Category: Society

What Can We Keep in Mind?

Perhaps the underlying problem with banks that are “too big to fail” is that they are also too big to succeed.  Unable to be managed effectively, they will almost inevitably stumble and fail.  Earlier this week, The Wall Street Journal offered some tips on the problem. (See “Too Big To Manage.”)  But in the typical up-beat style of business journalism, the Journal underestimated and oversimplified the problem.

It’s not just a matter of size and complexity.  In the early years of this century huge enterprises were successfully constructed for the purpose of extracting natural resources, manufacturing goods, or constructing vast public works, taking advantage of economies of scale to transform our industrial landscape.  There is nothing inherently impossible about size.

But some kinds of organizations are just too unruly to keep in check, to multifaceted to keep in mind.  The variety of tasks they set about accomplishing work at cross-purposes with each other.  And this may well be true of our financial behemoths.

Paul Volker, for example, has made the unpopular but sensible suggestion to reinstate the separation of commercial and investment banks mandated by the Glass-Steagall act.  Recent experience has amply demonstrated the need to better manage the conflicts of interest their separation was designed to prevent.

An additional problem is managing the entrepreneurial and competitive spirit contained within huge financial institutions.  Aggressive managers will inevitably use their positions to conceal or downplay the risks they take in order to make greater profits – and gain advantage over their peers.

Then there is the problem of bloated and dysfunctional bureaucracies, as managers chase new ideas to try to gain control of their departments while competing with each other for advancement.  In this environment, new ideas hardly have the chance to prove themselves before they are displaced by still newer and more enticing ideas.

Big banks are not the only ones that suffer from these problems, but the bigger the bank the more opaque the view inside.

I can understand the desire to believe that these organizations can be successfully managed, but those who think so are too often the ones who stand to gain from the chance to try.  That’s the problem in a nutshell.

What the Public Understands – and What it Can’t

Some defects in our financial system are easy to grasp.  Paying excessive salaries and bonuses to those who made disastrous mistakes is something the public understands very well.  Being deemed “too big to fail” is also pretty obvious, as it entitles some firms to unearned insurance at taxpayer expense.  But how to cure the excesses that produced our financial meltdown – that’s another matter.

In Sunday’s New York Times, Gretchen Morgenson noted that according to some acute observers, Washington’s moves to cut executive pay was “tinkering around the edges and did nothing to prevent another disaster.”  She added, it “looks like a way for the government to reassure an angry public that they are making genuine changes. But compensation is a trifling matter compared to, say, true reform of derivatives trading.”

She quoted Michael Greenberger, a law professor at the University of Maryland: “In essence, the compensation problems, as bad as they are, are a sideshow to the casino-like nature of the economy as it existed.”  (See “Wall Street Follies: The Next Act.”)

We all understand bigness and unfair competition, or greed and exploitation.  But what about derivatives and credit default swaps?  How many of us understand asset pricing and the risks of leveraging?   The risks were taken with our money, but most of us don’t really understand what happened.  And in the absence of public understanding and pressure for change, change is not likely.

Morgenson went on to quote Neil Barofsky, special inspector general of Treasury’s Troubled Asset Relief Program.  Asked on CNN last week about changes that could prevent another financial disaster, he said he saw thing moving in the other direction: “These banks that were too big to fail, are now bigger. Government has sponsored and supported several mergers that made them larger….  The idea that the government is not going to let these banks fail, which was implicit a year ago, its now explicit.”

As a result, he concluded: “Potentially, we could be in more danger now than we were a year ago.”

So who is trying to convey to the public the “casino-like nature of the economy”?  I don’t think we all need to understand what a derivative actually is, but we need some concepts and metaphors to bring home to us what we don’t know we know about the extravagant risks the high-flyers took with our money.  “Casino” might be a good place to start.

Mending the Split or Hostile Bid?

On Tuesday, the Vatican announced “it would make it easier for Anglicans uncomfortable with their church’s acceptance of female priests and openly gay bishops to join the Roman Catholic Church while retaining many of their traditions.” (See “Vatican Bidding to Get Anglicans”)

“I don’t see it as an affront to the Anglican Church,” said The Very Rev. David Richardson, the archbishop of Canterbury’s representative to the Vatican, but I’m puzzled by what it means and by the timing of it.”  The anxiety and ambivalence in his statement is palpable.  He doesn’t see it as an affront, or at least he is trying not to take it that way, but certainly others will.  The Times characterized it as “a rare opportunity, audaciously executed, to capitalize on deep divisions within the Anglican Church.”

The parties are constrained to be polite and dignified, after almost 600 years of conflict, but the underlying issues are the same as what happens on Wall Street when one company makes a bid to take over all or part of another.  What are the real motives?  Who will come out ahead?  What will be lost?  What will be the unintended, unforeseen consequences?  It is not difficult to see these fears and feelings flickering beneath the surface of official statements.

It is being spun as mending the split that occurred when Henry VIII drove the Catholic Church out of England.  It is also presented as a compassionate gesture to those Anglicans troubled by the ordination of women and gays.  Some of them have already split off to found their own rites.  So this could be viewed as a helping hand.

On the other hand, it can look like a raid on a vulnerable corner of the Anglican establishment, an attempt to gain market share.  This, I suspect, is what makes Anglicans wary.  Is the Pope trying to profit from their woes?

But it can also lead to difficulties for the aggressive party.  Not all take-overs work out well.  Liberal Catholics were irritated that “Benedict reached out only to the most conservative elements on the Catholic spectrum.”  On the other hand, “the Anglican ruling was a rare, if mixed, moment of hope….   Allowing married priests, liberals noted, could go a long way to overcoming the deep shortages of priests in the developed world.”  And it might also increase long-standing pressures to change Catholic policy on celibacy.” (See “Offer Raises Idea of Marriage for Catholic Priests.”

The gesture arouses strong associations of aggressive maneuvers by big guns in finance, but reactions by churchmen are muted.  It has been a long time since churches warred openly – and they are not comfortable doing it or being seen to be doing it.  Acting like businesses might only further erode their shaky credibility as spiritual authorities.

Where Are the Little Guys?

Something is off about the news of our economic “recovery” — and I don’t just mean the fact that unemployment reaches 10% just as the Dow climbs over 10,000.  That’s troubling, but it’s not hidden.

In Monday’s New York Times, Paul Krugman put his finger on part of the problem: “while the wheeler-dealer side of the financial industry, a k a trading operations, is highly profitable again, the part of banking that really matters — lending, which fuels investment and job creation — is not. Key banks remain financially weak, and their weakness is hurting the economy as a whole.”  In other words, the part of the financial industry that grabs the headlines is trumpeting their success, the less visible part that actually fuels recovery is not. (See “The Banks Are Not All Right.”)

This week’s Economist elaborates on the problem:  “Big public firms have relatively easy access to loans and equity once again…. But only a quarter of America’s listed companies can tap bond markets. Beneath them is a mass of small and medium-sized firms that collectively employs about half of American workers and is heavily reliant on banks.”  (See “Slim Pickings, No Appetite.”)

Not only is the economy split, so are our minds.  That is, we know about the problem with unemployment and we see the soaring profits on Wall Street – but how do we connect the two?  We know that some are thriving – they are at the top of the heap, the biggest, the richest, the most profitable firms.  But who is left out?  Who are the losers in this “recovery”?

These articles provided the context for an article in The Wall Street Journal that threw me for a loop in August: “Halting Recovery Divides America in Two.”  At first I thought they were thinking, as I was, about the gap between the rich and poor, the investors in hedge funds and the unemployed, homeowners and the dispossessed.  But the article quickly made clear that they had a different division in mind:  “At one extreme of Corporate America is a cadre of companies and banks, mostly big, united by an enviable access to credit. At the other end are firms, chiefly small, with slumping sales that can’t borrow or are facing stiff terms to do so.” (See “Halting Recovery”)

I see now the article was a precursor to these more recent accounts of the slow recovery at the lower end of the economy.  At first, though, I thought, how could they think that the normal reader would not have the same mistaken assumption I did?  What America “divided in two” could they possible assume we had in mind?  Do their readers never think about the poor except as a drag on the economy, or the unemployed except as a loss of consumer power?

Now I understand the unspoken assumption:  at the top are the ones that matter.  Everyone else is split off.  Down below are the unemployed, the small firms or family businesses, the dispossessed, those struggling with medical or education bills, the middle class – you and me.

As we struggle towards recovery, it’s hard to keep the little guys in mind.

“It’s an Emotional Topic”

What is the meaning of the upsurge in resistance to vaccination this year?  Why is the public fighting more vigorously than ever those who are trying to help them avoid serious infections?

The Times reported that a conference organized by the National Vaccine Information Center, an anti-vaccinator activist group, attracted “675 people, more than double the number at the group’s last conference….  Unlike most people associated with the center. . . the newcomers were not traditional skeptics.”  The President of the Center noted that the swine flu vaccine campaign “breathed new life” into the cause. (See “Swine Flu Shots Revive a Debate About Vaccines.”)

There has always been an undercurrent of suspicion towards medical treatments, grounded in the fact that they are invasive and they can’t guarantee success.   But most people accept them because of the authority of physicians – an authority, in turn, based upon the quality of our medical education and the ethical standards the professions uphold.

Then there is suspicion of government.  Those entrusted with protecting us by regulating banks and investment firms have turned out to be more corrupt and self-interested than we ever imagined.  And this comes on top of FEMA’s disastrous incompetence in the wake of Katrina.  Faith in government has been seriously eroded.  According to the polls, most of us approve of Obama,  but he presides over a vast, entrenched bureaucracy we have all-too-many reasons to doubt.

I wonder, though, if the intense public debates about health care reform may not have tipped the scales this year.  As the various components of the health care industry – the drug companies, the insurance companies, the HMOs, the hospitals and professional associations for doctors, nurses, etc. — have all lobbied to protect their distinct interests, they have also exposed the degree to which they are competitive with each other and self-serving.  The public’s exposure to this political struggle, displayed relentlessly in the news, makes it clear that the health care industry’s primary focus is not the public interest.  It’s hard to imagine that this has not had some impact on the trust the public feels towards those it traditionally relies upon.

The makers of vaccines have profits to protect – and sometimes inadequate trials to hide.  The physicians earn a fee for every injection, even if is administered by a nurse.  Pharmacies make a profit too.  The regulating agencies that approve the vaccines have been shown to be not entirely above political influence.  As they fight with each other, their credibility declines.

The Times quoted one mother who feels there is “something different” about this vaccine. “I go back and forth on this every day. It’s an emotional topic.”  But, perhaps, the difference this time is not in the vaccine.