing explosive growth. (more)

How Pharma and Insurance Intend to Kill the Public Option

2009-06-11T18:22:00.000-07:00

I am cautiously optimistic about the up coming battle for a public healthcare option. I have been scanning the cable news channels, the dominant newspapers, and the blogs. They all point out that there is an intensifying debate in Washington and things are going to get worse. Leading the opposition, ironically, is the American Medical Association. The AMA is letting Congress know that it will oppose creation of a government-sponsored insurance plan, which President Obama and many other Democrats see as an essential element of legislation to remake the health care system. Additionally, as Reich points out, the opposition is coming from Big Pharma and Big Insurance. Enjoy the article below and let your representative and senators know you want a public option without conditions.

By Robert Reich--

I'ved poked around Washington today, talking with friends on the Hill who confirm the worst: Big Pharma and Big Insurance are gaining ground in their campaign to kill the public option in the emerging health care bill.

You know why, of course. They don't want a public option that would compete with private insurers and use its bargaining power to negotiate better rates with drug companies. They argue that would be unfair. Unfair? Unfair to give more people better health care at lower cost? To Pharma and Insurance, "unfair" is anything that undermines their profits.

So they're pulling out all the stops -- pushing Democrats and a handful of so-called "moderate" Republicans who say they're in favor of a public option to support legislation that would include it in name only. One of their proposals is to break up the public option into small pieces under multiple regional third-party administrators that would have little or no bargaining leverage. A second is to give the public option to the states where Big Pharma and Big Insurance can easily buy off legislators and officials, as they've been doing for years. A third is bind the public plan to the same rules private insurers have already wangled, thereby making it impossible for the public plan to put competitive pressure on the insurers...

This is it, folks. The concrete is being mixed and about to be poured. And after it's poured and hardens, universal health care will be with us for years to come in whatever form it now takes. Let your representative and senators know you want a public option without conditions or triggers -- one that gives the public insurer bargaining leverage over drug companies, and pushes insurers to do what they've promised to do. Don't wait until the concrete hardens and we've lost this battle. (more)

Poking Holes in a Theory on Markets

2009-06-10T18:58:00.000-07:00

Having spent many years debating my economist friends from the University of Chicago, this article gives a nice overview of the problems with one of the dominant economic theories of our time--efficient market hypothesis. I hope you enjoy and I look forward to any responses.

For some months now, Jeremy Grantham, a respected market strategist with GMO, an institutional asset management company, has been railing about — of all things — the efficient market hypothesis.

You know what the efficient market hypothesis is, don’t you? It’s a theory that grew out of the University of Chicago’s finance department, and long held sway in academic circles, that the stock market can’t be beaten on any consistent basis because all available information is already built into stock prices. The stock market, in other words, is rational.

In the last decade, the efficient market hypothesis, which had been near dogma since the early 1970s, has taken some serious body blows. First came the rise of the behavioral economists, like Richard H. Thaler at the University of Chicago and Robert J. Shiller at Yale, who convincingly showed that mass psychology, herd behavior and the like can have an enormous effect on stock prices — meaning that perhaps the market isn’t quite so efficient after all. Then came a bit more tangible proof: the dot-com bubble, quickly followed by the housing bubble. Quod erat demonstrandum.

These days, you would be hard-pressed to find anybody, even on the University of Chicago campus, who would claim that the market is perfectly efficient. Yet Mr. Grantham, who was a critic of the efficient market hypothesis long before such criticism was in vogue, has hardly been mollified by its decline. In his view, it did a lot of damage in its heyday — damage that we’re still dealing with. How much damage? In Mr. Grantham’s view, the efficient market hypothesis is more or less directly responsible for the financial crisis. (more)

President Obama’s Speech to the Muslim World

2009-06-04T05:59:00.000-07:00

This was a wonderful speech by President Obama yesterday in Cairo, Egypt, outlining his personal commitment to engagement with the Muslim world, based upon mutual interests and mutual respect, and discusses how the United States and Muslim communities around the world can bridge some of the differences that have divided them. June 4, 2009. I hope you enjoy!

Financial Careers Come at a Cost to Families

2009-05-27T08:01:00.001-07:00

Why do we choose the careers we do? How often do we assess the larger implications of our career decisions on our life and family? What are the specific factors that we decide on--money, status, quality of life, and time off, etc.? I am often surrounded by students in the academy struggling to choose a career. And many times, I am taken back by the small amount of time given to these questions. I understand that our decision making process is short sighted and can only take into account what we know at the time. However, it is crucial that more time is spent thinking about what we want and what will make our lives better--in the long run. Enjoy the article and I look forward to any comments.

The big influx of highly educated workers into finance in the last two decades has been the subject of some national hand-wringing lately. President Obama, college presidents and economists have all worried aloud that Wall Street has hoarded human resources that might otherwise have gone to science, education, medicine or other fields.

Now, new research is suggesting that the shift also brought another cost — a cost that fell mainly on the people, especially women, who took jobs in finance. Among elite white-collar fields, finance appears to be uniquely difficult for anyone trying to combine work and family.

Finance, on this score, is worse than law and worse than academia. It is far worse than medicine, which emerges from the research as the highly paid profession with the most flexibility. Near finance at the bottom of the list is consulting, another field that became more popular in the last two decades.

The research, by Claudia Goldin and Lawrence Katz of Harvard, answers a question that college students, for all their careful career planning, rarely consider: which jobs offer the best chance at balancing work and family life? A decade or two after college, however, that question often comes to dominate conversations among friends and between spouses. (more)

Are We in Control of Our Decisions?

2009-05-22T18:40:00.000-07:00

Here is a great talk by the behavioral economist Dan Ariely, the author of Predictably Irrational, who uses classic visual illusions and his own counterintuitive (and sometimes shocking) research findings to show how we're not as rational as we think when we make decisions.

By Ariely

Why are so many smart people convinced that irrationality disappears when it comes to important decisions about money. Why do they assume that institutions, competition, and market mechanisms can inoculate us against mistakes? If competition was sufﬁcient to overcome irrationality, wouldn’t that eliminate brawls in sporting competitions, or the irrational self-destructive behaviors of professional athletes? What is it about circumstances involving money and competition that might make people more rational? Do the defenders of rationality believe that we have different brain mechanisms for making small versus large decisions and yet another yet another for dealing with the stock market? Or do they simply have a bone-deep belief that the invisible hand and the wisdom of the markets guarantee optimal behavior under all conditions?

As a social scientist, I’m not sure which model describing human behavior in markets-rational economics, behavioral economics, or something else-is best, and I wish we could set up a series of experiments to ﬁgure this out. Unfortunately, since it is basically impossible to do any real experiments with the stock market, I’ve been left befuddled by the deep conviction in the rationality of the market. And I’ve wondered if we really want to build our ﬁnancial institutions, our legal system, and our policies on such a foundation. (more)

NYT: Rich Man's Burden

2009-05-13T19:47:00.000-07:00

This article points out an interesting trend in the American labor market, class relations, and inequality. FOR many American professionals, the Labor Day holiday yesterday probably wasn’t as relaxing as they had hoped. They didn’t go into the office, but they were still working. As much as they may truly have wanted to focus on time with their children, their spouses or their friends, they were unable to turn off their BlackBerrys, their laptops and their work-oriented brains.

Americans working on holidays is not a new phenomenon: we have long been an industrious folk. A hundred years ago the German sociologist Max Weber described what he called the Protestant ethic. This was a religious imperative to work hard, spend little and find a calling in order to achieve spiritual assurance that one is among the saved.

Weber claimed that this ethic could be found in its most highly evolved form in the United States, where it was embodied by aphorisms like Ben Franklin’s “Industry gives comfort and plenty and respect.” The Protestant ethic is so deeply engrained in our culture you don’t need to be Protestant to embody it. You don’t even need to be religious.

But what’s different from Weber’s era is that it is now the rich who are the most stressed out and the most likely to be working the most. Perhaps for the first time since we’ve kept track of such things, higher-income folks work more hours than lower-wage earners do. Since 1980, the number of men in the bottom fifth of the income ladder who work long hours (over 49 hours per week) has dropped by half, according to a study by the economists Peter Kuhn and Fernando Lozano. But among the top fifth of earners, long weeks have increased by 80 percent.

This is a stunning moment in economic history: At one time we worked hard so that someday we (or our children) wouldn’t have to. Today, the more we earn, the more we work, since the opportunity cost of not working is all the greater (and since the higher we go, the more relatively deprived we feel)...read more.

The Torturers’ Manifesto

2009-04-19T18:00:00.000-07:00

This is an eye opening article by the NYT's editorial board. I completely agree that until Americans and their leaders fully understand the rules the Bush administration concocted to justify such abuses — and who set the rules and who approved them — there is no hope of fixing a profoundly broken system of justice and ensuring that that these acts are never repeated.

To read the four newly released memos on prisoner interrogation written by George W. Bush’s Justice Department is to take a journey into depravity.

Their language is the precise bureaucratese favored by dungeon masters throughout history. They detail how to fashion a collar for slamming a prisoner against a wall, exactly how many days he can be kept without sleep (11), and what, specifically, he should be told before being locked in a box with an insect — all to stop just short of having a jury decide that these acts violate the laws against torture and abusive treatment of prisoners.

In one of the more nauseating passages, Jay Bybee, then an assistant attorney general and now a federal judge, wrote admiringly about a contraption for waterboarding that would lurch a prisoner upright if he stopped breathing while water was poured over his face. He praised the Central Intelligence Agency for having doctors ready to perform an emergency tracheotomy if necessary.

These memos are not an honest attempt to set the legal limits on interrogations, which was the authors’ statutory obligation. They were written to provide legal immunity for acts that are clearly illegal, immoral and a violation of this country’s most basic values.

It sounds like the plot of a mob film, except the lawyers asking how much their clients can get away with are from the C.I.A. and the lawyers coaching them on how to commit the abuses are from the Justice Department. And it all played out with the blessing of the defense secretary, the attorney general, the intelligence director and, most likely, President Bush and Vice President Dick Cheney. To read more, click here.

Obama's Weekly Address--April 18th

2009-04-19T06:17:00.000-07:00

It is essential to our democracy that we keep up with the recent changes taking place in Washington and to make sure our leaders are following through with what they were elected for--health, education, diplomacy, moral leadership, and a sustainable economic agenda, etc.. In line with that goal, here is Obama's weekly address. With the process of going through the budget line by line in full swing, the President uses his Weekly Address to give some examples, big and small, of how the Administration is working to cut costs and eliminate waste. The President also announces two new key appointments, Jeffrey Zients as Chief Performance Officer and Aneesh Chopra as Chief Technology Officer, who will be invaluable in streamlining the way government functions through efficiency and innovation. April 18, 2009. For more information, click here.

FRONTLINE: Sick Around America

2009-04-05T05:08:00.001-07:00

Last night I watched an investigative documentary by FRONTLINE on the current state of the American health care system. I was completely shocked and saddened to find out that America is neglecting its citizens and treating them as if they are a liability. A few questions that come to mind--Where has the Federal Government been for so long? How can the leaders running our country stand for this? Are they so blinded by lobbyists, self interests, free markets, and a philosophy of self reliance? Why aren't the poor and middle class coming together to form a movement for change? Now that change has arrived with the Obama administration, is it possible for America to finally get a comprehensive and affordable health care system for all Americans? This report suggests some helpful solutions and opens our eyes to the difficulties we face ahead. Additionally, FRONTLINE has produced another report called Sick Around the World--for those interested in solutions other developed countries in the world have found. Enjoy and I look forward to any comments or debate.

Statistics on American Health Care System-
How under-65 Americans are insured:
* + 60.9% -- get health insurance through their employer
* + 11.8% -- through Medicaid/SCHIP
* + 5.5% -- buy private health coverage (self-employed; those who retire at 55 and won't be working for the next 10 years until qualifying for Medicare; those between jobs/coverage due to divorce, being widowed, laid off, etc.)
* + 17.2% -- have no insurance
* + 1.3% -- covered through Medicare (65 or older; some disabled people under age 65; or all who have end-stage renal disease)
* + 1.2% -- covered through the military

America's various government health care systems:
* + one for people over 65
* + one for veterans
* + one for active military
* + one for members of Congress
* + one for Native Americans
* + one for under-16 people with 120 percent of poverty income
* + one for people with 200 percent of poverty income

Sick Around America

As the worsening economy leads to massive job losses—potentially forcing millions more Americans to go without health insurance—FRONTLINE travels the country examining the nation's broken health care system and explores the need for a fundamental overhaul. Veteran FRONTLINE producer Jon Palfreman dissects the private insurance system, a system that not only fails to cover 46 million Americans but also leaves millions more underinsured and at risk of bankruptcy.

At its best, American health care can be very good. For Microsoft employee Mark Murray and his wife, Melinda, their employee health plan paid for eight years of fertility treatments and covered all the costs of a very complicated pregnancy. "If it wasn't for our health insurance," Murray says, "we wouldn't have a baby boy right now." The Murrays' medical bills totaled between $500,000 and $1 million, and their plan covered every penny.

But beyond large, high-wage employers like Microsoft, FRONTLINE learns that available, affordable, adequate insurance is becoming hard to find. Small businesses face a very bleak outlook for finding and keeping coverage. Coverage is becoming more expensive and less comprehensive, with high deductibles, co-pays and coverage limits. Georgetown University Research Professor Karen Pollitz explains that for many people, the current system is "like having an airbag in your car that's made out of tissue paper: I'm so glad that it's there, but if I ever get in a crash, it's not going to protect me."

Outside of employer-based health care plans, matters are even worse. Americans seeking insurance in the individual market must submit to "medical underwriting," and if they have a pre-existing condition, they will likely be denied. Kaiser Permanente Chairman and CEO George Halverson says frankly: "I could not get insurance. I've had heart surgery, and so I am completely uninsurable in the private market. So it's important that I keep my job."

Around the world, other developed democracies offer universal health care, requiring insurance companies to cover everyone. People are mandated to buy it; insurance for the poor is subsidized; and governments control prices by setting the cost of everything from doctors' salaries and hospital rooms to drugs and MRIs. But efforts to implement similar policies in the U.S. have proven unsuccessful. In 2006, Massachusetts implemented reforms mandating everyone be covered by health insurance, but there are still problems of affordability. FRONTLINE profiles the Abramses, a Massachusetts family of four earning $63,000 annually, who found that although they were too prosperous to receive a health care subsidy, they could not afford to buy a health care insurance policy at around $12,000 a year. "What we're finding out in Massachusetts," says veteran insurance industry executive and consultant Robert Laszewski, "you can mandate that people have health insurance, but if it costs more than they can afford, it doesn't matter."

As President Obama launches his plan for reforming health care, Kaiser Family Foundation President Drew Altman tells FRONTLINE: "This is the first big opportunity for health reform since ... [the] early 1990s. And a question is again, pointedly, whether we will blow the opportunity again this time or [whether] we will actually get it all done or get something significant done." But consultant Laszewski wonders if Americans have the will to make it happen. "Every doctor I meet says he's underpaid. I've yet to meet a hospital executive who thinks he or she can operate on less. I have yet to meet a patient who is willing to sacrifice care. So we have this $2.2 trillion system, and I haven't met anybody in any of the stakeholders that's willing to take less. And until we're willing to have that conversation, we're just sort of nibbling around the edges."

The Quiet Coup - The Atlantic (May 2009)

2009-03-30T07:06:00.001-07:00

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund and MIT professor, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. This disturbing similarity between the U.S. and emerging markets centers around the elite business interests—financiers, in the case of the U.S.—that played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

The Quiet Coup
by Simon Johnson

One thing you learn rather quickly when working at the International Monetary Fund is that no one is ever very happy to see you. Typically, your “clients” come in only after private capital has abandoned them, after regional trading-bloc partners have been unable to throw a strong enough lifeline, after last-ditch attempts to borrow from powerful friends like China or the European Union have fallen through. You’re never at the top of anyone’s dance card.

The reason, of course, is that the IMF specializes in telling its clients what they don’t want to hear. I should know; I pressed painful changes on many foreign officials during my time there as chief economist in 2007 and 2008. And I felt the effects of IMF pressure, at least indirectly, when I worked with governments in Eastern Europe as they struggled after 1989, and with the private sector in Asia and Latin America during the crises of the late 1990s and early 2000s. Over that time, from every vantage point, I saw firsthand the steady flow of officials—from Ukraine, Russia, Thailand, Indonesia, South Korea, and elsewhere—trudging to the fund when circumstances were dire and all else had failed.

Every crisis is different, of course. Ukraine faced hyperinflation in 1994; Russia desperately needed help when its short-term-debt rollover scheme exploded in the summer of 1998; the Indonesian rupiah plunged in 1997, nearly leveling the corporate economy; that same year, South Korea’s 30-year economic miracle ground to a halt when foreign banks suddenly refused to extend new credit.

But I must tell you, to IMF officials, all of these crises looked depressingly similar. Each country, of course, needed a loan, but more than that, each needed to make big changes so that the loan could really work. Almost always, countries in crisis need to learn to live within their means after a period of excess—exports must be increased, and imports cut—and the goal is to do this without the most horrible of recessions. Naturally, the fund’s economists spend time figuring out the policies—budget, money supply, and the like—that make sense in this context. Yet the economic solution is seldom very hard to work out.....(more)

Why We Think It's OK to Cheat and Steal (Sometimes)

2009-03-21T13:12:00.000-07:00

In light of one of the worst economic and financial crisis in modern history, it is important to evaluate the fundamental assumptions, intuitions, and reasoning behind our human behavior and institutions. In this talk, Dan Ariely--a behavioral economist at MIT--attempts to uncover one particular behavior that may have played a significant role--Cheating. What is cheating, how does it manifest itself in economic behavior, and what are the implications of cheating for the larger economic system? Ariely's experimental studies suggest that their are bugs in our moral code: the hidden reasons we think it's OK to cheat or steal (sometimes). Clever studies help make his point that we're predictably irrational--and can be influenced in ways we can't grasp. That is, human behavior is often driven by irrational forces such as social norms, visions of morality, intuitions, and social groups, which are themselves predictable. Enjoy the talk!

Capitalism Beyond the Crisis

2009-03-16T07:16:00.000-07:00

The New York Review of Books has an excellent article by Amartya Sen--Lamont University Professor at Harvard and 1998 Nobel Prize in Economics--that addresses the nature of capitalism and whether it needs to be changed. Some defenders of unfettered capitalism who resist change are convinced that capitalism is being blamed too much for short-term economic problems—problems they variously attribute to bad governance (for example by the Bush administration) and the bad behavior of some individuals (or what John McCain described during the presidential campaign as "the greed of Wall Street"). Others do, however, see truly serious defects in the existing economic arrangements and want to reform them, looking for an alternative approach that is increasingly being called "new capitalism."

What are the special characteristics that make a system indubitably capitalist—old or new? If the present capitalist economic system is to be reformed, what would make the end result a new capitalism, rather than something else? It seems to be generally assumed that relying on markets for economic transactions is a necessary condition for an economy to be identified as capitalist. In a similar way, dependence on the profit motive and on individual rewards based on private ownership are seen as archetypal features of capitalism. However, if these are necessary requirements, are the economic systems we currently have, for example, in Europe and America, genuinely capitalist?

All affluent countries in the world—those in Europe, as well as the US, Canada, Japan, Singapore, South Korea, Australia, and others—have, for quite some time now, depended partly on transactions and other payments that occur largely outside markets. These include unemployment benefits, public pensions, other features of social security, and the provision of education, health care, and a variety of other services distributed through nonmarket arrangements. The economic entitlements connected with such services are not based on private ownership and property rights.

Also, the market economy has depended for its own working not only on maximizing profits but also on many other activities, such as maintaining public security and supplying public services—some of which have taken people well beyond an economy driven only by profit. The creditable performance of the so-called capitalist system, when things moved forward, drew on a combination of institutions—publicly funded education, medical care, and mass transportation are just a few of many—that went much beyond relying only on a profit-maximizing market economy and on personal entitlements confined to private ownership.

Rand Illusion

2009-03-13T07:46:00.000-07:00

The Colbert ReportMon - Thurs 11:30pm / 10:30c

The Word - Rand Illusion

Colbert Report Full Episodes
Political Humor

Rap Battle
NASA Name Contest

On a lighter note, this is a great clip from the Colbert Report that has a little fun with the new found supporters of the novelist Ayn Rand. Specifically, with all this economic turmoil of late, not to mention a suspected socialist in the White House, right-wing pundits like femmebot Michelle Malkin and fellow Fox-friendly cretin Glenn Beck are looking to “author, philosopher and female comb-over pioneer” Ayn Rand for guidance. Stephen Colbert thinks they should move to an island all their own, where less work gets done on purpose.

On a more serious note, how can a novel that depicts a non-existent world, rallies the darker side of humanity, and intensifies the inequalities in society be held up as a model for American?

NYT: The Geography of a Recession

2009-03-04T08:40:00.001-08:00

Over at the Grey Lady, they have created an excellent visual depiction of the geography of the recession. In particular, the map illustrates that job losses have been the most severe in the areas that experienced a big boom in housing, those that depend on manufacturing, and those that already had the highest unemployment rates. To see more click here.

Synopsis-

What does the worst recession in a generation look like? It is both deep and broad. Every state in the country, with the exception of a band stretching from the Dakotas down to Texas, is now shedding jobs at a rapid pace. And even that band has recently begun to suffer, because of the sharp fall in both oil and crop prices.

Unlike the last two recessions — earlier this decade and in the early 1990s — this one is causing much more job loss among the less educated than among college graduates. Those earlier recessions introduced the country to the concept of mass white-collar layoffs. The brunt of the layoffs in this recession is falling on construction workers, hotel workers, retail workers and others without a four-year degree.
The Great Recession of 2008 (and beyond) is hurting men more than women. It is hurting homeowners and investors more than renters or retirees who rely on Social Security checks. It is hurting Latinos more than any other ethnic group. A year ago, a greater share of Latinos held jobs than whites. Today, the two have switched places.

The President Addresses Joint Session of Congress

2009-02-28T14:33:00.000-08:00

President Obama lays out his comprehensive approach to addressing both the economic and fiscal crises facing the nation, and stresses the need to end the era of profound irresponsibility that has brought us to where we are today. In my opinion, Obama's first address to the joint session of Congress was excellent--he set a progressive and inclusive vision for our government, focused on the specifics of energy/healthcare/education, and emphasized the necessity for transparency, accountability, and personal responsibility.

Similarly, I am in agreement with the February 27th Editorial in the NYT, which states that "President Obama’s first budget recognizes what most of Washington has been too scared or ideologically blind to admit: to recover from George W. Bush’s reckless economic policies, taxes must go up... A credible pledge to reduce the deficit is imperative. Without it, foreign lenders — who financed the Bush-era deficits and are now paying for the stimulus and bailouts — could lose faith in the nation’s ability or willingness to repay in anything other than rapidly depreciating dollars. That would send interest rates up and the economy down, the worst-case scenario. Controlling the deficit is also necessary to sustain a recovery — when it comes."

The Corporation

2009-02-26T17:56:00.000-08:00

This is a thought provoking documentary on the rise of the most dominant institution of our time. Winner of 26 international awards. Including, 10 Audience Choice Awards--2004 Sundance Film Festival.

Since the late 18th century American legal decision, the corporate organizational model has been given the legal equivalency of a person and has become a dominant economic, political, and social force around the world. This film takes an in-depth historical and psychological examination of the organizational behavior of the corporation. What this examination illustrates is that if the corporation were a person, then its behavior would be considered dangerously destructive and border on psychopathic. Furthermore, this film argues that the corporation's behavior has the ability to profoundly threaten our world and our future. However, the film leaves the viewer with hope--people with courage, intelligence, and determination can reorganize society and influence the political system in a positive way. The Corporation includes interviews with 40 corporate insiders and critics - including Noam Chomsky, Naomi Klein, Milton Friedman, Howard Zinn, Vandana Shiva and Michael Moore - plus true confessions, case studies and strategies for change.

FRONTLINE: Inside the Meltdown

2009-02-24T19:52:00.000-08:00

I came across this excellent investigative report from FRONTLINE regarding what has happened to the economy. Specifically, the questions at the heart of Inside the Meltdown are--How did it all go so bad so quickly? Who is responsible? How effective has the response from Washington and Wall Street been? From a more sociological analysis, this investigative report provides evidence that markets presuppose trust between participants and confidence that promises made will be kept. Moreover, it reinforces the insights of Emile Durkheim regarding the dependence of markets on the existence of shared values--the non-contractual basis of contract. I hope you enjoy!

Synopsis-

On Thursday, Sept. 18, 2008, the astonished leadership of the U.S. Congress was told in a private session by the chairman of the Federal Reserve that the American economy was in grave danger of a complete meltdown within a matter of days. "There was literally a pause in that room where the oxygen left," says Sen. Christopher Dodd (D-Conn.).

As the housing bubble burst and trillions of dollars' worth of toxic mortgages began to go bad in 2007, fear spread through the massive firms that form the heart of Wall Street. By the spring of 2008, burdened by billions of dollars of bad mortgages, the investment bank Bear Stearns was the subject of rumors that it would soon fail.

"Rumors are such that they can just plain put you out of business," Bear Stearns' former CEO Alan "Ace" Greenberg tells FRONTLINE.

The company's stock had dropped from $171 to $57 a share, and it was hours from declaring bankruptcy. Federal Reserve Chairman Ben Bernanke acted. "It was clear that this had to be contained. There was no doubt in his mind," says Bernanke's colleague, economist Mark Gertler.

Bernanke, a former economics professor from Princeton, specialized in studying the Great Depression. "He more than anybody else appreciated what would happen if it got out of control," Gertler explains.

To stabilize the markets, Bernanke engineered a shotgun marriage between Bear Sterns and the commercial bank JPMorgan, with a promise that the federal government would use $30 billion to cover Bear Stearns' questionable assets tied to toxic mortgages. It was an unprecedented effort to stop the contagion of fear that seemed to be threatening the rest of Wall Street.

While publicly supportive of the deal, Treasury Secretary Henry Paulson, a former Wall Street executive with Goldman Sachs, was uncomfortable with government interference in the markets. That summer, he issued a warning to his former colleagues not to expect future government bailouts, saying he was concerned about a legal concept known as moral hazard.

Within months, however, Paulson would witness the virtual collapse of the giant mortgage companies Fannie Mae and Freddie Mac and preside over their takeover by the federal government.

The episode sent shockwaves through the economy as confidence in Wall Street began to evaporate. Within days, in September 2008, another investment bank, Lehman Brothers, was on the brink of collapse. Once again, there were calls for Bernanke and Paulson to bail out the Wall Street giant. But Paulson was under intense political pressure from conservative Republicans in Washington to invoke moral hazard and let the company fail.

"You had a conservative secretary of the Treasury and conservative administration. There was right-wing criticism over Bear Stearns," says Congressman Barney Frank (D-Mass.), chairman of the House Financial Services Committee.

Paulson pushed Lehman's CEO Dick Fuld to find a buyer for his ailing company. But no company would buy Lehman unless the government offered a deal similar to the one Bear Stearns had received. Paulson refused, and Lehman Brothers declared bankruptcy.

FRONTLINE then chronicles the disaster that followed. Within 24 hours, the stock market crashed, and credit markets around the world froze. "We're no longer talking about mortgages," says economist Gertler. "We're talking about car loans, loans to small businesses, commercial paper borrowing by large banks. This is like a disease spreading."

"I think that the secretary of the Treasury could not fully comprehend what that linkage was and the extent to which this would materialize into problems," says former Lehman board member Henry Kaufman.

Paulson was thunderstruck. "This is the utter nightmare of an economic policy-maker," Nobel Prize-winning economist Paul Krugman tells FRONTLINE. "You may have just made the decision that destroyed the world. Absolutely terrifying moment."

In response, Paulson and Bernanke would propose -- and Congress would eventually pass -- a $700 billion bailout plan. FRONTLINE goes inside the deliberations surrounding the passage of the legislation and examines its unsuccessful implementation.

The Crises of Credit

2009-02-21T05:22:00.000-08:00

The Crisis of Credit
Movie by Jonathan Jarvis

This two part series visualizes the crisis of credit and makes it very easy to understand. The simple credit crisis story is the following. In the fall of 2008, the credit crunch, which had emerged a little more than a year before, ballooned into Wall Street’s biggest crisis since the Great Depression. As hundreds of billions in mortgage-related investments went bad, mighty investment banks that once ruled high finance have crumbled or reinvented themselves as humdrum commercial banks. The nation’s largest insurance company and largest savings and loan both were seized by the government. The channels of credit, the arteries of the global financial system, have been constricted, cutting off crucial funds to consumers and businesses small and large.

In response, the federal government adopted a $700 billion bailout plan (TARP) meant to reassure the markets and get credit flowing again. But the crisis began to spread to Europe and to emerging markets, with governments scrambling to prop up banks, broaden guarantees for deposits and agree on a coordinated response.

The roots of the credit crisis stretch back to another notable boom-and-bust: the tech bubble of the late 1990’s. When the stock market began a steep decline in 2000 and the nation slipped into recession the next year, the Federal Reserve sharply lowered interest rates to limit the economic damage.

Lower interest rates make mortgage payments cheaper, and demand for homes began to rise, sending prices up. In addition, millions of homeowners took advantage of the rate drop to refinance their existing mortgages. As the industry ramped up, the quality of the mortgages went down.

And turn sour they did, when home buyers had to leverage themselves to the hilt to make a purchase. Default and delinquency rates began to rise in 2006, but the pace of lending did not slow. Banks and other investors had devised a plethora of complex financial instruments to slice up and resell the mortgage-backed securities and to hedge against any risks — or so they thought...

IRAN (is not the problem)

2009-02-20T15:57:00.000-08:00

IRAN (is not the problem)-
I came across this excellent documentary about the failure of the American mass media to provide the public with relevant and accurate information about the standoff between the US and Iran, as happened before with the lead up to the invasion of Iraq. We have heard that Iran is a nuclear menace in defiance of the international community, bent on "wiping Israel off the map", supporting terrorism, and unwilling to negotiate. This documentary disputes these claims as they are presented to us and puts them in the context of present and historical US imperialism and hypocrisy with respect to Iran. It looks at the struggle for democracy inside Iran, the consequences of the current escalation and the potential US and/or Israeli attack, and suggests some alternatives to consider. The goal of this movie is to promote dialog and change the debate on Iran, so please consider organizing a screening, big or small, in your area. Enjoy and I look forward to any comments or debate.

High Noon: Geithner v. The American Oligarchs

2009-02-14T13:17:00.000-08:00

This is an excellent talk that gives insight into the power struggles taking place among Washington and Wall Street. Former chief economist of the International Monetary Fund (IMF), MIT Sloan School of Management professor and senior fellow at the Peterson Institute for International Economics, Simon Johnson examines President Obama's plan for economic recovery.

February 13, 2009

BILL MOYERS: Welcome to the Journal.

The battle is joined as they say — and here's the headline that framed it: "High Noon: Geithner v. The American Oligarchs." The headline is in one of the most informative new sites in the blogosphere called: baselinescenario.com. Here's the quote that grabbed me:

"There comes a time in every economic crisis, or more specifically, in every struggle to recover from a crisis, when someone steps up to the podium to promise the policies that — they say — will deliver you back to growth. The person has political support, a strong track record, and every incentive to enter the history books. But one nagging question remains. Can this person, your new economic strategist, really break with the vested elites that got you into this much trouble?"

And here's the man who asked that question. Simon Johnson is former chief economist at the International Monetary Fund. He now teaches global economics and management at MIT's Sloan School of Management and is a senior fellow of the Peterson Institute. He is co-founder of that website I quoted — baselinescenario.com — where he analyzes the global economic and financial crisis.

Welcome, Simon Johnson to the Journal....