I’ve shared before how technology, media and politics can be (and often are) hijacked by the passionate extremes. In a recent article, Tyler Cowen argues that the “median voter theorem” posits that politicians can’t ultimately stray too far from the mainstream where citizens live.
A lot has been written on the "Too Big to Fail" problem: the perception that some firms are so large that their failures would lead to systemic failure for the entire economy; the related conclusion that companies in that category should be bailed out to prevent a massive breakdown of the financial system; and the resulting moral hazard problem - that these big firms then can take all the risks in the world knowing there is no downside to them. A direct result of this problem has been that many Wall Street insiders profited at the expense of American taxpayers when they were bailed out by the US government.
But a no less serious problem is that some of these firms are "too big to lose." They wield so much influence over the economy that they can manipulate the outcome of their trades. It’s as if the President of the United States could short a particular market and then use his bully pulpit to scare the market to move in his direction.
A case in point is what Goldman did with mortgage securities. Gretchen Morgenson of the New York Times wrote an incisive article about the Goldman conflict with AIG. In it, she details how Goldman bet against the mortgage market by buying insurance from AIG on certain products that would pay if the underlying mortgage securities went south. There is nothing wrong with that - so far. For years, many (including me) also feared that a bubble had formed in real estate. Goldman’s Jonathan Egol and Ram Sundaram were smart and arguably even visionary to anticipate it and bet against mortgage securities. But the problem is what they did next. They proceeded to bully A.I.G., other business partners, and even the Federal Government, to pay them at valuations THEY arbitrarily set. The perception that Goldman bankers are the smartest bankers in the room helped them create the momentum that led to the devaluation from which they benefited.
Wall Street sharks will go where they smell the blood, and you cannot change that. It is a necessary feature of a market economy - which is the worst of all economic models, except for all other options, to paraphrase Winston Churchill.
But Paul Volcker’s call to structurally protect against these financial behemoths must be heeded. In this opinion piece he walks through some of the prescriptions that are necessary, including regulating which risks the different financial institutions can take, separating commercial banks from investment banks by reversing the recent decision to allow them to perform the same function and gamble with their account-holders’ savings, and limiting the leverage these firms can have.
We’d do well to listen to former Fed Chairman Paul Volcker on the structural reforms the U.S. economy and financial sector need. I only hope politicians will rise above special interests and do what the nation needs to build a solid future.
If you haven’t seen the documentary Food Inc. - you have to. Like Michael Pollan’s books, this movie will change the way you see food and the world.
If we as consumers and citizens don’t do something quickly to fight back against the food industrial complex, by voting with our dollars, by informing and educating others, and by advocating to the government for more transparency, freedom, and a level playing field for natural foods producers, then the epidemics of diabetes, obesity, environmental degradation, food contamination and inhumane treatment will threaten us further.
Some highlights:
Serious work ahead.
A study recently found that children on Medicaid are given antipsychotic drugs at a rate 4 times higher than those on private health insurance.
The implications for health and justice are deep. Antipsychotic drugs are severely overprescribed - and their long-term damage to society has not yet been registered.
The article posits this trend among the poor may be related to short- sighted measures to "efficiently" control problem children.
A more serious and systemic problem is the abuse by the pharmaceutical industry of government programs - and their undue influence over certain segments of the medical community.
These are scary developments that seem to get scarier with time. A serious and systemic response is necessary.
Interesting article about an investment scandal in Lebanon that has tarnished Hezbollah’s reputation.
This article provides some proof that, Putin’s KGBesque bravado aside, Russia’s economy is a house of cards waiting to fall.
David Brooks wrote an interesting column on the working values America desperately needs to regain in order to forestall a national economic decline amidst hedonistic indulgence and overspending beyond its peoples’ and its government’s means.
Immigrants with nothing to fall back on tend to work hard and build themselves. Children of rich and successful people are less likely to have that same work ethic. At a macro level, the same challenge befalls nations as a whole. How do we regain the work ethic and entrepreneurial spirit tied to long-term value creation rather than short-term debt escalation?
From Lloyd Blankfein, CEO of Goldman Sachs:
You have to, in your own life, get people to want to work with you and want to help you. The organizational chart, in my opinion, means very little. I need my bosses’ goodwill, but I need the goodwill of my subordinates even more. Because they can make it easy for me to get information. They’ll come to me and say: “Look at this. Do this.” Or they can give it to me begrudgingly, if they’re hostile.
Now why would they be hostile? Why would they be negative? Why would they be slow to give me information? Because they thought I wasn’t good for them. They thought I’d be bad for them.
Life is always about contracts that you make with people. Very few of them are written. Most of them are implicit, and most of them evolve out of a course of dealing and understanding. And if you are good for your people, they’ll be good to you, and help you and help propel you up in your career.
By the way, being good to them doesn’t mean you pay them more or you’re more liberal, or you let them get away with things. Most people, what they want is to be better. They want to work for a great organization. They want to feel good about themselves. They want to not so much get promoted, as be promotable. They want to evolve. And if you’re the kind of person that they think will help them do that, they’ll give you a loyalty that’s the most sincere kind of loyalty.
from NYTimes interview: http://www.nytimes.com/2009/09/13/business/13corner.html?sq=lessons%20learned%20at%20goldman&st=cse&scp=2&pagewanted=print
In three paragraphs, Peter Goodman [http://www.nytimes.com/2009/09/13/business/economy/13excerpt.html?_r=1&scp=1&sq=big%20spenders&st=cse] plainly describes how an administrator ended in a homeless shelter:
Millions of Americans have lost homes, jobs and savings to the financial crisis and recession. While greed and extravagance played roles, many lived beyond their means because their paychecks shrank. This article is adapted from “Past Due: The End of Easy Money and the Renewal of the American Economy,” by Peter S. Goodman, a reporter for The New York Times. The book, to be published Tuesday by Times Books, explores the origins of the crisis and suggests ways to reinvigorate the economy.
ONE afternoon in November 2006, a policeman spotted an expired license plate on Dorothy Thomas’s 10-year-old Toyota Corolla as she drove through San Jose, Calif. He ordered her to pull over.
Struggling under the weight of thousands of dollars in credit card bills, Ms. Thomas was perpetually short of cash. She had not bought a $10 auto registration sticker. The officer checked his database and recognized that she had already been ticketed once before for the same thing. He arranged to have her car towed away.
“I got down on my knees and begged that officer,” Ms. Thomas recalled.
As she watched her car being hauled off, she sensed that this was the beginning of a descent into a crisis from which she might not easily escape. Without money to pay the towing and storage fees, she could not extract her car from the lot, and the tab soon grew to $1,600. Without a car, she could not reach the hospital where she worked in the administrative offices, so she lost her $16-an-hour job. Without a paycheck, she could no longer pay the rent on her modest home. She moved to Oakland, where a friend lived in a beaten-down, rented house on a street they called Crack Avenue. By year’s end, Ms. Thomas, then 49, was occupying a bunk at a homeless shelter, searching in vain for a job in an economy plagued by unemployment.
