Morning Joe Diminuendo

• During its first years on MSNBC, Morning Joe was a refreshing and interesting show. Joe was a reasonably fair-minded conservative, there were many interesting guests, and MSNBC’s policy of all ads all the time had not yet come into effect.
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• In the last few years, however, this show has become increasingly obnoxious. Joe’s views have hardened into Fox News wannabe land, and with it his incredible egotism and insistence on interrupting everyone has grown to intolerable proportions. His sidekick Mika plays the role of pathetic liberal (game but outgunned and outwitted) that Fox is so fond of, and most of the guests are simply repeaters who better toe Joe’s line or never appear again. When politicians come on, they are almost always Republicans spouting their dogma, and these are about the only guests that Joe does not always repeatedly interrupt with long and often irrelevant rants of his own. The constant advertising interruptions no longer seem so much irritations as relief.
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• This is now a worthless and actually meretricious show.

Terrorism in France

The horror of the terrorist attacks rests not so much on the wounding and death of the victims as on the deliberate and hateful nature of the attacks. It is therefore prudent to separate the two aspects and consider them each.

The attacks were perpetrated by crazy young people using a murderous ideology to motivate and justify their actions. I say crazy because sane people do not deliberately murder people to whom they have no relation. The unfortunate reality is that at any given time there is always, in every society, a substantial pool of crazy people, some of whom could be tipped into violently hostile and aggressive action. Tribal ideologies, whether derived from ethnic identity, fundamentalist religion, injustice, or anything else serves to stimulate and justify such actions.  but These crazies are not much different than, say, the anarchists of the late 19th century, the Slavic nationalists who engineered the assassination of the Austro-Hungarian archduke at Sarajevo in 1914, or the assassination of President Lincoln by John Wilkes Booth. But with modern communications and relatively easy access to guns, such crazies seem to have become more numerous and much more dangerous than ever before.

Is it feasible to shut down the communications that stimulate them? Certainly not directly, without losing our freedom of speech. Perhaps indirectly, by reducing the urgency and romance of their appeals through corrective measures to the misery that so many now endure in their lives, eliminating the most militant terrorists, and in general making the practice of terrorism more unattractive to the young--long term projects all.

Turning to the risks that terrorism creates, I have two thoughts. One is that in cold statistical terms terrorism adds very little to the general level of risk of physical harm that prevails. On an annual basis I imagine that disease, automobiles, fires, and natural disasters, even bicycles kill or wound many more people. My other thought is that many people, including the "experts" who advise, write, and appear on TV; the firms that sell equipment to police, paramilitary, military, and terrorist organizations; and of course the media themselves all profit from creating or perpetrating public hysteria about terrorism.

Eliminate Taxes on the Wealthy: a Modest Proposal

It is high time that federal and state governments finish eliminating all taxes on wealthy persons.  Perhaps 90% of this has been completed in recent decades, but remaining taxes on income, capital gains, realty, and estates still cause our most prestigious and most honored people and corporations enormous personal anguish, not to mention accounting and legal fees.

The elimination of these taxes would not only ease the minds of our most productive persons, but would also achieve desirable policy goals. Tax considerations would no longer distort their allocations of capital. Estate planning would no longer be contorted to minimize inheritance taxes. Corporate compensation could take more productive forms if freed from the contortions required for the sake of tax minimization. And real property could be put to owners’ creative uses, instead of being forced into intensive use. Another benefit would be a reduction of enforcement expense, or at least a reallocation letting agents of the fisc pursue more easily adjudged tax cheats. Moreover, the elimination of taxes on the wealthy would reduce crime the same way legalizing marijuana does.

Some might object that the elimination of these taxes would starve governments of the money they need to operate effectively. At the moment, however, it is almost entirely the wealthy who block all tax increases. If they are freed from taxes, opposition to tax increases would sharply diminish and necessary increases could finally take place.

Another objection is that the elimination of taxes, especially estate taxes, would cement the upper class into place. But that is unlikely, given the high-spending propensities of rich children and the opportunities they have to lose money on investments. Even if it does take place, what exactly is wrong with that? England has enjoyed the noblesse oblige of its wealthy for centuries. If people become secure in their possessions, they can more readily afford to be generous and kind to others.

A third objection would be that eliminating taxes might eliminate charitable donations from the wealthy, and many good causes depend on those donations. But to a significant extent the private donations that benefit from tax favors reflect the particular interests of their donors, rather than public needs. If charitable organizations were to lose their private support, they would have to pick up public support, which would only be available for organizations truly operating in the public interest.

In conclusion, let us eliminate all taxes on our wealthy persons. Everyone would benefit.

The many horrible conflicts around the world that the Times reports about have one common link: stupid, selfish, dishonest, and cowardly leadership. Whether the current leaders are tribal warlords seeking to fund their Swiss bank accounts, ideologues, or heads of organized states currently embroiled in wars, these men (all are men) understand or care little about the people and regions they supposedly "lead," much less their enemies. The al-Malikis,Netanyahus, and their counterparts  lack the greatness of spirit to rise above their selfish concerns. Until the suffering citizens of their states have the good fortune to find greater leaders, like Mandela and deKlerk, or Kagame, the misery will continue. 

It will also continue unless good leaders retain continuing support. Obama, for example, has been hampered, even blamed, because of fanatical Republican opposition and incompetent DemocratIc politicians AND VOTERS. He is a good leader with no adequate counterpart.

US Economic Growth

US Economic Growth

Economic growth—basically, increasing sales per person[1]—underlies improvements in the standard of living. Technological innovation is the primary driver of economic growth today, particularly in developed countries with stable or declining populations. [2] As a recent World Economic Forum report concludes, “In the long run, standards of living can be enhanced only by technological innovation.”[3] This is good news for the US, which has long led the world’s technological growth, and remains in excellent position to continue its economic growth through technological innovation.

For most of human history population growth was the primary driver, because as the ancient Greek writer Xenophon observed, with more people there can be more specialization, and “[o]f necessity he who pursues a very specialized task will do it best.[4] Although fortuitous discoveries and transfers of information sometimes also boosted growth,[5] the long-term rate of economic growth in pre-industrial societies remained gradual at best.

European growth rates quickened with the Industrial Revolution, starting in the late 18^th century. Steam and, later, electric power triggered many innovations. There was a flood of new goods—railroads, threshing machines, refrigerators, etc.—and of new manufacturing processes that sharply reduced costs by simplifying labor, substituting machinery, or having machines perform previously inconceivable tasks. Such changes rendered traditional cost structures and productive capabilities obsolete, and produced a cornucopia of new or newly affordable goods.

The Industrial Revolution also made manufacturing and commercial exchange the dominant sectors of modern economies. Technological innovation proved crucial for their profitability and economic survival,[6] as well as for military power.

Underlying technological innovation were growing communities of scientists, engineers, and mechanics who employed scientific discoveries that had been accumulating since the days of Galileo and Newton. Accordingly, by the late 19^th century businesses, universities, and militaries in advanced nations built new institutions, or expanded traditional ones, to train scientific personnel and perform research: institutes of technology, research laboratories, secular universities, night schools, and vocational schools.

But technological innovation alone cannot generate economic growth. To increase sales, innovations must be desired, and those who desire them need purchasing power to buy them. Only the combination of desire with purchasing power, known as economic demand, can turn technological innovations into economic growth.

In other words, there are three ingredients necessary for economic growth: technological innovation, a desire for that innovation, and the purchasing power to buy it. The US is extremely well situated to supply all three.

Technological Innovation

As of recent reports, the US has as many people with a college or higher degree as China, India, and Russia combined, 26% of the world’s total.[7] The US also continues to enjoy a substantial influx of science and engineering students, of whom more than two thirds remain here 10 years after graduation.[8]

More than 700 US universities do serious research at a 2009 cost of $54 billion.[9] US corporations employ more than 800,000 scientists and engineers, primarily in the US.[10] Of the top universities in the category of Engineering/Technology and Computer Sciences, ranked by papers published or cited in major scientific journals and number of Nobel or Fields medalists, the US has the top 15 universities, 20 of the top 25, and 52 of the top 100, and 154 of the top 500 universities in the world,[11] only 4 fewer than Japan, Germany, the UK, France, China, and India combined.[12]

The US spends a third of all the R&D expenditures by countries spending $1 billion or more, and at $405.3 billion US R&D expenditures exceed those of China, the second largest spender, by 260 percent. In aerospace and defense, US public and private R&D will total $88.8 billion in 2012, compared to $26.2 billion for the rest of the world. US R&D for defense alone exceeds total R&D expenditures in every other country but China, Japan, and Germany.[13]  In energy R&D, US public and private spending in 2012 will be 37% of global spending, in life sciences R&D, 49.7%, in information and communication technologies, 58%, and in chemicals and materials 27.5%.[14]

Although most US expenditures on R&D come from the private sector, unlike many other countries, even in governmental R&D the US predominates. The National Science Foundation’s annual report, Science and Engineering Indicators: 2012, which uses 2009 data on government expenditures estimates that US governmental R&D expenditures totaled $164.3 billion in 2009, compared to $110.2 billion for the EU, and $31.1 billion for Japan. Totals for China were unknown.[15] As I think this small selection of statistics clearly indicates, the bottom line is that the US R&D effort remains far greater than any other nation’s, and remains by far the largest in the world.

Demand

The Industrial Revolution’s preeminent current historian Robert C. Allen states, “the frenetic pursuit of income to buy novel consumer goods, many imported from abroad as the [British] economy globalized in the seventeenth century, was a cultural basis of the Industrial Revolution.”[16] In other words, the Industrial Revolution came in response to economic demand. Economic demand consists of desire coupled with purchasing power. Marketing is the discipline of stimulating desire; finance, of generating purchasing power.

Desire

Marketing creates desire by shaping innovations to maximize their allure, introducing them to potential buyers, communicating their value, and alleviating concerns that might inhibit their sale. Modern marketing uses a well-developed infrastructure for advertising and promotion, and increasingly uses technology and statistical tools to gather, organize, and analyze information about potential consumers.

As the leading market in the world since the end of World War I, if not before, the US has long since built a huge and highly sophisticated marketing sector. It is safe to assume that unlike many smaller, less developed, or more highly regulated markets, the US has long trained and deployed a plethora of highly skilled marketers, primarily US firms. No data directly indicates US superiority in marketing, but there are certainly indirect indications. For example, the US appears to have many more business schools, most of which stress marketing, than any comparable region. The Princeton Review lists 296 US business schools, whereas the Financial Times’ listing of European business schools includes only 75.[17] A ranking of the top 200 business schools in the world includes 82 in the US, 67 in Europe, and 36 in Asia and the Pacific. Rated by their marketing programs, this ranking lists 8 of the top 10 as US schools; 14 of the top 20; 18 of the top 30, and 22 of the top 40.[18] In other words, US capabilities in marketing are clearly equal if not superior to those of any other nation.

Purchasing Power

Any valuable widely acceptable as payment constitutes purchasing power. Today, it’s usually cash, of which central banks usually maintain a consistent supply, or credit, whose supply is quite variable. Credit is the purchasing power provided in return for a promise of repayment, and in developed nations now constitutes most of the purchasing power. It comes in various forms, including goods furnished on account, secured or unsecured loans, and equity investments. The cost and availability of credit depends on creditors’ trust in repayment, which means that the quantity of purchasing power likewise depends primarily on the trustworthiness of promised repayment.

 The financial industry arranges most credit transactions, and in the developed world has steadily improved systems for making promises of repayment trustworthier. These improvements have included advances in the rule of law; better processes for finding, securing, and if necessary taking possession of property that has been pledged as security; increasing the types of property that could be used as security by developing markets where such properties could be valued and sold; and the systematic gathering of information about borrowers.

Recent financial innovations, many based on computer power, have greatly increased the trustworthiness of repayment promises. Credit cards are a US mid-20^th century invention based on rapid and easy communications, computerized systems for evaluating credit records, and more sophisticated understandings of credit portfolios. New financial understandings like portfolio theory and how to value options, new credit instruments, and ever-expanding information systems have further assured repayment, or allowed investors to protect against perceived risks.

These financial creations have supported a considerable expansion of credit in recent decades, one that has helped finance technological innovation through venture capital, and provided purchasing power to those who desire the fruits of that innovation.[19] In this way, purchasing power grows apace with technological innovation, supporting the demand that drives economic growth.

As with technological innovation and marketing, the US has long been a world leader in finance, and seems well positioned to continue providing the purchasing power necessary for economic growth from innovation. The US financial system is the most fully developed in the world, with by far the largest number of commercial banks.[20] At the end of 2010, the capital value of US credit securities, both debt and equity, was $67 trilliion. Western Europe’s market capitalization was, by the same measure, $63 trillion, while China’s totaled $16 trillion.[21]  In the area of venture capital and private equity, however—the type of credit most oriented to innovation—a list of 50 leading private equity/venture capital firms, which “control the bulk of all capital committed to private equity,”[22] indicated that those in the US raised $548 billion for investment purposes during the preceding 5 years as compared to $251 billion raised by those based elsewhere. The fact that US firms control 68.5% of the money raised indicates the overwhelming nature of the US advantage in venture capital.

Conclusion

The concept of technological growth that underlies my optimism about the US economic future derives from my study of ancient business history, particularly the astonishing story of classical Athens.[23] This great city-state, known as the cradle of western civilization, was a dirt-poor town until about 600 BC. It had a barter market on the Acropolis, and some silver mines, but most Athenians were sharecroppers who produced only enough food to subsist after paying a fixed rent to clan leaders.

Soon after the nearby Anatolian kingdom of Lydia pioneered coinage, however, this technological innovation began to enliven the Athenian market. Coins simplified sales, sped up transactions, and gave everyone better information about prices. The market became more central to Athenian life and attracted traders selling previously unknown goods. A desire for these appealing foods and wares motivated many Athenians to increase their purchasing power by working harder, having fewer children, devoting food-growing land to cash crops like olives and grapes, and sending young men into mercenary service in foreign wars.

Democracy, although limited, prevented the aristocrats from capturing all of the resulting purchasing power. As ordinary Athenians gained wealth they deposited cash with bankers, who could consolidate many small savings into commercial investments in ships and trade goods as well as consumer loans. Trade increased wealth further, allowing this small city-state to bequeath us a legacy of great literature, magnificent sculptures, and beautiful monuments.

As with coins, technological innovation has generated economic growth in advanced modern nations, especially the US, and the growth has occurred much as it did in Athens. Innovation stoked new desires. To satisfy those desires, people pursued purchasing power. Democracy protected them from rapacious elites, so that the resulting wealth got widely distributed. My suggestion here is that with the now deliberate pursuit of technological innovation we are excellently positioned to continue economic growth into the future. To be sure, the current mal-distribution of wealth in the US and other countries calls the wide distribution of benefits into question. But if democracy does prevail, we should continue to enjoy robust economic growth.

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[1] The measurement is “the total of spending on finished goods and services within that territory over the course of a period, plus the net of exports and imports.” See Bureau of Economic Advisors, “A Guide to the NIPAs,” p. 5 http://www.bea.gov/national/pdf/nipaguid.pdf referenced July 19, 2012. We usually speak in terms of “real” or “chained” GDP, using the inflation-adjusted value of money. Thus, GDP as of January 1, 2012 stood at $15.468 trillion, whereas “chained” GDP was $13.429 trillion. For GDP see Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/data/GDP.txt, For chained GDP see http://research.stlouisfed.org/fred2/series/GDPC1?cid=106

[2] As when the ancients learned to make iron tools, military expeditions and traders found new agricultural stock, Archimedes invented his pump, Roman engineers created deep soil plows, and European colonists unearthed new goods and treasure.

[3] Sadly, the rapidity of these innovations and the political power of creditors and financial intermediaries have allowed irresponsible and unscrupulous financial behavior to do great harm. But such wrongs are no more inherent to finance than lawlessness was inherent to the west during its frontier days.

[4] The Origins of Business, Money, and Markets (Columbia University Business School, 2011)

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[5] World Economic Forum, The Global Competitiveness Report 2012-2013, p.7. See also Table 2: Countries/economies at each stage of development, p. 10

[6] World Economic Forum, The Global Competitiveness Report 2012-2013, p. 7

[7]  quoted in Finley, Early Greece, 135

[8] David C. Mowery, Nathan Rosenberg, Technology and the Pursuit of Economic Growth, 1989: Cambridge University Press, p. 37

[9] Fig. 3-49, National Science Foundation, National Center for Science and Engineering Statistics, Science and Engineering Indicators: 2010, available at http://www.nsf.gov/statistics/seind10/c3/c3s5.htm

[10] Ibid.

[11] The Center for Measuring University Performance, The Top American Research Universities, 2011 Annual Report, available at http://mup.asu.edu/research.html

[12] National Science Foundation, op. cit.

[13] Shanghai Ranking Consultancy, http://www.arwu.org/FieldENG2010.jsp

[14] op. cit., http://www.arwu.org/ARWUStatistics2010.jsp

[15]  “Battelle R&D Magazine Annual Global Funding Forecast Predicts R&D Spending Growth will Continue While Globalization Accelerates,” http://www.battelle.org/media/news/2011/12/16/battelle-r-d-magazine-annual-global-funding-forecast-predicts-r-d-spending-growth-will-continue-while-globalization-accelerates

[16] Ibid.

[17] Ibid.

[18] Robert C. Allen, The British Industrial Revolution in Global Perspective (2009), Cambridge University Press.

[19] http://rankings.ft.com/businessschoolrankings/european-business-school-rankings-2011

[20] QS Global 200 Business Schools Report 2012, at http://www.topmba.com/mba-rankings/global-200/2011/region/asia. This ranking rates schools on a variety of characteristics.

[21] As of July, 2012 the US had 7,246 bank and thrift firms with $7.5 trillion in outstanding loans (including international loans). FDIC, Statistics at a Glance as of June 30, 2012, http://www.fdic.gov/bank/statistical/stats/2012jun/industry.pdf A fairly comprehensive list of all the banks in the world, not including thrifts, totals 1,290 banks. Of these approximately 93 are in the euro zone, and most of the rest are US banks. See Allbanks, “Banks of the World, at http://www.allbanks.org/main/list/

[22] McKinsey & Co., Mapping global capital markets 2011, Exhibit E2, p. 6 and Wikipedia, “List of Countries by GDP (nominal), List by United Nations.

[23] Dealogic, The Largest Private Equity Firms in the World: Anatomising the impact of the PEI 50,” http://www.peimedia.com/productimages/Media/000/179/537/Sample_pages_PEI50book.pdf

Class War

The NY Times head for its National section today (July 24, 2012) tells it all: "GOP PLAN WOULD RAISE TAXES. Senate Republicans will press a plan to extend tax cuts for affluent families scheduled to expire Jan. 1, but allow a series of cuts for the working poor and the middle class to end."

I am currently reading Francis Fukuyama's excellent The Origins of Political Order in which he describes the recurring struggle in China between aristocrats and commoners. Anyone familiar with my book about The Origins of Business, Money, and Markets will recognize the same pattern as it befell the late Roman Empire. A powerful central government bases its legitimacy on popular support. But elites gradually capture the government, and extract favors and exemptions from common obligations. The government ends up helping them gain power over the rest of the population, using it to impose onerous burdens and restrictions. In the end, either revolution or invasion destroy the weakened central government, and a period of chaos and warfare follows until a new cycle begins.

Corporate Crime

I agree with Mark that "draconian and emotional responses to these problems [of corporate crime], if allowed to take hold, will lead to explosive collateral damage and far worse problems in the future." But I am not proposing either draconian or emotional responses. Nor am I suggesting RICO prosecutions.


When I speak of corporate crime, I am speaking as a lawyer, and I mean behavior that has been defined to a constitutionally valid degree of clarity, declared to be criminal through legislation or judicial construction, and punishable in proportionate and suitable ways if guilt is found under the normal "proof beyond a reasonable doubt" standard.


In a corporate case, whilst the standard of proof is the same as for individuals, what we mean by intentionality, and how we show it, may well be different. The difficulty in prosecuting corporate officials has been in showing that they actually knew that decisions they made within their scope of responsibility would result in crime. To know about the decisions does not go far enough; for conviction, the prosecutor must show that they knew about the criminal result. And proof of that knowledge has been very hard to collect. Indeed, serious doubts have been raised even about the convictions of Enron's leaders.


On the other hand, convicting an organization would not necessarily require showing guilty knowledge by any particular person. Take, for example, a bribery case. Megacorp wants to drill for oil in Xistan, and hires a consultant named Smith. Smith helps the oil minister's son get admitted to Eton, and consultant Jones pays his tuition there. At some point during the boy's first year, Megacorp gets the concession. Smith and Jones were independently on retainer to Megacorp, but each claims that Eton was merely a favor for an old friend. There's no evidence to the contrary. Could either of them be convicted of violating the laws against bribery? Probably not. Could any Megacorp executive? No. Could Megacorp itself? Possibly yes. It paid money to Smith and Jones. They were its agents, seeking the concession. They did favors for the oil minister, and Megacorp got its concession.


Mark properly notes that the misdeeds of Enron's higher level executives cost nearly 100,000 people to lose their jobs. That is a result to be avoided. Would it not have suited the Enron case better to order the corporation to withhold bonuses and stock options from the "C" level executives there for a period of years? Or to have devised some other punishment that would fall on the stockholders and executives, rather than the workers? 

Corporate Punishment: We Need Surgery Rather than Shotguns

          Keith implicitly raises a couple of important issues in his tirade against corporate crime: (1) First, how can we design fair and effective punishments to fit crimes deemed to have been committed by corporations, and (2) how can we do so without triggering rafts of unintended consequences? Underlying both of these questions is the more fundamental one of what exactly is a corporation? Despite the legalistic facade of "personhood", a corporation is in fact an association of persons collaborating around a collective purpose. Are a corporation's misdeeds, once proven,  then somehow the collective responsibility of all these people? Only those "at the top"? Only those directly party to the misdeeds? The difficulty in answering any of these questions with much precision explains why prosecution of corporate crime is often a slippery slope.

          One of the most sensational cases of corporate malfeasance in fairly recent memory would be the Enron saga, which climaxed with the firm's 2001 bankruptcy. More than 20,000 people lost their jobs, and  several of the firm's senior executives - including its president and its Chief Financial Officer - went to prison, where the president - Jeff Skilling - resides to this day. Creditors took huge loses and stockholders were wiped out. The company's 64-year old CEO Kenneth Lay was convicted of fraud and would have spent the remainder of his life behind bars were it not for the fact that he died of heart failure a couple of months after his trial. Enron's auditor, Arthur Anderson was deemed complicit in Enron's wrongdoing and stripped of the licenses necessary for it to continue in business. Another 28,000 people lost their jobs, and one of the world's largest and most highly respected accounting firms disappeared forever.

          It's hard to imagine a more unsparing set of punishments for corporate crime. Yet at the time, so intense was the anti-Enron and anti-corporate bloodlust that it seemed no punishment was going to be severe enough to satisfy people. Before Ken Lay's ultimate demise, California's Attorney General said at a press conference that he would like personally to escort him to a small prison cell that he would share with a "tattooed dude" who would "call him honey" and proceed to do to him what leering tattooed dudes in prison can be expected to do. And this from a liberal Democrat on record for his staunch opposition to hate crimes, environmental pollution, and all manner of bad things. Even more troubling, he was the state's highest legal officer charged with enforcing the laws of the land.

          The point is that otherwise rational people can become emotional and quite irrational on the subject of corporate crime. Large corporations often appear out of touch and out of reach and thus emerge as natural targets for popular resentment. This is true even among Republicans, who at times regard them as unholy extensions of Big Government. Reading news reports about possible corporate misdeeds, people often assume the worst and clamor for maximum punishments “for the guilty” before gaining a clear picture, or even any picture, of what has actually occurred.

          Which brings me back to Keith’s intemperate screed and the news of more current events. He complains about “malefactors walking free” and hiding behind “screens of deniability." Then he speculates boldly about how easy it should be to prove “beyond reasonable doubt” the culpability of corporations. While he doesn’t really explain himself, and while I’m surely not a lawyer, what he seems to be suggesting is a sweeping new field of application for the federal RICO law, or something like it, whereby ordinary corporations could be decreed criminal enterprises. Indeed, what a powerful weapon this would be in the hands of ambitious prosecutors! After gaining such judgments, they could bring all manner of retribution to bear on targeted corporations and the “malefactors” employed by them. Our heroic avengers could go about their good work unencumbered by pesky distractions like the burden of proof. Trial lawyers too could have a field day feeding on anything that remained alive afterwards.

          The only two companies that Keith mentions by name, because they are in the news currently, are Glaxo and Barclays. Both are, of course, British companies, although their operations are global as are the issues in question.  I don’t know much about the pharmaceutical industry and won’t comment on Glaxo, but I do pay some attention to the banks and fully understand the importance of the LIBOR index Barclays has now admitted to having of manipulated, along with the analogous EURIBOR in Europe.  Notional value of trillions of dollars of contracts are potentially affected, including interest-rate swaps, home mortgages, and numerous other types of instruments. Selective release of emails from traders apparently involved the affair casts an even more disturbing light over it, since the attitude of amoral and puerile aggression so common among traders is there for all to see. For those perhaps previously unaware of it,  our banking system entrusts massive amounts of investment money to people who emotionally never matured much past their early adolescence.

          But then again, what has really been going on here? For one thing, this is not a new issue. Four years ago, the Wall Street Journal - hardly a leftwing muckraking rag - raised serious questions about LIBOR and the subjective judgments that underlie its daily calculation. It was obviously a system seriously prone to abuse, although since the apparent manipulation at that time appeared systematically downward, the WSJ's investigation elicited a collective yawn from the markets and the Government.  After all, homeowners with adjustable rate mortgages were benefiting, and central banks  around the world at the time were laboring  to bring all rates down anyway. The already-deposed CEO of Barclays has even alleged that the Governor of the Bank of England encouraged him in the endeavor.

          This latest spate of news, however, is different. The Barclays traders appeared to have been collaborating with traders at other banks to advantage specific trading positions. Keeping this in perspective, we're talking about minute distortions to the index - probably no more than a basis point or two - but enough presumably to make a P&L difference for large and highly leveraged trades. While an effort will be made to dramatize this story with tales of destruction wrought on long-suffering homeowners and the like, nothing of the sort is likely to be possible. The victims will be institutional investors on the losing end of the manipulated trades.

          Having said that, this is nonetheless a very serious scandal that in some way strikes at the heart of what has become a grotesquely complicated and vulnerable financial system around the world. The case will not, and should not,  go away quickly.  There will be more investigations, law suits, sackings, and so forth, at Barclays and other banks,  followed undoubtedly by a major revamping to the archaic procedures for by which these indices are produced. And this should be all for the better. What there is not a place for, in my opinion, is a highly-charged moralistic crusade led by posturing politicians with no practical ideas of their own, backed by armies of self-dealing trial lawyers.

          I realize that I am exaggerating the position that Keith took in his brief letter, and I'm making unfair sport of it to some degree.  I'm actually in more sympathy than I probably sound with his underlying attitude, which is a deep frustration with the corruption, immaturity and breathtakingly short-term orientation that characterizes our current financial system, not to mention our political system. I do feel, however, that draconian and emotional responses to these problems, if allowed to take hold, will lead to explosive collateral damage and far worse problems in the future.

Punishment for Corporate Crime

I replied to the NY Times editorial about Barclay's Bank this morning, July 3 2012, as follows:
The mounting levels of corporate crime, such as those of Barclay's and Glaxo, when combined with the apparent immunity of responsible officials from personal criminal liability, suggests that we need to fix the criminal laws and sentences that apply to corporations. We have an aggressive Dept. of Justice, but it just can't penetrate the screens of deniability that top corporate officials maintain. It can't prove guilty knowledge beyond a reasonable doubt, so these malefactors walk free, and continue to enjoy the trappings of respect and wealth. 

What we can prove beyond a reasonable doubt, however, is the criminal guilt of the corporations themselves. Since they are now "persons," and like Glaxo can plead guilty to crimes, we need a corporate version of jail. Fines are just a "cost of doing business," like paying bribes in Nigeria. But why not require criminally convicted firms to suspend the payment of dividends, or of executive bonuses and stock options? There are many creative possibilities for punishing criminal concerns that fall well short of injuring the least responsible employees. We need to pursue this option, because a society that does not punish its criminals cannot claim to have a rule of law.

I agree with much of what Mark says, actually.  I don't think money is all-determinative. For one thing, if the less well financed party has enough money to get itself heard, that should suffice if it has a potent message. But in past elections, whatever the party messages, both had enough money--including, probably, the Republicans in 2008. Now, however, the Citizens United decision allows heavy private and corporate thumbs to tip the scales to a previously unknown extent, and I think that the Democrats can overcome the resulting disadvantage only with a clearly superior message.

Unfortunately, Obama has a virtually impossible task because of the economy. I also agree with Mark that both Obama care and Dodd-Frank are highly imperfect bills. But who is actually responsible for these problems? I submit that the blame falls largely on the Republicans, who stonewalled Obama from the beginning. Their refusal to let him fully pursue the Keynesian solution that virtually all knowledgeable economists advocated has mired the economy in its present stasis. They are not responsible for Europe, but Obama would not be so badly hurt by Europe if unemployment were a point or two lower and our growth was better. Both Obamacare and Dodd-Frank incorporated many Republican ideas, and the party's stonewalling on those bills made sensible compromises and evaluations essentially impossible.

One point on which I do strongly disagree with Mark is his prioritizing the national debt, along with his claim, which I think is false, that Obama does not care about it. Obama and all the other national Democratic leaders have repeatedly said that we need to spend now in order to restart an economy whose growth can then pay off the debt, hopefully starting in 2014. Again, virtually all economists, apart from the partisan right, agree, and so do the lenders. So demanding that growth-promoting measures be trimmed or shelved in order to pay off the debt is self-defeating. By doing that, as has happened, we simply stop the economic growth that is the only sane way to escape the current situation.

It may well be that conservatives like Mark actually understand this, but have another reason for emphasizing the debt. Worrying about debt makes sense to most people, and therefore legitimizes in the public mind an attack on pension liabilities and public employee unions. There is definitely some merit to using the crisis to cut those problem areas down to size, but I would have more sympathy if the attack were carried out more straightforwardly, and without undercutting recovery.

I also, obviously, differ with Mark about the importance of the election. I think Romney's prescriptions will do tremendous damage, and that he will in fact carry out most of what he said he would.