"I Ain't Kitten, either" 
John Case
Harpers Ferry, WV
Harpers Ferry, WV
The Winners and Losers Radio Show
7-9 AM Weekdays, WSHC-Listen Live, Shepherd University
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Check out Socialist Economics.
Saturday, August 6, 2016
MiB: Danny Kahneman [feedly]
MiB: Danny Kahneman
http://ritholtz.com/2016/08/mib-danny-kahneman/
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http://ritholtz.com/2016/08/mib-danny-kahneman/
In this week's "Masters in Business" podcast, we chat with Danny Kahneman, professor of behavioral & cognitive psychology, and winner of the 2002 Nobel Price for economics. He is also the author of the highly regarded Thinking Fast & Slow.
In a wide-ranging discussion, Kahneman discusses how he met Amos Tversky, who became his his long time research partner. He describes how "we" won the Nobel Prize, referring to his sharing of the prize with Tversky, who died prior to the Nobel Prize win.
Kahneman discusses the process of how they discovered the first three heuristics of Representativeness, Availability, and Anchoring. He tells why going first in a negotiation is, contrary to common opinion, an advantage, as the human brain tries to make sense of the number it receives, regardless of how ridiculous it may actually be.
For example, the Availability heuristic – "WYSIATI" aka What you see is all there is – reveals how people are unaware of what they do not know, and people use available info to create a narrative. Hence,
"Availability bias" allows people to use what looks to be salient info to fabricate narratives that seem to make sense.
You can hear the full interview, including the podcast extras, by downloading the podcast at iTunes, SoundCloud or Bloomberg. All of our earlier podcasts are atiTunes, Soundcloud and Bloomberg. (The show broadcasts all weekend on Bloomberg radio and SiriuxXM, at Friday at 9pm, Saturdays at 10am, 6pm, and 11pm, and Sundays at 3am).
Next week, we sit down with Michael Mauboussin, head of Global Financial Strategies at Credit Suisse, adjunct professor at Columbia University's school of business, and author ofUntangling Luck and Skill in Sports, Business and Investing.
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Friday, August 5, 2016
Globalization and its New Discontents [feedly]
Globalization and its New Discontents
https://www.project-syndicate.org/commentary/globalization-new-discontents-by-joseph-e--stiglitz-2016-08
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https://www.project-syndicate.org/commentary/globalization-new-discontents-by-joseph-e--stiglitz-2016-08
NEW YORK – Fifteen years ago, I wrote a little book, entitled Globalization and its Discontents,describing growing opposition in the developing world to globalizing reforms. It seemed a mystery: people in developing countries had been told that globalization would increase overall wellbeing. So why had so many people become so hostile to it?
Now, globalization's opponents in the emerging markets and developing countries have been joined by tens of millions in the advanced countries. Opinion polls, including a careful study by Stanley Greenberg and his associates for the Roosevelt Institute, show that trade is among the major sources of discontent for a large share of Americans. Similar views are apparent in Europe.
Overcoming the Poisonous Politics of Protectionism
Simon Tilford examines how Barry Eichengreen, Joseph Stiglitz, Laura Tyson, and other Project Syndicate contributors address the anti-trade sentiment roiling advanced economies.
How can something that our political leaders – and many an economist – said would make everyone better off be so reviled?
One answer occasionally heard from the neoliberal economists who advocated for these policies is that people are better off. They just don't know it. Their discontent is a matter for psychiatrists, not economists.
But income data suggest that it is the neoliberals who may benefit from therapy. Large segments of the population in advanced countries have not been doing well: in the US, the bottom 90% has endured income stagnation for a third of a century. Median income for full-time male workers is actually lower in real (inflation-adjusted) terms than it was 42 years ago. At the bottom, real wages are comparable to their level 60 years ago.
The effects of the economic pain and dislocation that many Americans are experiencing are even showing up in health statistics. For example, the economists Anne Case and Angus Deaton, this year's Nobel laureate, have shown that life expectancy among segments of white Americans is declining.
Things are a little better in Europe – but only a little better.
Branko Milanovic's new book Global Inequality: A New Approach for the Age of Globalization provides some vital insights, looking at the big winners and losers in terms of income over the two decades from 1988 to 2008. Among the big winners were the global 1%, the world's plutocrats, but also the middle class in newly emerging economies. Among the big losers – those who gained little or nothing – were those at the bottom and the middle and working classes in the advanced countries. Globalization is not the only reason, but it is one of the reasons.
Under the assumption of perfect markets (which underlies most neoliberal economic analyses) free trade equalizes the wages of unskilled workers around the world. Trade in goods is a substitute for the movement of people. Importing goods from China – goods that require a lot of unskilled workers to produce – reduces the demand for unskilled workers in Europe and the US.
This force is so strong that if there were no transportation costs, and if the US and Europe had no other source of competitive advantage, such as in technology, eventually it would be as if Chinese workers continued to migrate to the US and Europe until wage differences had been eliminated entirely. Not surprisingly, the neoliberals never advertised this consequence of trade liberalization, as they claimed – one could say lied – that all would benefit.
The failure of globalization to deliver on the promises of mainstream politicians has surely undermined trust and confidence in the "establishment." And governments' offers of generous bailouts for the banks that had brought on the 2008 financial crisis, while leaving ordinary citizens largely to fend for themselves, reinforced the view that this failure was not merely a matter of economic misjudgments.
In the US, Congressional Republicans even opposed assistance to those who were directly hurt by globalization. More generally, neoliberals, apparently worried about adverse incentive effects, have opposed welfare measures that would have protected the losers.
But they can't have it both ways: if globalization is to benefit most members of society, strong social-protection measures must be in place. The Scandinavians figured this out long ago; it was part of the social contract that maintained an open society – open to globalization and changes in technology. Neoliberals elsewhere have not – and now, in elections in the US and Europe, they are having their comeuppance.
Globalization is, of course, only one part of what is going on; technological innovation is another part. But all of this openness and disruption were supposed to make us richer, and the advanced countries could have introduced policies to ensure that the gains were widely shared.
Instead, they pushed for policies that restructured markets in ways that increased inequality and undermined overall economic performance; growth actually slowed as the rules of the game were rewritten to advance the interests of banks and corporations – the rich and powerful – at the expense of everyone else. Workers' bargaining power was weakened; in the US, at least, competition laws didn't keep up with the times; and existing laws were inadequately enforced. Financialization continued apace and corporate governance worsened.
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DONATE NOWNow, as I point out in my recent book Rewriting the Rules of the American Economy, the rules of the game need to be changed again – and this must include measures to tame globalization. The two new large agreements that President Barack Obama has been pushing – the Trans-Pacific Partnership between the US and 11 Pacific Rim countries, and the Transatlantic Trade and Investment Partnership between the EU and the US – are moves in the wrong direction.
The main message of Globalization and its Discontents was that the problem was not globalization, but how the process was being managed. Unfortunately, the management didn't change. Fifteen years later, the new discontents have brought that message home to the advanced economies.
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Reimagining the United Nations: A 2020 Vision [feedly]
Reimagining the United Nations: A 2020 Vision
http://www.globalpolicyjournal.com/blog/04/08/2016/reimagining-united-nations-2020-vision
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http://www.globalpolicyjournal.com/blog/04/08/2016/reimagining-united-nations-2020-vision
"Does the United Nations Still Matter?" It often seems so irrelevant to the problems of the modern age that those words appeared last year on the front page of The New Republic magazine. More than seven decades after the UN's invention in 1945, our multiple planetary crises seem dramatically different from those confronting the generation that emerged from the rubble of the Second World War. Isn't it time to devise architectures of global governance intended not to avoid the mistakes of the 1930s, but focused instead on the intertwined predicaments of our own 21st Century?
A New Global Governance Commission
If so, we have a new guide to start the journey. It's the report from the "Commission on Global Security, Justice, and Governance," co-chaired by former U.S. Secretary of State Madeleine Albright and former UN Under-Secretary-General Ibrahim Gambari. The name they chose reflects the inescapable links the Commission sees among those three variables. Their report elaborately makes the case that we can't have security anywhere without justice, or justice anywhere without security. And it asserts that nothing could do more to provide both security and justice to much of humanity than smart 21st Century innovations in global governance.
The Commission does not just offer "policy proposals" about tackling these transnational issues, but asserts instead that reimagining key elements of international institutions can provide new tools to surmount them. The Commission subtly threads the needle of contemporary political reality, advancing new ideas which one might say stand somewhere in between today's status quo and a more ideal array of global governance structures adequate to the magnitude of contemporary transnational challenges. So voices beyond the Commission can begin to think about the logical conclusions of some of its carefully parsed recommendations – and to define the eventual historical goals.
Expanding Our Global Governance Imagination
- Regarding the UN Security Council, the Commission calls for adding new members beyond the present 15, creating a new kind of "dissenting vote … (that would) not block passage of a resolution," and "restraint in the use of the veto." Under Article 27 of the 1945 UN Charter, the representatives of Britain, France, America, Russia, and China -- the winners of a war that took place during the first half of the last century -- can "veto" Security Council action. This means that on any issue before the Council, one single country can prevent every other country in the world from any kind of collective action at all. Even when the heavy hand of the veto is not actually cast, it still dominates Council decision-making. The only initiatives that ever get advanced are ones which might actually fly with all five permanent members. It's the most extreme case of what the American political scientist Walter Dean Burnham calls "the politics of excluded alternatives." If the UN is ever to become both democratic and effective, the veto doesn't need to be "restrained." The veto needs to be eliminated.
- The Commission recommends the creation of a "UN Parliamentary Network … to raise greater awareness and participation in UN governance." Today's UN represents only national executive branches. An analogy might be if every single member of the US Congress was appointed by state governors. This innovative new concept proposes that individuals already elected to national legislatures could be selected to sit in this new international body. That very idea has been promoted for years by the international "Campaign for a UN Parliamentary Assembly" based in Berlin. But the hope of this international campaign is that eventually the representatives in such a body would be not selected from national parliaments, but directly elected to a new transnational chamber. That's not such a far-fetched notion. An American woman living in Los Angeles elects particular individuals to represent her in the LA City Council, the California state legislature, and the U.S. Congress. Why shouldn't she be able to elect particular individuals to represent her at the global level as well? Whether a Parliamentary Network now or a newly invented Citizens Assembly later, we might just see the emergence of transnational political parties, which could dramatically increase the direct participation of ordinary citizens in global affairs.
- Besides providing a forum for national government executive branches alone, the structure of the UN General Assembly put forth in the United Nations Charter contains two other fundamental flaws – which unfortunately the Commission's "UN Parliamentary Network" would do nothing to ameliorate. First, the principle of one nation one vote, for states large and small, India and Vanuatu alike, could hardly be more undemocratic or absurd. Second, once votes are cast in the UN General Assembly, its decisions serve only as polite requests to the world. It has no power to make anything like universal laws. The obvious solution to those twin defects is to establish some kind of weighted voting system in the General Assembly (perhaps accounting for both population and monetary contributions to global public initiatives), and then to give the results of its balloting the force of international law (like Security Council decisions already possess). "One nation one vote" (and no power) is surely not the one and only concept we can ever envisage to legislate for and govern our one world.
- "Tents, Water Run Short for Iraqis Fleeing Fallujah." "Nigerians at Refugee Camp Face Starvation." "Dire Funding Shortfalls Will Hit Aid to Yemen, UN Says." These recentWashington Post headlines from one single day demonstrate that the single greatest hindrance to the UN carrying out its multiple and often overwhelming missions is the absence of any kind of funding source beyond voluntary ad hoc contributions from member states. Many proposals have been put forth to remedy this structural deficiency. Probably the most well-known is the "Tobin Tax," devised by the late Nobel economics laureate James Tobin, which, by placing a microscopic fee on international currency speculation, could provide vast and reliable new resources for the entire UN system.
- Finally, the Commission does not to put forth the most promising idea for preventing genocide and crimes against humanity – a permanent, directly-recruited, all-volunteer UN Rapid Deployment Force (UNRDF). Many don't realize that "UN Peacekeepers," in their distinctive blue helmets, are in every case national soldiers, dispatched and ultimately controlled by national governments on a case by case basis. A proposal for such a "UN Legion" was first put forward in 1948 by the first UN Secretary-General, Trygve Lie. A half century later, his successor Kofi Annan observed with some exasperation that the UN is the only fire department that cannot obtain fire engines until after the flames have broken out. A UNRDF would be poised to act not to serve the national interests of any individual state, but the common human interest we all share in relegating genocide to the dustbin of history. It could free the American president in particular from the excruciating dilemma of dispatching "the most powerful military in the world" to stop crimes that have little to do with us, or doing nothing while the nightmares continue to unfold. It might well deter the perpetrators of crimes against humanity from making their fateful choices in the first place. And it would give individual citizens of the world the opportunity not just "to serve their country," but to put their lives on the line to serve humanity. To bring both security and justice to countless violent conflicts -- where national governments are unwilling to deploy their own national forces because the fight in question does not engage their own national interests -- the world needs a UN army.
It is the complete absence of these kinds of smart institutional innovations, 70 years on, which lead so many to consider the UN so ineffectual and irrelevant. The problem with the UN is neither "Council deadlock" nor "bureaucratic timidity." The problem with the UN is the design of the UN.
In 2020: A World Summit on Global Governance
Fortunately, however, the Commission atones for any of its hesitancies with one overarching recommendation. It calls for convening in 2020 -- the 75th anniversary of the birth of the United Nations – a formal global summit, of both governments and non-governmental actors, called a "World Summit on Global Security, Justice, and Governance."
The Commission report emphasizes that most of what it proposes could be accomplished in 2020 without revising the 1945 UN Charter. But it does acknowledge that to advance the broad overall agenda, "consideration could be given … to Articles 108 or 109." That first is the provision in the Charter for making individual Charter amendments, while the second provides for summoning "A General Conference of the Members of the United Nations for the purpose of reviewing the present Charter." Indeed, Article 109(3) indicates that the framers intended for such a conference to be held no later than "the 10th annual session" -- 1955! Today the UN is into its 71st annual session. But no such formal Charter review process has ever been launched.
A world summit on global governance during the UN's 75th anniversary year could provide a once-in-our-lifetime opportunity to reinvent humanity's architectures of world order. It would allow many to suggest that a redesigned United Nations might tackle not just the bloody upheavals inside "fragile states" that the Commission identifies, but the ancient and omnipresent danger of military confrontations between nations -- and actually find a way to save succeeding generations from the scourge of war. Civil society activists on a vast variety of other issues – climate, human rights, the education of girls, migration, poverty and inequality and ever-increasing economic globalization – all could pursue global institutional reforms to advance their issues through the vehicle of such a 2020 world summit. NGOs could engage their constituencies on a large menu of imaginative global governance proposals focused upon their own agendas. (The Commission to its credit urges nongovernmental participation and civil society agitation on nearly every page.) Indeed, the American NGO Citizens for Global Solutions(founded in 1947 as the "United World Federalists for World Government with Limited Powers Adequate to Prevent War") is already laying plans to mobilize a broad coalition -- of multiple actors who might possess a great many different issue priorities and world order visions -- behind the singular call for governments to commit now to convening in the year 2020 a world summit on global governance.
Humanity's "Ultimate Aims"
On November 12, 1946, the Prime Minister of the United Kingdom, Clement Attlee, announced to the House of Commons that nothing less than a world government could serve as "the ultimate aim of Great Britain's foreign policy." (Attlee succeeded one Winston Churchill in that post – who repeatedly suggested much the same thing.) What strikes one about this utterly forgotten vision is not just how few world leaders would say anything like it today, but how rarely they speak about any sort of "ultimate aims" in the realm of world order at all.
As we approach the year 2020, our agenda should not be limited solely to what we might practically try to achieve in the year 2020. We also ought to begin to talk about the kinds of structures of global governance we might hope to enact by, oh, the UN's 100th anniversary year, in 2045. And, perhaps too, about the world political structure and the nature of the human condition that we might hope for at the very end of the present century, in 2099. That last might seem inconceivably remote and distant -- far too much so to utter any kind of meaningful predictions or prescriptions. And yet a child 6 years old today will be 89 years old in 2099. Surely, we ought not hesitate to express our hopes regarding how future history might unfold during the space of a single human lifetime.
That leads to some Very Big Questions.
What kind of United Nations would we create if we were designing it from scratch today? If the League of Nations was the first and the United Nations the second, can we begin to envision a "Third Generation World Organization" – Version 3.0? Might the modest "UN Parliamentary Network" proposed by the Commission evolve someday into a true world legislature – what Alfred Lord Tennyson called in 1835 "The Parliament of Man?" Can we dream that some distant day the human race might eliminate both permanent national military establishments and endless international arms races, through the establishment of what the University of Chicago's Committee to Frame a World Constitution in 1948 called a "Federal Republic of the World?"
That idea, of something like a world state, has been repeatedly advanced over the course of many centuries, by geniuses like Albert Einstein, H.G. Wells, Victor Hugo, Immanuel Kant, Jean Jacques Rousseau, William Penn … dating as far back as Dante! But is a world state in fact a desirable destination, or might its costs and risks exceed its benefits? If desirable, could it ever be achievable? If not desirable or not achievable, what are the likely costs, benefits, and risks of the contemporary state sovereignty system enduring indefinitely, on and on into the dim mists of perpetuity? Can we envision any hypothetical models of world order beyond tribes with clubs, Thomas Hobbes's "bellum omnium contra omnes," the war of all against all? If we are going to put a message in a bottle and dispatch it to the Earthlings of the 22nd Century – containing our hopes and dreams for them -- what do we want it to say?
Almost certainly, the kinds of next steps in the social evolution of the human species suggested in these questions will not be accomplished in the year 2020. Politics, after all, as every freshman learns, is "the art of the possible." But we profoundly constrain our ability to imagine a brighter human future if we insist that every single proposal be weighed down by the ball and chain of "PPP" – present political possibility. Nothing will ever become a realistic goal unless someone first declares it a desirable goal – and proclaims it, however distantly, as humanity's eventual historical aspiration.
So civil society needs to begin working right now to persuade national governments to convene the world summit on global governance proposed by the Albright/Gambari Commission in 2020. Then it needs to endeavor to move those governments to push the edges of the envelope as far outward as possible during the UN's 75th anniversary year. But perhaps more than anything else, campaigns for human progress ought to set out to shatter the limitations – the ones that so many so often so completely take for granted – on humanity's collective political imagination, the future potential of our single global civilization, and the infinite historical possibility of One World.
Tad Daley, JD, PhD, is a former policy advisor and speechwriter for three Democratic members of the United States Congress. One of these, U.S. Senator Alan Cranston (D-Cal, 1969-1993), served before he ran for public office as president of the United World Federalists (known as Citizens for Global Solutions today). Tad is author of the book from Rutgers University Press called APOCALYPSE NEVER: FORGING THE PATH TO A NUCLEAR-WEAPON FREE WORLD. He now directs the Project on Abolishing War at the Center for War/Peace Studies in New York. Please follow him on Twitter @TheTadDaley. This post first appeared on Citizens for Global Solutions blog.
Photo credit: Sharon Mollerus via Foter.com / CC BY
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Dani Rodrik: Fairness and Free Trade
Fairness and Free Trade
Dani Rodrik - 5th August 2016
Dani Rodrik explores what China's role may mean for the global trade system.
The global trade system faces an important turning point at the end of this year, one that was postponed when China joined the World Trade Organization almost 15 years ago. The United States and the European Union must decide whether they will begin to treat China as a "market economy" in their trade policies. Unfortunately, even as the battle escalates over the course of this year, the terms of the choice ensure that nothing will be done to address the global trade regime's deeper flaws.
China's WTO accession agreement, signed in December 2001, permitted the country's trade partners to deal with China as a "non-market economy" (NME) for a period of up to 15 years. NME status made it a lot easier for importing countries to impose special tariffs on Chinese exports, in the form of antidumping duties. In particular, they could use production costs in more expensive countries as a proxy for true Chinese costs, increasing both the likelihood of a dumping finding and the estimated margin of dumping.
Today, though many countries, such as Argentina, Brazil, Chile, and South Korea, have already rewarded China with market-economy status, the world's two biggest economies, the US and the EU, have not. But, regardless of whether they do, antidumping measures are ill-suited to the task of addressing concerns about unfair trade – not because such concerns are ungrounded, but because they go well beyond dumping. Antidumping facilitates protectionism of the worst kind, while doing nothing for countries that need legitimate policy space.
Economists have never been fond of the WTO's antidumping rules. From a strictly economic standpoint, pricing below costs is not a problem for the importing economy as long as the firms that engage in the strategy have little prospect of monopolizing the market. That is why domestic competition policies typically require evidence of anti-competitive practices or the likelihood of successful predation. Under WTO rules, however, pricing below costs on the part of exporters is sufficient for imposing import duties, even when it is standard competitive practice – such as during economic downturns.
This and other procedural considerations make antidumping the preferred route for firms to obtain protection from their foreign rivals when times are tough. The WTO does have a specific "safeguard" mechanism that enables countries to raise tariffs temporarily when imports cause "serious injury" to domestic firms. But the procedural hurdles are higher for safeguards, and countries that use them have to compensate adversely affected exporters.
The numbers speak for themselves. Since the WTO was established in 1995, more than 3,000antidumping duties have been put in place (with India, the US, and the EU being the heaviest users). The corresponding number for safeguard measures is a mere 155 (with developing countries being the heaviest users). Clearly, antidumping is the trade remedy of choice.
But the global trade regime has to address issues of fairness, in addition to economic efficiency. When domestic firms must compete with, say, Chinese firms that are financially supportedby a government with deep pockets, the playing field becomes tilted in ways that most people would consider unacceptable. Certain types of competitive advantage undermine the legitimacy of international trade, even when (as with this example) they may imply aggregate economic benefits for the importing country. So the antidumping regime has a political logic.
Trade policymakers are deeply familiar with this logic, which is why the antidumping regime exists in its current form, enabling relatively easy protection. What trade officials have never taken on board is that the fairness argument extends beyond the dumping arena.
If it is unfair for domestic firms to compete with foreign entities that are subsidized or propped up by their governments, is it not similarly unfair for domestic workers to compete with foreign workers who lack fundamental rights such as collective bargaining or protections against workplace abuse? Aren't firms that despoil the environment, use child labor, or provide hazardous employment conditions also a source of unfair competition?
Such concerns about unfair trade lie at the heart of the anti-globalization backlash. Yet legal trade remedies permit little room for them beyond the narrow commercial realm of below-cost pricing. Labor unions, human rights NGOs, consumer groups, or environmental organizations do not have direct access to protection in the way that firms do.
Trade experts have long been wary of opening up the WTO regime to questions about labor and environmental standards or human rights, fearing the slippery slope of protectionism. But it is becoming increasingly clear that excluding these issues does greater damage. Trade with countries that have very different economic, social, and political models raises genuine concerns about legitimacy. Refusal to acknowledge such concerns not only undermines these trade relationships; it also jeopardizes the legitimacy of the entire global trade regime.
None of this implies that democracies should not trade with non-democracies. The point is that commercial logic is not the only consideration that should govern their economic relationships. We cannot escape – and therefore must confront – the dilemma that gains from trade sometimes come at the expense of strains on domestic social arrangements.
Public discussion and deliberation are the only way that democracies can sort out the contending values and tradeoffs at stake. Trade disputes with China and other countries are an opportunity for airing – rather than repressing – these issues, and thus taking an important step toward democratizing the world's trade regime.
Dani Rodrik is Professor of International Political Economy at Harvard University's John F. Kennedy School of Government. He is the author of The Globalization Paradox: Democracy and the Future of the World Economy and, most recently, Economics Rules: The Rights and Wrongs of the Dismal Science.
Article Copyright: Project Syndicate 2016
Photo credit: hans-johnson via Foter.com / CC BY-ND
John Case
Harpers Ferry, WV
Harpers Ferry, WV
The Winners and Losers Radio Show
7-9 AM Weekdays, WSHC-Listen Live, Shepherd University
Sign UP HERE to get the Weekly Program Notes.
Check out Socialist Economics.
Mike Konczal: The Right wants Glass Steagal for wrong reasons
The Right Wants Glass-Steagall for the Wrong Reasons
By Mike Konczal |
It's impossible to look at any single financial regulation without understanding the problem it is trying to solve and how it would hang together with the rest of the financial regulatory regime. This is why cost-benefit analysis of financial rules isn't very useful, as any rule depends on all the other rules. It also means that two people who agree on one idea for regulation could still bring about two very different worlds, one significantly worse than the other.
This has happened with Glass-Steagall, the Depression-era separation of commercial and investment banking. Both the Republicans and Democrats endorsed its return in their party platforms. But there are two ways to talk about the reform, a Left and a Right way to imagine what problem Glass-Steagall would solve and what kind of financial regulatory regime you would have after it was reinstated. I think the Right's way is wrong, dangerously so, and would leave us with a split regulatory regime and a world very similar to 2007.
The Left's Approach to Glass-Steagall
The Left story would argue that the risks of investment banking are so great that they put FDIC insurance at risk. The wave of losses hitting investment banks like Lehman Brothers and Bear Stearns in 2008 were bad enough, but when that wave of losses was about to hit a bank like Citigroup it became far riskier. As Barry Ritholtz described,Glass-Steagall's repeal was "not a cause, but a multiplier" of the crisis. Imposing Glass-Steagall would reduce this spillover risk; it would also make it easier to resolve said firms in a crisis, while reducing their political power. The extent to which this is important and a priority has been debated extensively in the primary, but it is a clear story.
It follows from this story that you would extend important stability regulations to all the new, standalone investment banks created by reinstating Glass-Steagall. You'd use the designation powers of Dodd-Frank to require them to be funded with more capital and equity and prepare for how they'd handle a crisis. They'd be subject to the Consumer Financial Protection Bureau, the same consumer regulator as commercial banks. In short, you'd standardize the regulatory regime.
The Right's Approach to Glass-Steagall
Here's another story about Glass-Steagall: The protections around commercial banking caused the financial crisis. Federal backstops for consumer deposits mingled with normally boring investment banking to make both far riskier than they would have been otherwise. Commercial banking obligations, such as the Community Reinvestment Act, made it worse. As Thomas Hoenig argues, "A safety net was extended beyond commercial banks to bank holding companies and broker-dealers […] The Federal Deposit Insurance Corporation (FDIC) fund and the taxpayer are the underwriters of this private risk-taking [leading up to the crisis]."
I personally think the idea that FDIC insurance was responsible for the crisis is difficult to justify on any number of grounds, but the important thing about this story is that it absolve investment banking of any systemic risk. The Left's story is about the risks investment banks pose to commercial banks; the Right's story is about the risks commercial banks pose to investment banks. If commercial banking regulation lead to the crisis, you wouldn't want to extend it to investment banks.
As a result, the Right's story calls for splitting the regulatory regime and rolling back reform, which is exactly what the Republican platform does. The RNC platform makes a point of ending Dodd-Frank, including its ability to regulate investment banks, while also attacking the CFPB at length. It says the cause of the crisis was "the government's own housing policies," not mentioning Wall Street. Interestingly, it includes a demand "that FDIC-regulated banks are properly capitalized." Note that this purposeful phrasing means the new investment banks would be exempt from the requirement for more capital.
The Serious Consequences
So the Right's plan would involve creating many new investment banks while taking away Dodd-Frank's new abilities to subject them to higher capital requirements and crisis preparation. There'd be no FSOC or SIFI designation, so no way to heighten their regulations. No CFPB to standardize consumer protection, and no tools to wind them down. In other words, it would be the world of 2007 all over again.
But there's a deeper issue here. The crisis showed that it is difficult to draw a clear line between the risks of commercial banking and investment banking, and as such, it's crucial to standardize the regulatory regime between the two, no matter what activities you allow any one firm to do.
I'm going to quote at length from a fascinating discussion I had with Columbia law professor Jeffrey Gordon over his new book Principles of Financial Regulations. Gordon notes that "Glass-Steagall divided the world intellectually into two distinct financial arenas, securities markets and banking. Securities markets were subject to the regulatory authority of the SEC, whose major tools were disclosure and enforcement; the banking agencies oversaw banks using a strategy of prudential oversight. Legal specialization aligned this way; so did academic work."
However, he says, "in the ensuing decades, an increasing share of financial activity took place in the large space of functional overlap between banks and securities markets." Since those activities were securities markets, "the principal regulatory tool was disclosure, even though the core activity was maturity and liquidity transformation, the sort of activity that we have learned from banking requires prudential oversight for stability." He concludes that "[t]he consequence of this regulatory mismatch was a massive increase in systemic risk."
Worse, Gordon believes that this separation helped with the development of shadow banking. "The development of market-based credit intermediation was not by chance. Glass-Steagall created a set of institutions – investment banks – that came to see that their living depended on inventive ways to use securities market for debt finance. Hence the rapid financial innovations in debt markets in the run-up to the financial crisis." Gordon contrasts that system with the universal banks of Europe, which were slower to develop market-based debt finance.
It's difficult to determine if Glass-Steagall is a serious policy priority for Donald Trump or not, and whether it will be in the next Republican platform. But regardless of which activities you believe the largest financial institutions should be allowed to carry out, it's essential to ensure a unified regulatory regime. To cleave it in two, as the GOP platform would do, is to invite another disaster.
Mike Konczal is a Fellow with the Roosevelt Institute, where he works on financial reform, unemployment, inequality, and a progressive vision of the economy. His blog, Rortybomb, was named one of the 25 Best Financial Blogs by Time magazine. Follow him on Twitter @rortybomb.
John Case
Harpers Ferry, WV
Harpers Ferry, WV
The Winners and Losers Radio Show
7-9 AM Weekdays, WSHC-Listen Live, Shepherd University
Sign UP HERE to get the Weekly Program Notes.
Check out Socialist Economics.
Employment Again Rises Sharply in July [feedly]
Employment Again Rises Sharply in July
http://economistsview.typepad.com/economistsview/2016/08/employment-again-rises-sharply-in-july.html
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http://economistsview.typepad.com/economistsview/2016/08/employment-again-rises-sharply-in-july.html
Dean Baker:
Employment Again Rises Sharply in July: The Labor Department reported the economy added 255,000 jobs in July. With the June number revised up to 292,000, the average for the last three months now stands at 190,000. The household survey also showed a positive picture, with employment rising by 420,000. With new people entering the labor force, the employment-to-population ratio (EPOP) edged up by 0.1 percentage point to 59.7 percent, while the unemployment rate remained unchanged at 4.9 percent.
The job gains in the establishment survey were broadly based. ...
Other news in the establishment survey was also positive. The length of the average workweek edged up by 0.1 hours leading to an increase in the index of aggregate weekly hours of 0.5 percent. There also is some evidence of more rapid wage growth. The year-over-year increase in the average hourly wage was 2.6 percent. The annual rate comparing the average for the last three months with the prior three months was 2.8 percent. If this continues, workers will be able to get back some of the share lost to profits in the downturn.
While the household survey is mostly positive, there are some aspects that continue to suggest labor market weakness. The duration measures of unemployment all increased in July, with the average duration of unemployment spells rising from 27.7 weeks to 28.1 weeks and the median from 10.3 weeks to 11.6 weeks. These durations are more consistent with a recession than a strong labor market.
Similarly, the number of people involuntarily working part-time rose slightly to 5.94 million. This followed a sharp drop in June, but it is nonetheless quite high for a labor market with an unemployment rate of 4.9 percent. Also, the percentage of unemployment due to voluntary job leavers remained at 10.7 percent. This compares with peaks of more than 12.0 percent before the recession and over 15.0 percent back in 2000.
One interesting note is that the least educated workers appear to be the biggest beneficiaries of recent job growth. The EPOP ratio for workers without high school degrees rose by 2.1 percentage points for the month and is 1.6 percentage points above its year ago level. The unemployment rate for this group is 1.9 percentage points below the year ago level. By contrast, the EPOP ratio for college grads is down by 0.5 percentage points from its year ago level while the unemployment rate is unchanged. The unemployment rate for workers with just a high school degree fell by 0.5 percentage points over the last year.
One positive item in this report is a sharp drop in black teen unemployment from 31.2 percent to 25.7 percent. These data are highly erratic, but the June level was a sharp reported rise from a low of 23.3 percent in February.
This is mostly a very positive report. In addition to the strong growth in jobs in the establishment survey, the household survey also showed a large jump in employment. The increase in hours, coupled with some evidence of more rapid wage growth, add to the positive picture. The labor market still has some way to go to fully recover, but it is making progress.
See also Calculated Risk, Jared Bernstein.
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