ANOTHER LESSON IN GREED

This is Labor Relations 101 (or should be). From Huffington Post, this story on confiscated gratuities is simply incredible. Seriously, who keeps tips and then tells their servers they can't let the paying customers know who's actually getting the tip? It kinds of reminds me of this guy ...

As a former waiter, bartender, busboy, and general supporter of working folk I hope the servers win their case, and then get damages too.

- Mark

THE DEATH OF LABOR & THE AMERICAN CONSUMER?

If you want to know why the economy is still in trouble check out these two pieces on corporate crime and our 30 year-long "wage" recession from Harvard economist Jeffrey Sachs and former Labor Secretary Robert Reich.

First up, we have Sachs' "Corporate Crime Wave" piece.

In very simple terms Sachs makes it clear that corporate crime pays. And it especially pays if you earn a living as a top executive in one of the largest firms around the world. And why does corporate crime pay? Two reasons.

* Big companies are now multinational, while governments remain national. Big companies are so financially powerful that governments are afraid to take them on.

* Big companies are major funders of political campaigns in places like the U.S., while politicians themselves are often part owners, or at least the silent beneficiaries of corporate profits.

Sachs is spot on here. Conceptually, the challenge of managing multinationals is easy to understand. There's historical precedent. At the beginning of the 20th century corporate America had become so powerful that individual states were largely powerless to take on the Carnegies, Morgans, and Rockefellers of the world. It took market collapses, entrenched corruption, and genuine public outrage to motivate a political movement.

But it also took the genius of Teddy Roosevelt at the national level to challenge the "trusts" and monopoly practices of corporate America.

But even the efforts of Teddy Roosevelt weren't enough. A string of laissez-faire, let-the-market-do-what-it-wants, American presidents in the 1920s allowed corporate America to have it's way with the economy and the American public. We all know what happened with the triumph of conservative Republicanism in the 1920s ...

Sachs also discussess how problems are made worse by the international financial structure. In his view the international financial structure is propped up and supported by institutions that lack genuine oversight authority.

This has created an environment that allows tax havens, winks at secretive Swiss banks, encourages global tax evasion, accepts global kickbacks, nods at illegal payments, turns it's back on bribes, and pretty much ignores other illegal transactions - as long as it's done by and for large multinationals (drug lords, money launderers, and weapon runners really need to work on getting their trade legalized).

According to Sachs, the "wealth, power, and illegality enabled by this 'hidden' system are now so vast as to threaten the global economy's legitimacy." (Sachs doesn't touch what William K. Black referred to as "control fraud" at the domestic level. Anyways ...)

With no global institutions dedicated to advancing and protecting the interests of people like you and me in this giant parlor game, the losers in this market game are the rights of labor and, ultimately, the American consumer. This brings us to Robert Reich's piece on the wage and jobs recession we're now experiencing.

Reich's argument is a simple one: Because wages have stagnated and even fallen backwards, while record profits and bonuses continue, the American economy is bifurcated and in trouble. And it's getting worse.

One of the reasons wages have stagnated is because corporate America has been sending jobs overseas (aided by very favorable legislation). This dynamic cuts into the wages and salaries of workers who see jobs disappear, and must now compete with more unemployed laborers here, and millions of workers willing to work in sweat shop conditions in the developing world.

How bad has it gotten? Consider the following: The Commerce Department recently reported that over the past decade, American multinationals (essentially all large American corporations) eliminated 2.9 million American jobs while adding 2.4 million abroad. If you're looking for specific examples check this out:

* In 2000, 30% of General Electric's business was overseas, along with 46% of its employees. Today, 60% of its business is outside the United States, as are 54% of its employees.

* Over the past five years, Oracle added twice as many workers overseas as in this country; 63% of its employees now work abroad.

The incredible thing is that workers wages in America have been collapsing at precisely the same time that productivity has been going through the roof.

What should be happening in this scenario - according to economic history and the "laws of justice" Adam Smith spoke about - is that the workers should be sharing in the productivity gains made by industry. Wages in America should be going up. Consumption should be stable, or going up. A real recovery should be happening. But this is not the case. 

Part of the reason for this, as Sachs points out, can be attributed to the power and influence corporations wield around the world. In addition to securing a steady stream of bailout money, they're able to move money and jobs out of the United States, in the process depriving the American economy and its workforce of the resources they need to recover. The incredible thing is that corporations no longer need to rely on the Pinkertons and Baldwin-Felts of the past to intimidate and cow labor.

They simply go to their muscle in the lobbying halls of Washington DC. The blackjacks used by the Pinkertons have been replaced by briefcases of lobbyists in Washington.

There's more. Much more. But one thing is clear. Don't expect the American consumer to lead the recovery. They are buried under a barrage of bad news, collapsing wages, and favorable legislation for corporate America. And, as I pointed out in my book (and 7 months before the market collapsed in 2008), the American consumer is simply tapped out.

- Mark

REPUBLICAN CLASS WARFARE EXPLAINED

If you want to understand what the Republican attack on the middle class means watch this ...



For more information on what the Republican attack on the middle class and labor entails you can watch Rep. George Miller's five minute speech on the House floor here.

If you want to contribute a few bucks to the effort in Wisconsin, click here.

- Mark

THE WALL STREET TAX MAN COMETH (for your home)

When Wall Street found they didn't have the cash to pay off their stupid bets and other financial obligations they ran to Uncle Sam and the American taxpayer for trillions in loans and other guarantees. But when a homeowner finds that they don't have the cash to pay their tax obligations Wall Street has no sympathy.

Put another way, Wall Street got a financial parachute for it's role in the creating the market crash. The homeowner, however, is told to pull himself up by his cement bootstraps.

But wait. It gets even worse. Check this out.

After stabilizing their financial position with a taxpayer funded bailout some of Wall Street's biggest financial institutions have created a new money-making scheme - they are now bidding on the tax debts of strruggling homeowners. If they win the bidding process they then turn around and sell the debt elsewhere.

Making money on homeowner debt is really pretty simple. Here's how it works.

1. Once a financial firm has purchased a tax lien debt of, say, $5,000 Wall Street's finest add interest charges and fees to the debt amount (just like they do with credit card debt).

2. If the homeowner can't pay the new debt amount (of say, $10,000), the financial institution forecloses on the home. This is done rather quickly, especially if the home has equity. This has become extremely easy now with our collapsing foreclosure standards.

3. Once foreclosure happens Wall Street's financial firms then bundle up and sell thousands of these tax debt contracts to investors (as securities), selling or extracting the equity from the house to pay 7-10% interest (and pocketing what remains). 

You know, when people like me said we need to take over struggling banks (instead of stuffing them with trillions of bailout dollars) critics said that this couldn't be done because it was socialism. And besides, we needed to keep banks afloat or else the entire system would sink ...

Tell me, if taking over a troubled bank with mounting debts is called socialism, what should we call taking over a struggling debtor's home who had their tax debt sold out from under them? Lawful racketeering?

 

Just asking ...

- Mark

THE DARK SIDE OF OUR FREE MARKET MYTHS, III

In class last week we discussed the transformation of America, from agrarian to industrial society. Key to this transformation is recognizing the demographic shift that occurred in just one generation, and how the state helped turn this period into an era of extraordinary opportunity for American industrialists.

Developments occurred so quickly that somebody born in 1845 was introduced to a country where roughly 90% of Americans lived in rural areas. If that person lived to the age of 80 they would have seen their grandchildren living in an industrial America with over half of it's population residing in the cities.

This had a significant impact on American politics in 1925, as cities had to deal with crowding, health, and infrastructure issues. Specifically, America had to become more diligent in the areas of public planning, public health, and public order.

As you can imagine, when the stock market crash hit in 1929 a majority of Americans could no longer feast off of nature's bounty, like early pioneers, because they lived in the cities. Capturing and feeding off of rats and other street vermin is not the same as hunting down and feasting on the deer and fish caught in the countryside.

This new reality posed serious problems during the Great Depression. Astute politicians and policy makers understood quickly that economic depression created entirely new problems when people live on top one another in urban settings. But I'm getting ahead of myself.

The real story is what made industrial America tick.

What Made the Great Transformation Possible
During the Great Transformation of America individual achievements and spectacular events were made possible and driven by the liberties granted by the Constitution, the gift of natural resources, protective tariffs (the highest in the industrializing world), and a very aggressive foreign policy, which we called Manifest Destiny.

While we like to believe that Americans achieved greatness because of hard work and the spirit of entrepreneurialism alone, the reality is the very visible hand of the state and nature's bounty were critical for setting the table for Americans to work hard and get ahead. The moral justification of capitalism draws it's lifeblood from this dynamic mix.

Along the way, there were many problems and issues that had to be dealt with which, as we shall see, required much more than a mythical "invisible hand" to solve.

As the demographic shift in America was occurring, old customs and habits were slowly swept away. A culture that valued familiarity and a handshake was gradually giving way to a world of increasingly distant and impersonal relations. The allure of the West - made possible by an aggressive foreign policy - and a string of economic booms and busts, pushed people across the continent in droves.

In the process, loyalties dissolved, while old forms of control, like familiarity, family bonds, and a sense of community were turned upside down. Practically, this meant that the familiarities of custom and tradition had to be replaced by state mandates and law enforcement as forms of social control.

In this way - and in spite of what contemporary politicians might argue - while we like to say that we want the state off our back, we definitely wanted them on our neighbors back. This was all part of the magic that was America.

Because people on the move were no longer held in check by local customs, traditions, or old family histories, self-starters understood that they could get a fresh start if they were willing to leave their comfort zones. Going to a new town, where no one knew your story, was a blessing for many. Perhaps more importantly, for those that had failed before, it gave life to the notion of redemption that was captured in the Constitution (see especially debtors and bankruptcy).

In the process many Americans took advantage of the opportunities available to make money and get fabulously rich.

From Sam Colt to Andrew Carnegie and John D. Rockefeller, people with great ideas and an organized mind found the right environment to create business empires that became the envy of the world. Along the way, the state made things easier for great wealth accumulation with a living Constitution that breathed life into vibrant public policies that favored industry and wealth creation.

Whether it was clearing Indians off the land, granting homesteaders property rights, building infrastructures, creating public education, subsidizing the railroads, embracing land grant colleges, and providing the legal infrastructures for businesses to become corporate behemoths (the Santa Clara decision in 1886 was particularly important), public policy promoted industrialization. There were no invisible hands here.

But there was a flip - and even dark - side to these developments.

How the Other Half Lived
As many began to point out in the late 1800s, Americans were leaving rural communities in droves. This forced them into cities and crowded conditions that were entirely unfamiliar. Customs and folk wisdom that came from the slower pace of the countryside were quickly lost. Neighbors didn't necessarily look after one another in an urban setting as easily as they did in the countryside.

Worse, as personal bonds disappeared, or never developed, in the cities an impersonal gap emerged between those who worked in America's emerging industrial palaces and those who owned them. Workers were often viewed as cogs in a machine, whose only utility lied in keeping the wheels of commerce going strong. The losers in our rapidly industrializing society were considered more as throwaways than they were viewed as wasted opportunities, a sentiment which photo-journalist Jacob Riis captured in the late 19th century

Driven by a ruthless laissez-faire, government-out-of-the-market, approach to production industrialists believed that the best worker was one who did what they were told, and was left alone to do their job. It didn't matter what they did, or how they lived once they left the job. What mattered was that they showed up and worked.

Those that didn't like their job - the argument went - could always leave. America was a free country after all. America's "survival of the fittest" mantra mandated that you suck it up, or fail trying.

For many at the top of America's economic food chain, if you couldn't hack it you were a loser, plain and simple. Society had no responsibility for your station in life, especially since your station in life was determined by talent, hard work, and individual initiative alone. 

Or was it?

What people often ignore or downplay is that at the time it didn't matter that social mores cast women in a light that gave them one role in society, which robbed them of any real opportunity to compete or live on their own, without being socially stigmatized ...

It didn't matter that children weren't real free agents, and weren't competent to negotiate salaries and fend for themselves in the mines or on the shop floors of America ...

Finally, it also didn't matter that Jim Crow and outright racism robbed an entire segment of American society of their opportunity to compete on a level playing field ...

According to the economic winners of the day, the losers of life deserved their station in life because they were either genetically or racially inferior. And they knew this because, as we shall see, science proved it.

The Junk Scholars of the 19th Century
Among the many intellectuals who helped breathe life into the notion that your position in life was determined by hard work and initiative alone were popular academics, like William Graham Sumner and Herbert Spencer. In fact, while many believe that Charles Darwin coined the term "survival of the fittest" it was actually Herbert Spencer who gave life to the phrase.

It would help him win praise and monetary support from America's wealthiest tycoons.

For his part, William Graham Sumner helped convince America's richest that they not only deserved their place in society because of the hard work that they did, but that "a drunkard in the gutter is just where he ought to be, according to the fitness and tendency of things ..."

These observations were tied to laws of nature, according to Spencer and Sumner, and should not be tampered with. For them, the natural order of "divine right and privilege" we saw during the Feudal Order had been replaced by the natural order of "success or failure" in the America's new liberal republic. Drunks in the gutter, like social misfits, deserved all the scorn and ridicule they had heaped upon them because they were nature's losers.

But the benevolent spirit, and chivalry, were not entirely dead. Because women had a natural place in the society, the state didn't have to concern itself trying to educate their delicate minds. For William Graham Sumner, the state had only one objective when it came to women, protecting their honor.

Herbert Spencer was so adamant about maintaining the proper place of women that he believed society's softer gender should not be allowed to be educated because:

... such brain forcing could lead to nervousness, anaemia, hysteria, stunted growth and excessive thinness.

But this wasn't the worst of it.

The Junk Science of the 19th Century

Franz Joseph Gall (1758-1828) made a name for himself building phrenology, a controversial field of study in 19th century.

The experts in the field argued, to an increasingly wide audience, that you could determine the emotional and personal characteristics of an individual by looking at their skull.

According to Gall the mind is composed of multiple and distinct faculties. Each one determines traits and characteristics from individual benevolence to violence. As a result, the size of each "faculty" in the brain is important because each faculty pushes and shapes the skull in such a way that by measuring skull patterns a good phrenologist could determine whether someone was predisposed towards charity, spirituality, kindness and aggression.

More simply, with the proper training and tools, the surface of the skull was viewed as a good index for reading individual aptitude and personal tendencies.

Over the course of the 19th century phrenologists were able to determine - scientifically, of course - that certain ethnic groups were predisposed towards violence, while others were geared for success because of the shape of their heads. As you can imagine, Western European skulls emerged with the most aptitude and benevolence skull spots (bumps?), while slaves, Eastern/Southern Europeans, Asians, and other groups were deemed to have skull shapes that kept them out of the highest levels of civil society, and far away from success.  

This pseudo science was embraced by many who were looking for scientific justification for their capabilities and acumen in the business world. Similarly, phrenology was supported by those who wanted to justify slavery (it was part of their heritage), and those simply looking to reaffirm their life of leisure in the country club (it's their natural environment).

But the distorted teachings of these "junk scientists" didn't end with phrenology. There would be an even uglier spin-off, which helped justify emerging social hierarchies, and the status quo in America. This school of thought was eugenics.

The Eugenics Spin-Off

Louis Agassiz (1807-1873) was one of the first scholars to give scientific racism intellectual heft. Agassiz argued that each race on earth were separate creations, that were started in diverse geographic zones (called polygenism). These distinct beginnings, according to Agassiz, endowed each race with different and/or unequal attributes.

For this reason, Agassiz argued, each species can be tied or classified by specific climate zones, just like animals and plants. One of Agassiz's great "discoveries" came when he proved the superiority of European stock over all others. Agassiz's spectacular findings should not have come as a surprise to anyone. As a European, it was only natural that he (or someone like him) would make this discovery.

As you can imagine, Agassiz's life work was very popular in the America South, where slave owners were looking for ways to justify slavery and racism (from a Christian perspective, of course; Agassiz was a Christian).

But the eugenics legacy didn't end with simply establishing the superiority of one ethnic groups genetic make-up over another.

The real genius behind eugenics was when policymakers started to buy into the idea that certain genetic groups were predisposed to certain behaviors, and believed that they could purify society. To do this many states in America began to sterilize habitual criminals, lunatics, schizophrenics, and others who had been officially labeled as social misfits.

And, if you're wondering, yes, this is where the Nazis got many of their ideas.

The irony in all of this is that while many of these 19th century scientists drew from Charles Darwin (who was a real scientist) most, if not all, of their work would have been rejected by Darwin on scientific grounds.

Unfortunately, though, the damage had been done.

 Real World Effects ...

One of the most damaging effects that came from embracing the junk science that Spencer, Sumner, Gall, Agassiz, and their followers embraced is that it reinforced certain stereotypes, which perpetuated a biased and unequal system.

We have to keep in mind here that while the Robber Barons of the 19th century were undoubtedly hard workers, competitive, and possessed keen minds, they were successful in part because they didn't have to compete on a level playing field. One half of the population (women) were bottled up by an entrenched belief system that said a women's place was in the home, having babies. Moreover, blacks were systematically excluded, while other ethnic groups were removed from life's great entrepreneurial experiences by the prejudices and biases of the day.

With phrenology, eugenics, and the works pushed out by Sumner and Spencer (and their followers) dominating the day the promises of equal opportunity were distant dreams for many who lived in 19th and early 20th century America. Worse, women, the poor, certain ethnic groups, and people of color were viewed as nature’s misfits who deserved their misfortune.

This was, after all, the natural order of the day. And science was there to prove it. I'll pick up on this, and discuss the social and political reactions that challenged these developments in a post later this week.

- Mark

THE TRIUMPH OF SOVIET-STYLE CENTRAL PLANNING ...

In "Amar Bhide on the Stalinization of Finance" Yves Smith at nakedcapitalism.com directs us to an excellent article from the Harvard Business Review ...

Bankers of the World Unite (under one model)
The article discusses the loan activities of our financial institutions. Specifically it discusses how they have evolved from emphasizing decentralized decision-making (crucial for capitalist markets to function) to an increasing dependence on lending processes that resemble the centrally-planned economy of the Soviet Union. Personal one-on-one time with local bank loan officers, who traditionally studied regional conditions and developed a personal relationship with borrowers, has been replaced with mortgage brokers, who have to take their lending cues from abstract models developed by a few rocket scientists in the biggest financial institutions (which is also discussed in The Quants).

What makes this so dangerous is that the models and the programs they spawn are principally designed to benefit the narrow interests of market players who control the keys to the financial kingdom (the use of Net Present Value models in determining who can actually get home loan modifications, which I discuss here, is an example of this).

This is a troubling development when you consider that the patron saint of capitalism, Adam Smith, argued that the consumer should be the primary concern of a market economy. Protecting consumers was at the core of his "laws of justice" principle.

According to the article, the vast majority of market players in the financial sector depend on a standardized, model-reliant, process for accepting or rejecting loan applications. So, Why does this matter, you ask? Good question.

Why It Matters ...
As Smith points shifting lending from loan officers in local branches to standardized, score-based templates developed by faceless math geeks in New York has resulted in a "considerable loss of information": face to face assessment of the borrower (does he understand what he is getting into? Does he regard the loan as a serious commitment?) and knowledge of the community (How healthy is his employer? What is the outlook for the local economy?) have been lost in the process.

More importantly, as the article notes, reduced "case-by-case scrutiny has led to the misallocation of resources in the real economy." In the recent housing bubble, for example, lenders did little due diligence and "extended mortgages to reckless borrowers" because the models kept their focus on securing loan origination fees, and bonuses, rather than on the lenders actual ability to pay.

In a few words, because the models accepted the cooked up numbers of unscrupulous mortgage brokers the system became increasingly impaired as more and more brokers could give a dam as to whether the lender actually paid. Fixing the numbers to model is what mattered.

Today, our lending institutions continue to rely less and less on Adam Smith's "invisible hand" and depend more and more on a Stalin-like approaches to lending. Unfortunately these approaches bear "a troubling resemblance in its process and outcomes to a centrally planned economy."  

The actual article, and Smith's review and commentary, may be long for those of you who are short on time. But, as usual, they're worth the effort.

- Mark

THIS IS HOW WE DEFEAT THE PARIS HILTON PRINCIPLE

THE PARIS HILTON PRINCIPLE:

Living in a world where your status & wealth prevents

you from having to suffer the same financial and  

lifestyle hit for breaking the law that others do.

A driver caught doing 180 mph in Switzerland is set to be fined between $835,000 and $962,000. The reason the fine is so high is that Switzerland calculates fines based on the severity of the offense and the offender's income level.

I like this law.

In many ways Switzerland's method of assigning fines to drivers is their way to making sociopaths - who have money - feel some pain for their mistakes. Think about it. A $500 fine for a working-class driver (who makes $30-40,000 a year) will feel the penalty. A $500 fine means there are no frivolities for the month and/or some bills don't get paid. A $500 fine for the Donald Trumps and Paris Hiltons of the world mean nothing.

However, a driving fine of, say, $50,000 for someone making $3-4 million a year would go a long way in leveling the reward-penalty field in America. Specifically it would add some punch to the notion of merit and equality under the law ... principles that everyone in America understands, but are also quite sure doesn't always exist.

We could defend our new approach to equality under the law by telling the world we're trying to defeat the Paris Hilton Principle. The Paris Hilton Principle - which has already been linked to sex (what else?) - in many ways is akin to the Dunning–Kruger effect.

In a few words the Dunning-Kruger effect refers to unskilled and incompetent people whose cognitive bias (world view) allows them to make poor decisions - which they never acknowledge or recognize - because their incompetence denies them the capacity to realize their mistakes. Incompetence, after all, requires screwing up on many levels.

Defeating the Paris Hilton Principle refers to popping the bubble of rich sociopaths by forcing them to feel the same financial penalties the rest of us do when we're punished or fined for legal transgressions.

Incompetence, like rich sociopaths, should always feel the pinch of justice when they undermine society's rules.

- Mark

START A FIRE, YOU'RE IN TROUBLE. POLLUTE THE GULF COAST? GOP SAYS "GOOD FOR YOU"

Why is it that in the states of California or Wisconsin if you start this ...

or light the match that leads to this ...

... you are "liable to the owner of the property for the damages to the property" (CA) or "shall be liable for all expenses" (WI) caused by the fire?

But if you do business in the Gulf Coast and do this ...

and cause this ...

... Republicans will fall over themselves to limit liability? Just asking.

- Mark

P.S. Check out this satellite photo of the Gulf of Mexico from Huffington Post (click to enlarge) ... Additional photos here.

THE GOOD, THE BAD, AND THE UGLY

On a regular basis I get comments about what I have written or said in public forums or in the media. Some of it is good. Some times it's bad for what it reveals about America's future. Other times it just makes you laugh because of what it tells us about the crazies that are out there. I especially enjoyed this diatribe directed at me after I wrote to a Tea Party crazy conservative that the "Fairytopia market world" they believe in doesn't exist.

 Mark your vast knowledge of fairies would lead one to believe that you belong to that low life, scum sucking, bottom dwelling, dingy smelling group of nefarious would be communist Marxist who are by some twisted fate, members of that disgraceful group known as the Barney Frank, act alike, Democrats. If I were you, I would hide myself in shame and ... See Morerealize you really are not American at heart or of mind. But most definitely are an accumulation from some oderferious, decayed part of the world, like the bottom of a human waste pit. Consider yourself properly vetted and cast out of membership with any real American patriot. "WE THE PEOPLE" shall overcome the likes of detrimental ilk, such as you. I will pray for you, but not very much!

I know, pretty ugly. But you have to admit, it's kind of funny. Entertaining too.

Most of the time, though, I get genuinely good comments. Yesterday, for example, I gave a talk at the university for the 60+ Club. The group is made up mostly of retirees who support the mission of the university, and attend presentations given by faculty members because they're interested in the world around them.

One of the comments yesterday dealt with the specific definition of "mark-to-market" accounting. In a few words mark-to-market accounting in our post-meltdown world allows market players to reprice collapsed financial products upward. Apparently I didn't make it clear enough that mark-to-market accounting has been turned on it's head since the bailout, and is really just another way for market players to avoid taking responsibility for the stupid decisions they made. This is one of the reasons many accountants refer to the concept as "mark-to-make-believe" (which I should have noted yesterday).

In all cases, these comments demonstrate you've got an audience that's done their homework, and makes presentations fun. This is good.

Then I get comments from people who aren't looking for clarification. Nor are they foaming at the mouth Tea Party diatribes (like from the guy mentioned above). Instead, they're ideological rants that the writer believes are bold statements of fact, when they are really little more than emotionally-charged opinions. For example, a couple of days ago I received these comments on the blog site I have for my book, The Myth of the Free Market: The Role of the State in a Capitalist Economy.

The free market did not write a 60,000+ page tax code that punishes work, rewards sloth and buys the votes of special interest groups, the government did.

The free market did not destroy our public school system and graduate (or fail to graduate) generations of civically and financially illiterate citizens, the government did.

The free market did not drive our jobs overseas and kill our entrepreneurial spirit with over-taxation, over-regulation and frivolous lawsuits, the government did.

The free market did not ban drilling for oil, vilify coal and block the building of nuclear power plants in the United States, thereby transferring hundred of billions of dollars of American wealth and many thousands of energy-industry jobs to foreign countries, the government did.

This crisis is the result of a giant social engineering experiment and vote-buying scheme gone tragically wrong.

The free market does not try to engineer society or buy votes, the government does.

The government caused this crisis, the free market did not.

The government cannot fix the crisis, the free market can.

What's clear is that - like my Tea Partying friend noted above - this individual has a utopian view of how markets work. In a few words, the state creates the conditions under which wealth is created. I can't emphasize enough how silly it is to believe that market players in a market setting without rules suddenly become virtuous and ethical. The pursuit of profit does ugly things to people who might otherwise be decent people (then again, many of them are unhinged sociopaths).

What's interesting, though, is that I shouldn't have to write any of this.

James Madison and the Founding Fathers made it clear that what was behind the activities tearing the country apart, especially after winning our independence from Britain, were the conflicts and "factions" driven by people in the pursuit of wealth. Without going into a long history lesson here (read my book), it needs to be said that our Constitution includes Art. I, Section 8 (and other sections) precisely because the Framers understood that market players don't always do the right thing, and needed guidance. Indeed, the patron saint of captalism, Adam Smith, wrote that government action to protect consumers and citizens from market players was necessary. There's a reason why he wrote this (it's tied to collusion and favorable legislation), but this post is already long enough. Click on the labels below for more.

The point is, believing in market fairytopias is intellectually lazy and, quite frankly, reveals a penchant for embracing myths that's dangerous because they work against our understanding of reality. This is bad for the country because it prevents us from developing policies that deal with real world problems.

At the end of the day, market players in the pursuit of profit don't alway do the right thing. People in the state of nature aren't angels either. Believing otherwise is sweet. But it's also delusional.

- Mark

BANKING ON DEATH

We all know that part of what drove our economy into a tailspin in 2008 were the incredibly stupid bets market players made. These bets are called credit default swaps. Essentially they are unregulated insurance contracts written and sold by market players who never intended on paying out if things went wrong (primarily because they didn't have the capital on hand).

What the "insurance writers" were really after were the premiums. When the unregulated insurance writers found out that they couldn't pay out on the bets that went bad (like subprime mortgage securities), all financial hell broke loose.

Well, hang on to your hats. It looks like we're going to do this financial stupidity all over again, but on another level. Only this time the big market players are banking on death. Here's how it works.

Traditionally if you purchase a life insurance policy the expectation is that you will pay premiums. In return you have a life insurance policy that can pay anywhere from $100,000 on into the millions. Your family, or your designee, receives a payment upon your death. If you decide you want to cash out, for whatever reason, you cancel the insurance policy and settle with the insurance company. You get a fraction of what you paid into the policy. Most insurance companies anticipate people cashing out, which helps to keep their costs down (since they don't have the big payout at the end). Pretty simple, huh?

Today, however, Wall Street's investment banks want to purchase your life insurance policy and turn it into a security. Specifically, the idea is to get life insurance policy holders to sell their policies to Wall Street. In return the insured party (you, for example) receive a fraction of what you paid into the policy. The new beneficiary of your death are Wall Street market players.

To be sure, Wall Street market players continue making payments on your insurance policy. But instead of waiting for one person to die, what they do is bundle up hundreds, if not thousands, of insurance contracts. These contracts - and the future payouts - are then sold to market players as securities. So you could conceivably have 10,000 life insurance policies wrapped into one security.

What we end up with is a system that creates what economists call "perverse incentives" because of how they encourage the holders of these securities to cheer on your death. Worse, it provides Wall Street and the market players who buy into these securities a financial incentive to oppose national health care initiatives, to stall the release of new medicines, or to hinder medicinal patent sharing proposals. Anything that might prolong your life is viewed as bad news for this security market.

Death is money.

As economists Marshall Aueback and L. Randall Wray put it, we could see the evolution of a powerful alliance where:

Big Pharma and Big Finance might well try to keep new miracle drugs off the market; or, if these drugs were capable of extending life and thereby reducing profits on the securities, make them prohibitively expensive, thus curbing access.

Aueback and Wray add that it's "fairly easy to see some profitable synergies developing between financial firms marketing bets on death and health insurers opposed to universal, single-payer health care."

By keeping health insurance policies alive the securitization of death could bankrupt the insurance industry. Keep in mind that insurance companies have traditionally banked on policy holders canceling their policies long before they pass on. Keeping policies alive for Wall Street undermines this approach.

Or, Wall Street could do an end run around the insurance industry - as they did with credit default swaps - and create securities with the sole purpose of purchasing insurance policies. Another unregulated market, with a focus on encouraging death. Great.

Apart from the financial issues involved, there are also the ethical ones (which I discussed with reference to Dead Peasant Insurance in my book). Should we allow market players to literally bank on death in a way that might encourage them to oppose the release of medicines and public policies that make our lives healthier?

In my view, markets should neither encourage nor cheer on death. Like Dead Peasant Insurance, banking on death through the creation of death securities is not an industry that needs to be encouraged.

- Mark

Post Script: Here's a video with some interestings numbers on death.

THE BORN CONSPIRACY (redux) ... STARRING ELIZABETH WARREN

One of the more exciting series I've watched is the Bourne trilogy, starring Matt Damon. Painted as an out of control experiment gone bad, Jason Bourne is pursued by powerful forces trying to protect both themselves and a turf they believe others simply don't understand. The Bourne reference to Elizabeth Warren will become clearer below ...

In 2007 Elizabeth Warren, head of the Congressional Oversight Panel for the Troubled Asset Relief Program, penned an article that argued for a new model of financial regulation. She wrote that financial products should be subject to the same - and by now routine - safety screens that "governs every toaster, washing machine, and child's car seat." You know, the kind of government-driven safety measures that we all take for granted, and assume are "market-driven."

As is the case with all good legislation, Warren was clear that the focus should be "primarily on consumer safety rather than corporate profitability." Specifically, Warren wrote:

No one expects every customer to become an engineer to buy a toaster that doesn’t burst into flames, or analyze complex diagrams to buy an infant car seat that doesn’t collapse on impact. By the same reasoning, no customer should be forced to read the fine print in 30-plus-page credit card contracts to determine whether the company claims it can seize property paid for with the credit card or raise the interest rate by more than 20 points if the customer gets into a dispute with the water company.

After what we've learned about the financial sector's abuses of consumers and their own markets in 2008 and 2009 one would think that developing a financial product safety commission that focuses on the economic health of consumers would be a slam dunk. Think again.

Thomas Cooley, dean of New York University’s Stern School of Business, is part of growing group of special interests - led by the Chamber of Commerce, the American Bankers Association and the Financial Services Roundtable - who sees a wild-eyed fundamentalist in Elizabeth Warren. Cooley argues that her regulatory efforts make her little more than “an ideological crusader” who will "stir up a lot of trouble.”

Using the same tired arguments built around "free markets" and their magical powers to reign in stupidity, greed, and fraud, Cooley is effectively arguing that the same markets that helped create and fund lending activities before the 2008 market collapse only need to be tinkered with by "thoughtful people" doing "thoughtful analysis." Elizabeth Warren, according to Thomas Cooley, is not one of these people.

Accusing her of “waging a self-righteous holy war” Cooley makes the same arguments that were made about Brooksley Born, former head of the Commodity Futures Trading Commission (CFTC), who warned about the dangers of an unregulated derivatives market in the mid-1990s.

Born, whose warnings were famously ignored and criticized at the time by Alan Greenspan (Federal Reserve Chair), Larry Summers (Clinton's Council of Economic Advisors), Robert Rubin (Treasury Secretary), and Arthur Levitt (SEC Chair), was labled as an out of control zealot. Because of her efforts to audit and regulate the derivative market, which helped bring down the American economy in 2008, Born was painted as an "irrascible, difficult, stubborn" woman who was "unreasonable" when it came to judging the power of markets.

The logic of the market was presumed to be so powerful at the time that Alan Greenspan even went so far as to argue that fraud could be handled by the market and should not be regulated. This is all discussed in the Frontline video, The Warning (Arthur Levitt is not pictured in this Frontline ad/promo; presumably because he later regretted going after Born, and was interviewed saying as much).

For her efforts, Greenspan, Summers, Rubin, and Levitt conspired to work against Born, eventually forcing her from her post as director of the CFTC. In many respects their efforts could have been labled The Born Conspiracy.

Cooley revives this anti-regulatory mentality, implying that Warren is devoid of "rational and clear-headed perspective." He even goes so far as to disparagingly suggest that Warren's goals are Crusade-like and little more than her war of "faith" on markets. The implication is clear. Like Jason Bourne in the trilogy - and Brooksley Born in the 1990s - regardless of the talent, skill, and motives involved in her efforts, Elizabeth Warren is viewed as an out of control force that needs to be stopped.   

That this kind of mentality exists, so close to the market collapse, is troubling. It also helps explain how, if we continue to do nothing to discipline or regulate market players, we're setting ourselves up for another market collapse.

- Mark

THIS IS WHAT'S WRONG WITH PRIVATE HEALTH INSURANCE

If you want to know what will trigger the insurance industry to drop your health coverage take a look at this Youtube clip. These insurance company CEOs make it clear that anywhere from 1,200 to 2,000 conditions and ailments (like high blood pressure and pregnancy) can trigger their cancelation review policy from their "denial specialists" (who earn postive evaluations for canceling policies that save the company money).



Several things caught my eye:

1. EXPEDIENCY OVER INFORMATION: Securing health records of potential clients are not the primary concern of the insurance industry when it comes to signing them up (this comes in handy when the industry needs to deny coverage for "unknown" and "previous" conditions).

2. HONEST MISTAKES: Unintentional mistakes on an application for health insurance can trigger investigation, interruption, or cancelation (necessary for saving money, not lives).

3. RISE OF THE MACHINE: Programmed computers, rather than people, can have final authority over what triggers investigation, interruption or cancelation of an insurance policy (so much for that "personal" touch).

Towards the end of the clip (4:50), when the CEOs are asked if they will stop denying coverage to those they cover unless they commmitted "intentional fraud" in their application - as opposed to an honest mistake - all of the CEOs said they would not make that promise. Cancelations would continue, even if applicants made an honest mistake (kind of like, "The beatings will continue until morale improves").

Put another way, you can pay for a product but in the health insurance industry there is no longer a guarantee that the provider has to provide you with the service. Does this sound like a "free market" to you? More importantly, this clip makes it clear that your insurance coverage can be dropped simply because you got sick, as this LA Times article points out.

Final thought: If you ever wanted to see the character of the "mindless bureaucrat" - that many like to complain about when it comes to government servants - this clip makes it clear who's putting up all the roadblocks, and/or hiding behind regulations.

- Mark

FIXING SOCIAL SECURITY ... and other thoughts

A little over four years ago I wrote this op-ed article for the Bakersfield Californian. At the time the Bush administration was pushing hard to privatize Social Security. In layman terms "privatization" meant turning Social Security accounts - and their funds - over to Wall Street investment houses for them to invest. The argument at the time was that Wall Street understands finance and money better than government, and can be counted on to do the right thing. Ooops.

Among the points I made in the article was that Social Security wasn't in as much trouble as the scare-mongerers (i.e. the Bush administration & FOX News) were making it out to be. I also provided several solutions for fixing the system. Here they are:

1) Rescind Bush’s tax cuts for the rich. This would add approximately $1.8 trillion to government coffers over the next ten years.

2) Raise the cap on payroll taxes.

3) Raise the eligibility requirements, or reduce social security cost of living increases (COLAs) by one-half percent per year.

Of these, because of this Wall Street Journal article ("Pay of Top Earners Erodes Social Security"), the proposed remedy that sticks out today is #2. When I wrote the article in 2005 all income above $90,000 was exempt from the payroll tax. This meant that every dollar earned past $90,000 was not assessed a Social Security tax and that approximately 15% of all national income was released from the social security tax.

Today, every dollar earned past $106,800 is not taxed by the Social Security system.

This means that if you earn $1 million per year every dollar past $106,800 is not taxed by social security. Why is this important? Because the Wall Street Journal is reporting that the pay of wage earners who receive more than the Social Security wage base ($106,800) increased by 78%, or nearly $1 trillion, over the past decade. This means that nearly $1 trillion dollars in national income that could be taxed like your salary (or mine) is not taxed. The total ammount represents about 17% of national income that is exempt. Here's what the WSJ says about this:

Social Security Administration actuaries estimate removing the earnings ceiling could eliminate the trust fund's deficit altogether for the next 75 years, or nearly eliminate it if credit toward benefits was provided for the additional taxable earnings.

Republicans and other "fiscal conservatives" are, of course, opposed to the idea leveling the social security tax playing field. Wall Street bankers and their politically-connected patrons, after all, have earned every bailout dollar that they've received. How dare we threaten to tax their bailout-escorted riches?

And, besides, it's not like our nation needs the money. We can depend on the Chinese and the Saudis forever, can't we? (So much for Country First.)

At the end of the day, the Social Security tax is a regressive tax that affects the working poor and America's Middle Class disproportionately. That we allow bonus-drenched Wall Street bankers and their minions to continue feeding at the trough of bailouts and favorable legislation - without feeling the taxman's pinch like you and I - is a travesty.

- Mark

THIS IS WHY WE HAVE GOVERNMENT ...

Using humor, this YouTube clip points out the obvious: When it comes to creating a viable society, our government has gotten more than a few things right.



As former Supreme Court jurist Oliver Wendell Holmes put it, "Taxes are the price we pay for a civilized society."

- Mark

THIS ISN'T GOOD ...

Wouldn't you know it. Wall Street firms, flush with taxpayer money, and federal guarantees, are now looking to start paying their employees as much - if not more - as they were making before the economy's collapse. This story from the NY Times makes it clear that these guys still don't get it. They actually think they earned the money they're now being paid when, in fact, if it weren't for the federal government and the U.S. taxpayer, most of these guys would be walking the streets looking for a job. How do they justify this? (click on the graph to enlarge).

I find the NY Times' title for the article rather interesting too: "After Pause, Wall Street Pay is Bouncing Back" ... Look, Wall Street isn't bouncing back. Wall Street is sucking the American taxpayer dry, and laughing all the way to the bank (which might be a more appropriate title). But if we're going with the actual title it should read, "After Pause, Wall Street Pay is Bouncing Back Because of Government Bailouts, Taxpayer Money, and Government Guarantees" ...

Most of these market players don't deserve high(er) salaries. They deserve salary cuts and/or to be out of work.

- Mark