Author: ken

The “Friend” and the Big Brother

Who doesn’t know that Facebook is about to go public, with a projected market capitalization of one hundred billion dollars?  That’s the new face of Facebook, an economic blockbuster.  But where is all that money going to come from?  And why?

Facebook makes most of us think of “friends” and “likes,” birthdays and parties, vacations and photos.  But the vast stores of information the social networking site has accumulated turns out to be a bonanza for investors.  Personal information has become a commodity, the value of which we are just beginning to appreciate.

By now we are all familiar with “targeted marketing,” the way advertisers “know” what we’ve bought or inquired about and then customize ads for us.  Usually we don’t object when Amazon “suggests” books we might like, and sometimes we even find it useful.  Some even feel flattered that their tastes are catered to.

But as Lori Andrews pointed out in The New York Times, the use of this personal information doesn’t stop there.  Those who have done a Google search for “stress” or started using an online medical diary may find that the information is used against them.  “Whether you can obtain a job, credit or insurance can be based on your digital doppelgänger — and you may never know why you’ve been turned down.”

She adds:  “Material mined online has been used against people battling for child custody or defending themselves in criminal cases….  The Internal Revenue Service searches Facebook and MySpace for evidence of tax evaders’ income and whereabouts, and United States Citizenship and Immigration Services has been known to scrutinize photos and posts to confirm family relationships or weed out sham marriages. Employers sometimes decide whether to hire people based on their online profiles, with one study indicating that 70 percent of recruiters and human resource professionals in the United States have rejected candidates based on data found online.”  (See, “Facebook Is Using You.”)

We don’t usually stop to think about this.  Andrews noted:  “A 2008 Consumer Reports poll of 2,000 people found that 93 percent thought Internet companies should always ask for permission before using personal information.”  That’s extraordinarily naïve, and probably reflects the belief that we do not need laws to protect the exploitation of our personal data.

In Europe people think otherwise, no doubt because big brother has been more of a looming presence in their lives.  Authoritarian regimes have taught them to appreciate the dangers of continual surveillance.  They think of it as “spying.” (See, “Should Personal Data Be Personal?”)

But we are still at the beginning of this new age of information.  It’s great to be able to post to so many friends and google when we want to find something.  But we also find ourselves at the other end of those searches, being scrutinized for the information that gives others access to our minds, and we never know about it.

That’s what’s worth a hundred billion dollars — for starters.

 

 

 

 

 

 

 

 

The Accountability Banks Don’t Want to Face

Limited liability was a big idea with big benefits.  It immunized entrepreneurs from the failures of the companies they set up.  If the company went bankrupt, their personal assets were safe.

In the nineteenth century that legal principle was established in most advanced economies, allowing businesses to take the kinds of risks that made the dramatic expansion of our wealth and prosperity possible.  Less risk meant more profits for owners, but it also led to greater economic development, increased use of capital, as well as more jobs.  It was a win-win idea.

But it may have reached a limit with banks that are too big to fail.  If big banks need to be insured against failure to protect the economy, what recourse is there to ensure against the “moral hazard” of allowing banks to take excessive risks.  What could make bankers more prudent?  We have legal recourse in cases of outright fraud or malfeasance, but what about bad judgment, or carelessness, or indifference?  What penalty for just plain stupidity?

Shiela Bair, former Chair of the FDIC in the US, the agency responsible for insuring bank deposits, recently urged regulators to write rules requiring executives and boards to be “personally accountable for monitoring and compliance” of the institutions they oversee.

Interviewed by Gretchen Morgenson of The New York Times about how it could be done, Bair said: “There should be personal certifications and, at a minimum, civil penalties assessed by the banking regulators against the boards and management, as well as compensation clawbacks if there are losses to the organization because of proprietary trading. Regulators can’t run these financial institutions for the management.” (See, “The Fattest or the Fittest.”)

As Bair said, the regulators can’t run the banks.  If they did, they would cease to be regulators and turn into bankers.  On the other hand, owners are protected by limited liability.  That leaves management, as Bair proposed.  Reminded about the strong opposition to such an idea, she exclaimed in exasperation:  “What in the world are they being paid for?”

Good question.  One has to wonder why it isn’t more obvious to everyone else?

There seems to be an unconscious principle for managers, analogous to limited liability for shareholders, that they can’t be punished for their mistakes.  They can lose their jobs, to be sure, and they can be prosecuted for breaking the law, but if they fall asleep on the job that’s just too bad.  Nothing can be done.

Inhibited by this unarticulated principle, we are stymied.  Legislators are immobilized, holding endless, inconclusive hearings while lobbyists clamor for their attention.  One the other hand, the banks, now risk averse, are accumulating and hoarding assets, failing to play the role the economy needs them to play in stimulating growth.

Bair had a reputation for being difficult to work with during the credit crisis.  She is being difficult now in suggesting what bankers don’t want to hear.  But the only alternative to articulating management accountability is clearly breaking up the banks and, then, allowing them to fail when management acts incompetently.

 

 

Trust Is the Glue . . .

Most of us view trust as valuable and desirable, something that improves the quality of our personal lives.  We seldom take the next step and view it as indispensable, a vital ingredient in society — and in the economy.  But all credit is based on trust, and the fundamental problem in a credit crisis is not just the lack of “liquidity” but also the absence of trust, the trust that is essential to all financial transactions.

British Historian Geoffrey Hosking noted recently:  “A liberal, free market society needs ‘trust in the trustworthy’ as the core of its values, not just as a Quixotic moral ‘extra’.”  (See, “Trust: Money, Markets and Society.”)  Operating somewhere between hope and certainty, trust is the belief that the other person means what he says.  That is, he could be wrong but he is not trying to deceive.  He is reliable in the same way we feel ourselves to be reliable.

In times past, a handshake was often considered sufficient to seal a deal.  But such a handshake had to be “trustworthy,” offered by someone who knew himself, knew his resources, and was aware, as well, of the dangers in making a promise he couldn’t deliver.

Hosking points out:  “The 2000s were bad years for social trust, at least in the UK and USA. They were the culmination of several decades during which generalized social trust had been declining. Surveys in the UK suggest that, when asked in 1959 ‘Would you say that most people can be trusted?’ 56 per cent replied ‘Yes’; in 1998 the equivalent figure was 30 per cent. In the USA, when asked the same question in 1964, 55 per cent answered ‘Yes’, but in 1995 only 35 per cent.”

And then came the credit crisis with the collapse of investment values.  The exposure of the greed, carelessness and fraud that permeated the financial industry leading up to that crisis eroded even further the public’s trust.  The extraordinary salaries and bonuses subsequently meted out to those responsible for that failure finished the job.

Hosking pointed out that more than financial inefficiency and distress is at stake.  With distrust pervading the population, all the social services that government traditionally provide become more difficult to administer and more expensive:  “As a result, there are today more overworked teachers and demoralized social workers, there is more litigation, greater reluctance to help the police, greater recourse to private health care and the like.”

The essential point is not that people need to be encouraged to trust.  Most of us want to trust and have the basic capacity to trust.  We need institutions that are trustworthy.

 

 

Our Need for Fictions

We like to think that all problems have solutions.  The reasons may be complex and difficult to grasp, but our faith is that if we understand the causes, we can cure the effects.

And the simpler answers are better.  The appearances of things are often confusing, yet if we dig deeply enough we will get to the core of truth that will give us more control over events.  But that belief is getting harder and harder to sustain.

Investors, for example, used to try to focus on “the fundamentals” of a stock to determine if it would grow in value.  Was the company well capitalized? well managed? strategically positioned in the market?  Brokerage firms used to employ analysts to study such factors in order to advise their customers.  But, then, economists looked at the data more closely and discovered that no analyst actually out performed the market systematically.  The best an investor could do was to diversify, assemble a large basket of securities that covered the range of possibilities.  That discovery led to the birth of index funds.  They don’t solve the problem for investors, but they make it easier to live with it.

Recently Jonas Lehrer wrote in Wired about how science too is failing us.  He focused on the pharmaceutical industry’s efforts to produce drugs that target specific ills, and he gave the example of an extremely promising drug to treat cholesterol developed by Pfizer.  In the final phase of clinical trials it turned out that the drug did not work.  Indeed, in many cases, it harmed patients.  (See, “Trials and Errors: Why Science Is Failing Us.”)

Lehrer reminded us that the Scottish philosopher David Hume pointed out over 200 hundred years ago that we never really know the causes of anything.  We see correlations between events and we make up stories that connect them, but “causal explanations are oversimplifications.”  According to Lehrer, “they help us grasp the world at a glance.”  On the other hand, “those same shortcuts get us into serious trouble in the modern world when we use our perceptual habits to explain events that we can’t perceive or easily understand.”

Clean water seems to improve public health dramatically.  When surgeons wash their hands, fewer patients die.  These are robust correlations.  But when we try to account for the complexities of biological compounds interacting with the body or to predict the behavior of financial markets, we get enmeshed in our own fictions.  “The details always change, but the story remains the same: We think we understand how something works, how all those shards of fact fit together. But we don’t.”

Lehrer concludes: “we live in a world in which everything is knotted together, an impregnable tangle of causes and effects. Even when a system is dissected into its basic parts, those parts are still influenced by a whirligig of forces we can’t understand or haven’t considered or don’t think matter.”

We need our common sense explanations of things, but we also need to be wary of them.  This is particularly true as our world gets more complex and interrelated.  And it won’t get easier.

 

 

 

The Categories We Live By

In the eyes of the law, a corporation is a person, but when a real person, that is, a person of flesh and blood, declares bankruptcy or defaults on his or her debt it is usually considered a moral failure — at the very least a source of embarrassment.  American Airlines’s recent declaration of bankruptcy, on the other hand, was greeted by many commentators in the press as a smart “business decision,” a way of reducing debt and regrouping for growth.

James Surowiecki pointed this out in The New Yorker, contrasting the plight of the Airline with tens of thousands of mortgage owners who are “underwater,” i.e. owing more than their property is worth.  Our conventional moral standards prevent most of us from taking advantage of the “smart” way out of such predicaments.

To be sure, there are penalties for individuals who declare bankruptcy or default on their loans, usually in the form of restrictions on the debts they can subsequently undertake with credit cards and loans.  But the greatest obstacles are fear and shame.  Surowieki notes that one study suggests that eighty-one per cent of Americans think it’s immoral not to pay your mortgage when you can.”  (See, “Living By Default.”)  And, he adds, the banking industry has been seeking to reinforce that belief:  “the head of the Mortgage Bankers Association, argued that defaulters were sending the wrong message ‘to their family and their kids and their friends.’”

In what sense, then, are corporations “persons?”  This is a question of increasing urgency as the U.S. Supreme Court has ruled that corporations, as persons, are entitled to freedom of speech and can make unlimited contributions to political campaigns.  On the other hand, can they fall in love and dream?  Can they get sick and die?

The creation of fictitious corporate persons has proven very beneficial to modern economies.  Their legal rights have been instrumental to the growth we have sustained in the modern era.  But it is a fiction, nonetheless, often a useful fiction — but sometimes not.

The mind makes sense of the complex world through the categories it creates.  A large part of thinking is finding the right categories, the ones that help us to be more productive, more successful, and more human.

Let’s try the thought experiment of shifting our categories in the other direction, towards creating more profitable, more corporate-like people rather than more people-like corporations.  Families might consider divesting themselves of obsolete members, like grandparents, or selling off underperforming assets, like children who don’t do their chores.  What about cutting back on food when times are tight as a matter of policy, or selling off surplus body parts?  We might consider routinely right-sizing our extended families, selling information on our friends, or even diversifying by selling off parts of ourselves.

How restrictive and inhibiting it can seem to be a non-corporate person.